<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
Registration No. 333-42557
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------
MERCANTILE BANCORPORATION INC.
(Exact name of registrant as specified in its charter)
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MISSOURI 6712 43-0951744
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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P.O. Box 524
St. Louis, Missouri 63166-0524
(314) 425-2525
(Address, including ZIP code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
JON W. BILSTROM, ESQ.
General Counsel and Secretary
Mercantile Bancorporation Inc.
P.O. Box 524
St. Louis, Missouri 63166-0524
(314) 425-2525
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
------------------------
Copy to:
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JOHN Q. ARNOLD ROBERT M. LaROSE, ESQ. CHRISTOPHER R. KELLY, P.C.
Chief Financial Officer Thompson Coburn Silver, Freedman & Taff L.L.P.
Mercantile Bancorporation Inc. One Mercantile Center 1100 New York Avenue
P.O. Box 524 St. Louis, Missouri 63101 Suite 700
St. Louis, Missouri 63166-0524 (314) 552-6000 Washington, D.C. 20005
(314) 425-2525 ------------------------- (202) 414-6100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE
SECURITIES TO THE PUBLIC: As soon as practicable after the effective
date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. / /
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. / /
--------------------------
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CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit<F2> aggregate offering price<F3> registration fee<F4>
- ----------------------------------------------------------------------------------------------------------------------------
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Common Stock, $0.01 par
value<F1> 951,380 shares $48.71 $46,340,202 $13,671
============================================================================================================================
<FN>
<F1> Includes one attached Preferred Share Purchase Right per share.
<F2> The proposed maximum offering price per unit has been determined by
dividing the proposed maximum aggregate offering price by the number of
shares being registered.
<F3> Estimated solely for purposes of computing the Registration Fee pursuant
to the provisions of Rule 457(f), and based upon the average of the high
and low sales prices of the common stock, $ 0.01 par value, of HomeCorp,
Inc. reported on the Nasdaq National Market on December 16, 1997 and
1,708,552 shares outstanding as of December 16, 1997.
<F4> The registration fee was paid with the original filing on December 18,
1997.
</TABLE>
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 2
[LETTERHEAD OF HOMECORP, INC.]
January 26, 1997
Dear Fellow Stockholder:
The Board of Directors cordially invites you to attend a Special
Meeting of Stockholders of HomeCorp, Inc. ("HomeCorp") to be held at 10:00 a.m.
Central Time, on Thursday, February 26, 1998, at Northern Illinois University
Rockford Education Center, 8500 East State Street, Rockford, Illinois (the
"Special Meeting"). At the Special Meeting, you will be asked to consider and
vote upon a proposal to approve the Agreement and Plan of Merger, dated October
29, 1997 (the "Merger Agreement"), and each of the transactions contemplated
thereby, pursuant to which HomeCorp will be merged (the "Merger") with and into
Ameribanc, Inc., a Missouri corporation and wholly owned subsidiary of
Mercantile Bancorporation Inc. ("MBI"). Upon consummation of the Merger, each
share of HomeCorp common stock will be converted into the right to receive
0.4968 of a share of MBI common stock, all as more fully described in the
accompanying Proxy Statement/Prospectus. The Merger Agreement is attached as
Annex A to the accompanying Proxy Statement/Prospectus and is incorporated by
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reference herein.
I have enclosed the following items relating to the Special Meeting and
the Merger:
1. Proxy Statement/Prospectus;
2. Proxy card; and
3. A pre-addressed return envelope to HomeCorp for the proxy card.
The Proxy Statement/Prospectus and related proxy materials set forth,
or incorporate by reference, financial data and other important information
relating to HomeCorp and MBI and describe the terms and conditions of the
Merger. The Board of Directors requests that you carefully review these
materials before completing the enclosed proxy card or attending the Special
Meeting.
MBI is a bank holding company headquartered in St. Louis, Missouri. At
September 30, 1997, MBI owned, directly or indirectly, all of the capital
stock of Mercantile Bank National Association ("Mercantile Bank"), 23 other
commercial banks and one federally chartered thrift, all of which operate
from 583 banking offices and 535 Fingertip Banking automated teller machines,
including 55 off-premises machines, located throughout Missouri, Illinois,
eastern Kansas, northern and central Arkansas and Iowa. As of September 30,
1997, MBI had 130,289,361 shares of its Common Stock outstanding. As of
September 30, 1997, MBI reported, on a consolidated basis, total assets of
$30.0 billion, total deposits of $22.1 billion, total loans of $19.1 billion
and shareholders' equity of $2.4 billion.
THE BOARD OF DIRECTORS OF HOMECORP CAREFULLY CONSIDERED AND
APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST
INTEREST OF HOMECORP AND ITS STOCKHOLDERS. THE HOMECORP BOARD
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
---
APPROVE THE MERGER AGREEMENT.
The investment banking firm of Charles Webb & Company, a division of
Keefe, Bruyette & Woods, Inc., has issued its written opinion, dated October
29, 1997, to your Board of Directors regarding the fairness from a financial
point of view of the consideration to be received by HomeCorp stockholders
pursuant to the Merger Agreement. A copy of the opinion is attached as
Annex B to the Proxy Statement/Prospectus.
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APPROVAL OF THE MERGER AGREEMENT BY THE HOMECORP STOCKHOLDERS
IS A CONDITION TO THE CONSUMMATION OF THE MERGER. Accordingly, it is
important that your shares be represented at the Special Meeting, whether or
not you plan to attend the Special Meeting in person. Please complete, date
<PAGE> 3
and sign the enclosed proxy card and return it to HomeCorp in the enclosed
pre-addressed envelope, which requires no postage if mailed within the United
States. If you later decide to attend the Special Meeting and vote in
person, or if you wish to revoke your proxy for any reason prior to the vote
at the Special Meeting, you may do so and your proxy will have no further
effect. You may revoke your proxy by delivering to the Secretary of HomeCorp
a written notice of revocation or another proxy relating to the same shares
bearing a later date than the proxy being revoked or by attending the Special
Meeting and voting in person. Attendance at the Special Meeting will not in
itself constitute a revocation of an earlier dated proxy.
If you need assistance in completing your proxy card or if you have any
questions about the Proxy Statement/Prospectus, please feel free to contact
me at (815) 987-2200.
Sincerely,
C. Steven Sjogren
President and Chief Executive Officer
<PAGE> 4
HOMECORP, INC.
1107 EAST STATE STREET
ROCKFORD, ILLINOIS 61104
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD
February 26, 1998
TO THE STOCKHOLDERS OF HOMECORP, INC.:
Notice is hereby given that a special meeting (the "Special Meeting")
of stockholders of HOMECORP, INC., a Delaware corporation ("HomeCorp"), will be
held at Northern Illinois University Rockford Education Center, 8500 East State
Street, Rockford, Illinois on February 26, 1998, at 10:00 a.m.
Central Time, for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 29, 1997 (the "Merger
Agreement"), by and among Mercantile Bancorporation Inc. ("MBI"), Ameribanc,
Inc., a wholly owned subsidiary of MBI ("Ameribanc"), and HomeCorp, pursuant
to which HomeCorp will be merged (the "Merger") with and into Ameribanc, in a
transaction that will result in the business and operations of HomeCorp being
continued through Ameribanc, and whereby, upon consummation of the Merger,
each outstanding share of HomeCorp common stock will be converted into the
right to receive 0.4968 of a share of MBI common stock, as set forth in
detail in the attached Proxy Statement/Prospectus. The Merger Agreement is
attached as Annex A to the accompanying Proxy Statement/Prospectus and is
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incorporated by reference herein.
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The record date for determining the stockholders entitled to receive
notice of, and to vote at, the Special Meeting or any adjournments or
postponements thereof has been fixed as of the close of business on
January 20, 1997. On the record date, HomeCorp had 1,708,552 shares
of common stock issued, outstanding and entitled to vote. Such shares were
held by approximately 499 holders. Each share will be entitled one vote
on each matter submitted to a vote at the Special Meeting. A list of
HomeCorp stockholders entitled to vote at the Special Meeting will be
available for examination, during the normal business hours, at the principal
executive offices of HomeCorp, located at 1107 East State Street, Rockford,
Illinois 61104, for at least 20 days prior to the Special Meeting and for the
duration of the Special Meeting.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES OF HOMECORP COMMON STOCK IS REQUIRED FOR
APPROVAL OF THE MERGER AGREEMENT. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN
IT IN THE ACCOMPANYING ENVELOPE. THE PROXY MAY BE REVOKED AT ANY
TIME PRIOR TO THE VOTE AT THE SPECIAL MEETING BY FOLLOWING THE
PROCEDURES SET FORTH IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS. FAILURE
<PAGE> 5
TO RETURN THE ENCLOSED PROXY CARD OR TO VOTE AT THE MEETING WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE MERGER.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
If the Merger Agreement is approved, you will be sent instructions regarding
the mechanics of exchanging your existing HomeCorp common stock certificates
for new certificates representing shares of MBI.
BY ORDER OF THE BOARD OF DIRECTORS
Rockford, Illinois Wesley E. Lindberg
January 26, 1997 Secretary
<PAGE> 6
MERCANTILE BANCORPORATION INC.
PROSPECTUS
----------------
HOMECORP, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON February 26, 1998
This Prospectus of Mercantile Bancorporation Inc., a Missouri
corporation ("MBI"), relates to up to 951,380 shares of common stock, $0.01
par value (the "Common Stock"), and attached Preferred Share Purchase Rights
(the "Rights"), of MBI (the Common Stock and Rights are collectively referred
to herein as "MBI Common Stock"), to be issued to the stockholders of
HomeCorp, Inc., a Delaware corporation ("HomeCorp"), upon consummation of the
proposed merger (the "Merger") of HomeCorp with and into Ameribanc, Inc., a
Missouri corporation and wholly owned subsidiary of MBI ("Ameribanc"). Upon
receipt of the requisite stockholder and regulatory approvals, and the
satisfaction or waiver of certain conditions precedent, the Merger will be
consummated pursuant to the terms of the Agreement and Plan of Merger, dated
as of October 29, 1997 (the "Merger Agreement"), by and among MBI, Ameribanc
and HomeCorp. This Prospectus also serves as the Proxy Statement of HomeCorp
for use in connection with the Special Meeting of Stockholders of HomeCorp
(the "Special Meeting"), which will be held on February 26, 1998, at the
time and place and for the purposes stated in the Notice of Special Meeting
of Stockholders accompanying this Proxy Statement/Prospectus.
Pursuant to the Merger Agreement, MBI will issue up to an aggregate of
951,380 shares of MBI Common Stock. Upon consummation of the Merger, the
business and operations of HomeCorp will be continued through Ameribanc and
each share of common stock, $0.01 par value, of HomeCorp ("HomeCorp Common
Stock") will be converted into the right to receive 0.4968 of a share of MBI
Common Stock (the "Exchange Ratio"). The fair market value of MBI Common
Stock to be received pursuant to the Merger may fluctuate and at the
consummation of the Merger may be more or less than the current fair market
value of such shares. See "TERMS OF THE PROPOSED MERGER - General
Description of the Merger." No fractional shares of MBI Common Stock will be
issued in the Merger, but cash will be paid in lieu of such fractional
shares. See "TERMS OF THE PROPOSED MERGER - Fractional Shares."
The Merger Agreement also provides that upon consummation of the
Merger, MBI will assume the HomeCorp 1990 Incentive Stock Option and Incentive
Plan (the "1990 Plan") and the HomeCorp 1996 Premium Price Stock Option and
Incentive Plan (the "1996 Plan" and, collectively with the 1990 Plan, the
"Stock Plans"), and all of the outstanding rights (whether or not then
exercisable) with respect to options granted pursuant to the Stock Plans
(collectively, the "HomeCorp Options") will be converted into rights with
respect to MBI Common Stock (the "Option Conversion"). As a result of such
assumption: (i) each outstanding HomeCorp Option will be exercisable solely
for shares of MBI Common Stock; (ii) the number of shares of MBI Common Stock
subject to the HomeCorp Options will equal the number of shares of HomeCorp
Common Stock subject to each HomeCorp Option outstanding as of the Effective
Time (as defined below) multiplied by the Exchange Ratio; and (iii) the per
share exercise price for each HomeCorp Option will be adjusted by dividing
the exercise price as of the Effective Time by the Exchange Ratio and
rounding to the nearest cent.
<PAGE> 7
The Merger is intended to qualify as a reorganization under the
Internal Revenue Code of 1986, as amended (the "Code"). The Merger generally is
intended to achieve certain federal income tax deferral benefits for HomeCorp
stockholders with respect to shares of MBI Common Stock received in the
Merger. See "SUMMARY INFORMATION - Federal Income Tax Consequences in
General" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
MBI Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "MTL." On January 20, 1997 the closing sale price for
MBI Common Stock as reported on the NYSE Composite Tape was $52.63 per
share and the closing sale price for HomeCorp Common Stock as reported on the
Nasdaq National Market was $24.25 per share.
This Proxy Statement/Prospectus, the Notice of Special Meeting and the
form of proxy were first mailed to the stockholders of HomeCorp on or about
, 1998.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF MBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK
SUBSIDIARY OF MBI AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER FEDERAL OR STATE
GOVERNMENTAL AGENCY.
All information contained in this Proxy Statement/Prospectus with
respect to MBI has been supplied by MBI and all information with respect to
HomeCorp has been supplied by HomeCorp.
The date of this Proxy Statement/Prospectus is -------------------, 1998.
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AVAILABLE INFORMATION
---------------------
MBI and HomeCorp are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file with the Commission reports, proxy statements and
other information. Such reports, proxy statements and other information
filed with the Commission by MBI and HomeCorp can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at Suite 1300, Seven World Trade Center, New York, New York 10048 and
Room 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. The Commission maintains an Internet site on the World Wide
Web containing reports, proxy and information statements and other
information filed electronically by MBI and HomeCorp with the Commission. The
address of the World Wide Web site maintained by the Commission is
http://www.sec.gov. MBI Common Stock is listed on the NYSE, and such
reports, proxy statements and other information concerning MBI also are
available for inspection and copying at the offices of the NYSE, 20 Broad
Street, New York, New York 10005. HomeCorp Common Stock is quoted on the
Nasdaq National Market. Reports, proxy statements and other information
concerning HomeCorp also are available from HomeCorp, without charge, upon
written or oral request to John R. Perkins, Executive Vice President, 1107
East State Street, Rockford, Illinois 61104, telephone (815) 987-2200.
This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement on Form S-4 and exhibits thereto (the
"Registration Statement") covering the securities offered hereby which has
been filed by MBI with the Commission. As permitted by the rules and
regulations of the Commission, this Proxy Statement/Prospectus omits certain
information contained or incorporated by reference in the Registration
Statement. Statements contained in this Proxy Statement/Prospectus provide a
summary of the contents of certain contracts or other documents referenced
herein but are not necessarily complete and in each instance reference is
made to the copy of each such contract or other document filed as an exhibit
to the Registration Statement. For such further information, reference is
made to the Registration Statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
-------------------------------------------------
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE
DOCUMENTS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
DOCUMENTS RELATING TO MBI, EXCLUDING EXHIBITS UNLESS SPECIFICALLY
INCORPORATED THEREIN, ARE AVAILABLE, WITHOUT CHARGE TO ANY PERSON,
INCLUDING BENEFICIAL OWNERS OF HOMECORP COMMON STOCK TO WHOM THIS
PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO JON W. BILSTROM, GENERAL COUNSEL AND SECRETARY,
MERCANTILE BANCORPORATION INC., P.O. BOX 524, ST. LOUIS, MISSOURI
63166-0524, TELEPHONE (314) 425-2525. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY
REQUEST SHOULD BE MADE BY FEBRUARY 19, 1998.
The following documents filed with the Commission by MBI under the
Exchange Act are incorporated herein by reference:
(a) MBI's Annual Report on Form 10-K for the year ended December 31,
1996, as amended by Form 10-K/A.
(b) MBI's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997, June 30, 1997 and September 30, 1997.
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<PAGE> 9
(c) MBI's Current Reports on Form 8-K dated April 25, 1997 (as
amended by Form 8-K/A dated May 22, 1997), May 13, 1997, July 1,
1997 and two reports dated September 25, 1997 and January 10, 1998.
(d) The description of MBI's Common Stock set forth in Item 1 of
MBI's Registration Statement on Form 8-A, dated March 5, 1993, and
any amendment or report filed for the purpose of updating such
description.
(e) The description of MBI's Preferred Share Purchase Rights set
forth in Item 1 of MBI's Registration Statement on Form 8-A, dated
March 5, 1993, and any amendment or report filed for the purpose of
updating such description.
The following document filed with the Commission by Roosevelt Financial
Group, Inc. ("Roosevelt") under the Exchange Act is incorporated herein by
reference: Annual Report on Form 10-K for the year ended December 31, 1996, as
amended on Form 10-K/A on March 14, 1997 and on Form 10-K/A-2 on April 29, 1997.
Such incorporation by reference shall not be deemed to incorporate by
reference the information referred to in Item 402(a)(8) of Regulation S-K.
All documents filed by MBI and Roosevelt pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date hereof and until the
date of the Special Meeting shall be deemed to be incorporated by reference
herein and made a part hereof from the date any such document is filed. The
information relating to MBI and Roosevelt contained in this Proxy Statement/
Prospectus does not purport to be complete and should be read together with the
information in the documents incorporated by reference herein. Any statement
contained herein or in a document incorporated herein by reference shall be
deemed to be modified or superseded for purposes hereof to the extent that a
subsequent statement contained herein or in any other subsequently filed
document incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part hereof.
Any statements contained in this Proxy Statement/Prospectus involving
matters of opinion, whether or not expressly so stated, are intended as such
and not as representations of fact.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY MBI OR HOMECORP. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OTHER THAN THE SHARES OF MBI COMMON STOCK TO WHICH
IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
PURSUANT HERETO SHALL IMPLY OR CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF MBI OR HOMECORP OR ANY OF
THEIR SUBSIDIARIES OR IN THE INFORMATION SET FORTH HEREIN
SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 3
SUMMARY INFORMATION 8
Business of MBI 8
Business of Ameribancb 9
Business of HomeCorp 9
The Proposed Merger 9
Other Agreements 10
Interests of Certain Persons in the Merger 11
Special Meeting of HomeCorp Stockholders 12
Reasons for the Merger 13
Opinion of Financial Advisor to HomeCorp 13
Fractional Shares 13
Waiver and Amendment 14
Federal Income Tax Consequences in General 14
Regulatory Approval 14
Accounting Treatment 14
Appraisal Rights 15
Markets and Market Prices 15
Comparative Unaudited Per Share Data 15
Summary Financial Data 16
INFORMATION REGARDING SPECIAL MEETING 20
General 20
Date, Time and Place 20
Record Date; Vote Required 20
Voting and Revocation of Proxies 20
Solicitation of Proxies 21
TERMS OF THE PROPOSED MERGER 22
General Description of the Merger 22
Other Agreements 23
Interests of Certain Persons in the Merger 25
Background of and Reasons for the Merger; Board Recommendations 27
Reasons for the Merger; Recommendation of the Board of Directors 28
Opinion of Financial Advisor to HomeCorp 30
Conditions of the Merger 33
Representations and Warranties 35
Termination, Waiver and Amendment of the Merger Agreement 36
Indemnification 37
Closing Date 37
Surrender of HomeCorp Stock Certificates and Receipt of MBI Common Stock 37
Fractional Shares 38
Effect on Stock Option and Employee Benefit Plans 38
Regulatory Approval 39
Business Pending the Merger 39
Accounting Treatment 42
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<PAGE> 11
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 42
APPRAISAL RIGHTS OF STOCKHOLDERS OF HOMECORP 44
PRO FORMA FINANCIAL INFORMATION 45
Comparative Unaudited Per Share Data 45
Pro Forma Combined Consolidated Financial Statements (Unaudited) 46
INFORMATION REGARDING HOMECORP 56
Forward-Looking Statements 57
General 58
Market Area 58
Lending Activities - General 58
One- to Four-Family Residential Real Estate Lending 63
Construction and Land Lending 64
Commercial Real Estate Lending 67
Consumer Lending 68
Commercial Business Lending 69
Originations, Purchases, Sales and Servicing of Real Estate Loans 70
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults 73
Allowances for Losses on Loans and Foreclosed Real Estate 75
Mortgage-Backed and Investment Securities 77
Sources of Funds 81
Subsidiary Activities 86
Competition 88
Employees 88
Management Discussion and Analysis of Financial Condition and Results of
Operations for the Years Ended December 31, 1996, 1995 and 1994 88
Mangement's Discussion and Analysis of Financial Condition and Results of Operation
for the Nine Months Ended September 30, 1997 and 1996 100
Security Ownership of Certain Beneficial Owners and Management 104
INFORMATION REGARDING MBI STOCK 105
Description of MBI Common Stock and Attached Preferred Share Purchase Rights 105
Restrictions on Resale of MBI Stock by Affiliates 107
Comparison of the Rights of Shareholders of MBI and HomeCorp 107
SUPERVISION AND REGULATION 111
General 111
Certain Transactions with Affiliates 112
Payment of Dividends 112
Capital Adequacy 112
FDIC Insurance Assessments 112
Proposals to Overhaul the Savings Association Industry 114
Support of Subsidiary Banks 114
FIRREA and FDICIA 114
Depositor Preference Statute 115
The Interstate Banking and Community Development Legislation 115
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS 116
LEGAL MATTERS 116
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<PAGE> 12
EXPERTS 116
OTHER MATTERS 117
SHAREHOLDER PROPOSALS 117
CONSOLIDATED FINANCIAL STATEMENTS 118
ANNEXES
Annex A -- Agreement and Plan of Merger dated October 29, 1997 by and between Mercantile
Bancorporation Inc. and Ameribanc, Inc., as Buyers, and HomeCorp, Inc., as Seller A-1
Annex B -- Opinion of Charles Webb & Company B-1
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<PAGE> 13
SUMMARY INFORMATION
-------------------
The following is a summary of the important terms of the proposed
Merger and related information discussed elsewhere in this Proxy
Statement/Prospectus but does not purport to be complete and is qualified in
its entirety by reference to the more detailed information that appears
elsewhere in this Proxy Statement/Prospectus and the documents incorporated
by reference herein. Stockholders of HomeCorp are urged to read this Proxy
Statement/Prospectus in its entirety. All MBI per share data reflect
three-for-two stock splits distributed in the form of dividends on each of
April 11, 1994 and October 1, 1997.
BUSINESS OF MBI
MBI, a Missouri corporation, was organized in 1970 and is a registered
bank holding company under the federal Bank Holding Company Act of 1956, as
amended (the "BHCA"). At September 30, 1997, MBI owned, directly or
indirectly, all of the capital stock of Mercantile Bank National Association
("Mercantile Bank"), 23 other commercial banks and one federally chartered
thrift, all of which operate from 583 banking offices and 535 Fingertip
Banking automated teller machines, including 55 off-premises machines,
located throughout Missouri, Illinois, eastern Kansas, northern and central
Arkansas and Iowa. MBI's services concentrate in three major lines of
business: consumer; corporate; and trust and investment advisory services.
MBI also operates non-banking subsidiaries that provide related financial
services, including investment management, brokerage services and asset-based
lending. As of September 30, 1997, MBI had 130,289,361 shares of its Common
Stock outstanding and reported, on a consolidated basis, total assets of
$30.0 billion, total deposits of $22.1 billion, total loans of $19.1 billion
and shareholders' equity of $2.4 billion.
On March 5, 1997, MBI completed the acquisition of Regional Bancshares,
Inc., an Illinois corporation and a bank holding company ("Regional"). The
acquisition was accounted for under the purchase method of accounting. As of
March 5, 1997, Regional reported, on a consolidated basis, total assets of
$172.0 million, total deposits of $136.0 million and shareholders' equity of
$25.0 million.
On April 25, 1997, MBI completed the acquisition of Mark Twain
Bancshares, Inc., a Missouri corporation and bank holding company ("Mark
Twain"). This acquisition was accounted for under the pooling-of-interests
method of accounting. As of April 25, 1997, Mark Twain reported, on a
consolidated basis, total assets of $3.2 billion, total deposits of $2.5
billion and shareholders' equity of $320.4 million.
On July 1, 1997, MBI completed the acquisition of Roosevelt Financial
Group, Inc., a Delaware corporation and savings and loan holding company
("Roosevelt"). The acquisition was accounted for under the purchase method
of accounting. As of July 1, 1997, Roosevelt reported, on a consolidated
basis, total assets of $7.3 billion, total deposits of $5.3 billion and
stockholders' equity of $409.6 million.
On July 31, 1997, MBI announced the execution of an agreement to
acquire Horizon Bancorp, Inc., an Arkansas corporation and a registered bank
holding company under the BHCA ("Horizon"), headquartered in Arkadelphia,
Arkansas. As of September 30, 1997, Horizon reported, on a consolidated basis,
total assets of $550.7 million, total deposits of $470.4 million and
shareholders' equity of $46.7 million.
-8-
<PAGE> 14
On January 10, 1998, MBI executed a definitive agreement to acquire
CBT Corporation, a Kentucky corporation and registered bank holding company
under the BHCA ("CBT"), headquartered in Paducah, Kentucky. As of September 30,
1997, CBT reported, on a consolidated basis, total assets of $1.0 billion, total
deposits of $741.8 million and shareholders' equity of $117.2 million.
In connection with the acquisition of Mark Twain, MBI restated its
consolidated financial statements as of and for the years ended December 31,
1996, 1995 and 1994 and as of and for the three months ended March 31, 1997
and 1996. MBI filed supplemental financial statements as of and for the
years ended December 31, 1996, 1995 and 1994 and as of and for the three
months ended March 31, 1997 and 1996 in a Current Report on Form 8-K dated
May 13, 1997, which has been incorporated by reference into this Proxy
Statement/Prospectus.
MBI's principal executive offices are located at One Mercantile Center,
St. Louis, Missouri 63101 and its telephone number is (314) 425-2525.
Additional information concerning MBI is included in the documents
incorporated by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
BUSINESS OF AMERIBANC
Ameribanc, a Missouri corporation, is a wholly owned subsidiary of MBI
that was organized in 1991. Ameribanc is a registered bank holding company
under the BHCA. At September 30, 1997, Ameribanc owned all of the capital
stock of 24 banks and one federally-chartered thrift, all of which together
operate from 583 locations in Missouri, Illinois, eastern Kansas, northern
and central Arkansas and Iowa. Ameribanc, which will continue to be a
subsidiary of MBI following the Merger, will be the surviving corporation
upon consummation of the Merger.
BUSINESS OF HOMECORP
HomeCorp, a Delaware corporation, was formed in 1989 and is a savings
and loan holding company under the Home Owners' Loan Act of 1933, as amended
(the "HOLA"). HomeCorp currently owns all of the issued and outstanding
shares of capital stock of HomeBanc, a federal savings bank ("HomeBanc") that
currently operates from its main office in Rockford, Illinois and ten other
branch offices. As of September 30, 1997, 1,707,527 shares of HomeCorp
Common Stock were issued and outstanding. As of September 30, 1997, HomeCorp
reported, on a consolidated basis, total assets of $326.9 million, total
deposits of $299.1 million, total loans, net of unearned discount, of $265.7
million and stockholders' equity of $22.3 million. See "INFORMATION
REGARDING HOMECORP."
HomeCorp's principal executive offices are located at 1107 East State
Street, Rockford, Illinois, 61104 and its telephone number is (815) 987-2200.
THE PROPOSED MERGER
Subject to the satisfaction of the terms and conditions set forth in
the Merger Agreement, HomeCorp will be merged with and into Ameribanc. Upon
consummation of the Merger, HomeCorp's corporate existence will terminate and
Ameribanc will continue as the surviving entity. Simultaneously with the
effectiveness of the Merger, each share of HomeCorp Common Stock will be
converted into the right to receive 0.4968 of a share of MBI Common Stock.
Such consideration is subject to certain anti-dilution protections but is not
adjustable based upon the operating results, financial condition or other
-9-
<PAGE> 15
factors affecting either MBI or HomeCorp prior to the consummation of the
Merger. The fair market value of MBI Common Stock to be received pursuant to
the Merger may fluctuate and at the consummation of the Merger may be more or
less than the current fair market value of such shares.
Harris Trust and Savings Bank, the transfer agent for MBI Common Stock,
has been selected as the Exchange Agent (the "Exchange Agent") for purposes
of effecting the conversion of HomeCorp Common Stock into MBI Common Stock
upon consummation of the Merger. As soon as practicable after consummation
of the Merger, a letter of transmittal (including instructions setting forth
the procedures for exchanging certificates representing shares of HomeCorp
Common Stock for the MBI Common Stock payable to each holder thereof pursuant
to the Merger Agreement) will be sent to each record holder as of the
Effective Time (as hereinafter defined). Upon surrender to the Exchange
Agent of his or her certificate(s) representing shares of HomeCorp Common
Stock, together with a duly completed and executed letter of transmittal,
each such holder will receive certificates representing that whole number of
shares of MBI Common Stock to which such holder is entitled under the Merger
Agreement. See "TERMS OF THE PROPOSED MERGER - Surrender of HomeCorp Stock
Certificates and Receipt of MBI Common Stock."
The Merger Agreement provides that the consummation of the Merger is
subject to certain terms and conditions, including the approval of the Merger
Agreement by the affirmative vote of the holders of a majority of the
outstanding shares of HomeCorp Common Stock, the receipt of the requisite
regulatory approvals, an opinion of KPMG Peat Marwick LLP to the effect that
the Merger will qualify for pooling-of-interests accounting treatment and an
opinion of counsel for MBI regarding certain federal income tax aspects of
the transaction. For a discussion of each of the conditions to the Merger,
see "TERMS OF THE PROPOSED MERGER - Conditions of the Merger." The Merger
will be consummated and become effective (the "Effective Time") upon the
later of (i) the issuance of a certificate of merger by the Office of the
Secretary of State of the State of Missouri and (ii) the filing of a
certificate of merger with the Office of the Secretary of State of the State
of Delaware.
Unless the parties otherwise agree, the date of the closing of the
Merger (the "Closing Date") shall occur on such date as MBI shall notify
HomeCorp in writing but (i) not earlier than the satisfaction of all
conditions set forth in the Merger Agreement and (ii) not later than the
first business day of the first full calendar month commencing at least five
days after certain conditions to closing as set forth in the Merger Agreement
are satisfied. The Merger Agreement may be terminated at any time prior to
the Closing Date by the mutual consent of the parties or, unilaterally, by
either party upon the occurrence of certain events or if the Merger is not
consummated by September 30, 1998. See "TERMS OF THE PROPOSED MERGER -
Conditions of the Merger" and "- Termination of the Merger Agreement."
OTHER AGREEMENTS
In addition to and contemporaneously with the Merger Agreement, MBI and
HomeCorp executed a Stock Option Agreement (the "Option Agreement") and MBI
and each of the directors of HomeCorp executed separate Voting Agreements
(the "Voting Agreements"). The following is a summary of the material terms
of the Option Agreement and the Voting Agreements.
Option Agreement. Pursuant to the Option Agreement, HomeCorp issued
to MBI an option (the "Option") to purchase up to 424,470 shares of HomeCorp
Common Stock at a price of $19.75 per share (the "Option Price"). The Option
is exercisable upon the occurrence of certain events generally relating to
the failure of HomeCorp to consummate the Merger because of a material change
or potential material change in the ownership of HomeCorp, all as set forth
-10-
<PAGE> 16
in the Option Agreement. No such event has occurred as of the date hereof.
HomeCorp granted the Option as a condition of and in consideration of MBI
entering into the Merger Agreement. The Option is intended to increase the
likelihood that the Merger will be consummated in accordance with the terms
of the Merger Agreement. Consequently, the Option may have the effect of
discouraging a person who might now or prior to the consummation of the Merger
consider or propose the acquisition of HomeCorp (or a significant interest in
HomeCorp), even if such person were prepared to pay a higher price per share for
HomeCorp Common Stock than the price per share implicit in the Exchange Ratio.
In the event MBI acquires shares of HomeCorp Common Stock pursuant to the
Option, MBI could vote those shares in the election of HomeCorp directors and
other matters requiring a stockholder vote, thereby potentially having a
material impact on the outcome of such matters. For additional information
regarding the Option Agreement, see "TERMS OF THE PROPOSED MERGER -- Other
Agreements -- Option Agreement."
VOTING AGREEMENTS. Concurrent with the execution of the Merger
Agreement, MBI and each of the directors of HomeCorp executed separate Voting
Agreements (the "Voting Agreements") pursuant to which each such director
agreed that he or she will vote all of the shares of HomeCorp Common Stock
then owned, controlled or subsequently acquired in favor of the approval of
the Merger Agreement at the Special Meeting. In addition, until the earliest
to occur of the Closing Date or the termination of the Merger Agreement, each
director further agreed he will not vote any such shares in favor of the
approval of any other competing acquisition proposal involving HomeCorp and a
third party. Each director also agreed that he will not transfer shares of
HomeCorp Common Stock unless, prior to such transfer, the transferee executes
an agreement in substantially the same form as the Voting Agreement and
satisfactory to MBI. As of the Record Date (as defined below), the directors
of HomeCorp who signed Voting Agreements owned beneficially, directly and
indirectly, an aggregate of 554,507 shares of HomeCorp Common Stock, or
approximately 32.45% of the issued and outstanding shares.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EMPLOYMENT AGREEMENTS. C. Steven Sjogren, President and Chief
Executive Officer of HomeCorp, and John R. Perkins, Executive Vice President
and Chief Financial Officer of HomeCorp, have each entered into an employment
agreement with MBI pursuant to which they will continue to be employed by MBI
or its affiliates following the consummation of the Merger. Pursuant to Mr.
Sjogren's employment agreement, in addition to certain other terms and
conditions, Mr. Sjogren will be engaged as the President and Chief Executive
Officer of HomeBanc prior to its combination with Mercantile Bank of Northern
Illinois ("Mercantile-Northern Illinois"), and after which time Mr. Sjogren
will serve as President and Chief Executive Officer of the Rockford, Illinois
banking unit of Mercantile-Northern Illinois and as a member of such unit's
advisory board for a period of three years commencing at the Effective Time.
Additionally, Mr. Sjogren shall serve as a member of the Board of Directors
of Mercantile-Northern Illinois. Pursuant to Mr. Perkins' employment
agreement, in addition to certain other terms and conditions, commencing at
the Effective Time, MBI will engage Mr. Perkins as an Executive Vice
President and Chief Accounting Officer of HomeBanc prior to its combination
with Mercantile-Northern Illinois, after which time Mr. Perkins will serve as
Executive Vice President and Chief Financial Officer of the Rockford,
Illinois banking unit of Mercantile-Northern Illinois and as a member of such
unit's advisory board for a period of three years commencing at the Effective
Time. Additionally, Mr. Perkins will serve as a member of the Board of
Directors of Mercantile-Northern Illinois and as Executive Vice President and
Chief Accounting Officer of Mercantile-Northern Illinois. See "TERMS OF THE
PROPOSED MERGER - Interests of Certain Persons in the Merger - Employment
Agreements."
STOCK OPTION AND EMPLOYEE BENEFIT PLANS. Upon consummation of
the Merger, MBI will assume the Stock Plans, and all of the outstanding
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<PAGE> 17
rights (whether or not then exercisable) with respect to the HomeCorp Options
will be converted into rights with respect to the Option Conversion. As a result
of such assumption: (i) each outstanding HomeCorp Option will be exercisable
solely for shares of MBI Common Stock; (ii) the number of shares of MBI Common
Stock subject to the HomeCorp Options will equal the number of shares of
HomeCorp Common Stock subject to each HomeCorp Option outstanding as of the
Effective Time multiplied by the Exchange Ratio; and (iii) the per share
exercise price for each HomeCorp Option will be adjusted by dividing the
exercise price as of the Effective Time by the Exchange Ratio and rounding to
the nearest cent.
In addition, upon consummation of the Merger, Ameribanc will honor all
severance and other compensation contracts and provisions for vested benefits
under the employee plans of HomeCorp and its subsidiary earned or accrued
through the Effective Time. MBI will take such steps as are necessary to
integrate the former employees of HomeCorp and its subsidiary into MBI's
employee benefit plans as soon as practicable after the Effective Time. See
"TERMS OF THE PROPOSED MERGER - Effect on Stock Option and Employee Benefit
Plans."
ADVISORY BOARD. Pursuant to a Letter Agreement dated October 29,
1997, by and between MBI and HomeBanc, all current members of the Board of
Directors of HomeBanc will be entitled to serve as advisory directors of the
Rockford, Illinois banking unit of Mercantile-Northern Illinois for a term of
two years commencing upon the Effective Time.
INDEMNIFICATION. MBI also has agreed that the Merger will not
diminish any indemnification obligations of HomeCorp or its subsidiary in
favor of the employees, agents, directors or officers or HomeCorp or its
subsidiary existing as of the Effective Time. In addition, to the extent
that HomeCorp's existing directors' and officers' liability insurance policy
provides coverage for the acts or omissions of the directors and officers of
HomeCorp and its subsidiary prior to the Effective Time, HomeCorp has agreed
to give to such insurance carrier and to MBI notice of any potential claims
thereunder. On and after the Effective Time, MBI's directors' and officers'
liability insurance policy will provide coverage for the prior acts of the
directors and officers of HomeCorp and its subsidiary. See "TERMS OF THE
PROPOSED MERGER - Interests of Certain Persons in the Merger -
Indemnification."
SPECIAL MEETING OF HOMECORP STOCKHOLDERS
The Special Meeting will be held on February 26, 1998, at 10:00
a.m. Central Time, at Northern Illinois University Rockford Education Center,
8500 East State Street, Rockford, Illinois. Approval by the HomeCorp
stockholders of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of HomeCorp Common Stock. Only
holders of record of HomeCorp Common Stock at the close of business on January
20, 1997 (the "Record Date") will be entitled to notice of, and to vote at, the
Special Meeting. At such date, there were 1,708,552 shares of HomeCorp Common
Stock outstanding. Each share of HomeCorp Common Stock is entitled to one vote
on each matter submitted to a vote at the Special Meeting.
As of the Record Date, directors and executive officers of HomeCorp and
their affiliates owned beneficially, or controlled the voting of, an
aggregate of 782,006 shares of HomeCorp Common Stock, or approximately
40.93% of the shares entitled to vote at the Special Meeting. Each of
HomeCorp's directors and executive officers have indicated his or her
intention to vote his or her shares for the approval of the Merger Agreement.
Additionally, each of the directors of HomeCorp, pursuant to the terms of his
respective Voting Agreement, has committed to vote his or her shares of
HomeCorp Common Stock for the approval of the Merger Agreement. As of the
Record Date, such persons who had executed
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<PAGE> 18
Voting Agreements or otherwise indicated they would vote for approval of the
Merger Agreement owned beneficially, directly and indirectly, an aggregate of
554,507 shares of HomeCorp Common Stock, or approximately 32.45% of the
issued and outstanding shares.
THE BOARD OF DIRECTORS OF HOMECORP CAREFULLY CONSIDERED AND
APPROVED THE TERMS OF THE MERGER AS BEING IN THE BEST INTEREST OF
HOMECORP AND ITS STOCKHOLDERS. THE HOMECORP BOARD UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT. ---
REASONS FOR THE MERGER
HOMECORP. The Board of Directors of HomeCorp believes that the
Merger is in the best interests of HomeCorp and its stockholders. In reaching
the decision to recommend the approval of the Merger Agreement to the
stockholders, the Board of Directors, without assigning any relative or
specific weights, considered a number of factors. For a discussion of such
factors, see "TERMS OF THE PROPOSED MERGER - Background of and Reasons for
the Merger; Board Recommendations."
MBI. MBI's Board of Directors believes that the Merger will enable
MBI to (i) increase its presence in northern Illinois through the acquisition of
an established banking organization and (ii) enhance MBI's ability to compete
in the increasingly competitive banking and financial services industry. See
"TERMS OF THE PROPOSED MERGER - Background of and Reasons for the Merger;
Board Recommendations."
OPINION OF FINANCIAL ADVISOR TO HOMECORP
On October 27, 1997, Charles Webb & Company, a division of Keefe,
Bruyette & Woods, Inc. ("Webb"), HomeCorp's financial advisor, rendered to
the Board of Directors of HomeCorp a written opinion, to the effect that, as
of the date of such opinion, the consideration to be received by the holders
of HomeCorp Common Stock in the Merger was fair to them from a financial
point of view. Webb subsequently updated its opinion on October 29, 1997.
Attached to this Proxy Statement/ Prospectus as Annex B is a copy of the
-------
opinion of Webb, dated October 29, 1997, setting forth the procedures
followed, assumptions made, matters considered and qualifications and
limitations of the review undertaken by Webb in connection with rendering its
opinion. Holders of HomeCorp Common Stock are urged to read Webb's opinion
in its entirety. See "TERMS OF THE PROPOSED MERGER - Background of and
Reasons for the Merger; Board Recommendations" and "- Opinion of Financial
Advisor to HomeCorp."
FRACTIONAL SHARES
No fractional shares of MBI Common Stock will be issued to the
stockholders of HomeCorp in connection with the Merger. Each holder of
HomeCorp Common Stock who otherwise would have been entitled to receive a
fraction of a share of MBI Common Stock shall receive in lieu thereof cash,
without interest, in an amount equal to the holder's fractional share
interest multiplied by the closing stock price of MBI Common Stock on the
NYSE Composite Tape on the Closing Date as reported in The Wall Street
Journal. Cash received by HomeCorp stockholders in lieu of fractional shares
may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER."
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<PAGE> 19
WAIVER AND AMENDMENT
Any provision of the Merger Agreement, including, without limitation,
the conditions to the consummation of the Merger and the restrictions
described under the caption "TERMS OF THE PROPOSED MERGER - Business Pending
the Merger," may be (i) waived in writing at any time by the party that is,
or whose shareholders or stockholders are, entitled to the benefits thereof
or (ii) amended at any time by written agreement of the parties approved by
or on behalf of their respective Boards of Directors, whether before or after
the approval of the Merger Agreement by the stockholders of HomeCorp;
provided, however, that after approval of the Merger Agreement by the
stockholders of HomeCorp at the Special Meeting no such modification may (i)
alter or change the amount or kind of the consideration to be received by the
HomeCorp stockholders pursuant to the Merger Agreement or (ii) adversely
affect the tax treatment to the HomeCorp stockholders as a result of
receiving shares of MBI Common Stock in the Merger.
FEDERAL INCOME TAX CONSEQUENCES IN GENERAL
Thompson Coburn, MBI's legal counsel, has delivered its opinion to the
effect that, assuming the Merger occurs in accordance with the Merger
Agreement and conditioned on the accuracy of certain representations made by
MBI, HomeCorp and certain stockholders of HomeCorp, the Merger will
constitute a "reorganization" for federal income tax purposes and that,
accordingly, assuming the HomeCorp Common Stock is a capital asset in the
hands of the holder at the Effective Time, no gain or loss will be recognized
by HomeCorp stockholders who exchange their shares of HomeCorp Common Stock
solely for shares of MBI Common Stock in the Merger. However, cash received
in lieu of fractional shares may give rise to taxable income. EACH HOMECORP
STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
STOCKHOLDER, INCLUDING THE APPLICABILITY OF VARIOUS STATE, LOCAL
AND FOREIGN TAX LAWS. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER."
REGULATORY APPROVAL
The Merger is subject to prior approval of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") and any other bank
regulatory authority that may be necessary or appropriate (the Federal
Reserve Board and any other bank regulatory authority that may be necessary
or appropriate are collectively referred to herein as the "Regulatory
Authorities" and, individually, as a "Regulatory Authority").
MBI filed the requisite applications regarding the Merger with the Federal
Reserve Board and received approval for the Merger from the Federal Reserve
Board on January 8, 1998. In reviewing the applications and the
proposed Merger, the Federal Reserve Board considered various factors,
including possible anticompetitive effects of the Merger, and examined the
financial and managerial resources and future prospects of the combined
organization. See "TERMS OF THE PROPOSED MERGER - Regulatory Approval" and
"SUPERVISION AND REGULATION."
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for under the
pooling-of-interests method of accounting. See "TERMS OF THE PROPOSED MERGER
Accounting Treatment."
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<PAGE> 20
APPRAISAL RIGHTS
Pursuant to Section 262 of the Delaware General Corporation Law
("DGCL"), holders of HomeCorp Common Stock will not have any appraisal rights
with respect to the Merger. See "APPRAISAL RIGHTS OF STOCKHOLDERS OF
HOMECORP."
MARKETS AND MARKET PRICES
MBI Common Stock is traded on the NYSE under the symbol "MTL." The
closing per share sale price reported for MBI Common Stock on October 28,
1997, the last trading date preceding the public announcement of the Merger,
was $48.00. HomeCorp Common Stock is traded on the Nasdaq National Market
under the symbol "HMCI." The closing per share sale price reported for
HomeCorp Common Stock on October 24, 1997, the last date on which HomeCorp
Common Stock traded preceding the public announcement of the Merger, was
$20.25.
The following table sets forth the periods indicated the high and low
prices per share of MBI Common Stock as reported on the NYSE and of HomeCorp
Common Stock as reported on the Nasdaq National Market along with the
quarterly cash dividends per share declared. The per share prices do not
include adjustments for markups, markdowns or commissions.
<TABLE>
<CAPTION>
MBI<F1> HOMECORP
-------------------------------------- ---------------------------------------
SALES PRICE CASH SALES PRICE CASH
---------------------- DIVIDEND ----------------------- DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
1995
- ----
First Quarter $24.813 $20.813 $ .22 $10.000 $ 6.887 $ --
Second Quarter 29.938 24.000 .22 10.333 7.000 --
Third Quarter 31.312 27.750 .22 8.667 7.000 --
Fourth Quarter 31.000 27.688 .22 9.667 8.000 --
1996
First Quarter $31.000 $27.688 $.273 $12.000 $11.000 $ --
Second Quarter 31.938 29.000 .273 12.500 11.333 --
Third Quarter 35.250 28.938 .273 13.250 11.333 --
Fourth Quarter 36.000 32.688 .273 13.250 11.833 --
1997
First Quarter $39.688 $33.312 $.287 $15.167 $12.667 $ --
Second Quarter 41.688 35.000 .287 15.000 13.500 --
Third Quarter 53.500 40.500 .287 18.280 13.250 --
Fourth Quarter 61.625 45.500 .287 29.250 17.500 --
1998
First Quarter $60.250 $51.375 -- $28.750 $24.250 --
(through January 20, 1997)
<FN>
- ----------------------------
<F1> For a recent sale price of MBI Common Stock, see the cover of this
Proxy Statement/Prospectus.
</TABLE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth for the periods indicated selected
historical per share data of MBI and HomeCorp and the corresponding pro forma
and pro forma equivalent per share amounts giving effect to the proposed
Merger, the acquisition of Roosevelt, and the proposed acquisitions of
Horizon and CBT. The data presented is based upon the supplemental consolidated
financial statements and related notes of MBI and the consolidated financial
statements and related notes of HomeCorp and Roosevelt
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<PAGE> 21
included in this Proxy Statement/Prospectus or in documents incorporated herein
by reference, and the pro forma combined consolidated balance sheet and income
statements, including the notes thereto, appearing elsewhere herein. This
information should be read in conjunction with such historical and pro forma
financial statements and related notes thereto. The assumptions used in the
preparation of this table appear in the notes to the pro forma financial
information appearing elsewhere in this Proxy Statement/Prospectus. See "PRO
FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial
Statements." This data is not necessarily indicative of the results of the
future operations of the combined organization or the actual results that would
have occurred if the Merger and the completed acquisition of Roosevelt and the
proposed acquisitions of Horizon and CBT had been consummated prior to the
periods indicated.
<TABLE>
<CAPTION>
MBI/ MBI/ MBI/
HOMECORP HOMECORP MBI/ALL ENTITIES ALL ENTITIES
MBI HOMECORP PRO FORMA PRO FORMA PRO FORMA PRO FORMA
REPORTED REPORTED COMBINED<F1> EQUIVALENT<F2> COMBINED<F3> EQUIVALENT<F2>
-------- -------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Book Value per Share:
September 30, 1997 $18.070 $13.07 $18.090 $ 8.99 $18.120 $ 9.00
December 31, 1996 16.740 12.31 16.580 8.24 16.050 7.97
Cash Dividends Declared per Share:
Nine months ended September 30, 1997 $ .861 $ -- $ .861 $ .43 $ .861 $ .43
Year ended December 31, 1996 1.090 -- 1.090 .54 1.090 .54
Year ended December 31, 1995 .880 -- .880 .44 .880 .44
Year ended December 31, 1994 .750 -- .750 .37 .750 .37
Earnings per Share:
Nine months ended September 30, 1997 $ .920 $ .74 $ .930 $ .46 $ .700 $ .35
Year ended December 31, 1996 2.110 .20 2.100 1.04 1.490 .74
Year ended December 31, 1995 2.410 .68 2.400 1.19 2.390 1.19
Year ended December 31, 1994 2.060 (2.14) 2.050 1.02 2.060 1.02
Market Price per Share:
At October 28, 1997<F4> $48.000 $20.25 $48.000 $23.85 $48.000 $23.85
At January 20, 1998<F4> 52.500 24.25 52.625 26.14 52.625 26.14
<FN>
- ------------------------
<F1> Includes the effect of pro forma adjustments for HomeCorp, Roosevelt,
Horizon and CBT, as appropriate. See "PRO FORMA FINANCIAL INFORMATION -
Notes to Pro Forma combined Consolidated Financial Statements."
<F2> Based on the pro forma combined per share amounts multiplied by 0.4968,
the conversion ratio applicable to one share of HomeCorp Common Stock in
the Merger. Further explanation of the assumptions used in the
preparation of the pro forma combined consolidated financial statements
is included in the notes to pro forma financial statements. See "PRO
FORMA FINANCIAL INFORMATION - Notes to Pro Forma Combined Consolidated
Financial Statements."
<F3> Includes the effect of pro forma adjustments for HomeCorp, Roosevelt,
Horizon and CBT, as appropriate. Due to the immateriality of the financial
condition and results of operations of Regional to that of MBI, does not
include the effect of pro forma adjustments for Regional. See "PRO FORMA
FINANCIAL INFORMATION--Notes to Pro Forma Combined Consolidated Financial
Statements."
<F4> The market value of MBI Common Stock disclosed as of October 28, 1997,
the last trading day preceding the public announcement of the Merger,
and as of January 20, 1998, the last practicable date prior to the
distribution of the Proxy Statement/Prospectus, is based on the last sale
price as reported on the NYSE Composite Tape. The market value of
HomeCorp Common Stock disclosed as of October 24, 1997, the last day on
which HomeCorp Common Stock traded preceding the public announcement of
the Merger, and as of January 20, 1998, the last practicable date prior
to the distribution of the Proxy Statement/Prospectus, is based on the
last sale price as reported on the Nasdaq National Market.
</TABLE>
SUMMARY FINANCIAL DATA
The following table sets forth for the periods indicated certain
summary historical consolidated financial information for MBI and HomeCorp. The
balance sheet data and income statement data of MBI included in the summary
financial data as of and for the five years
-16-
<PAGE> 22
ended December 31, 1996 are taken from MBI's audited supplemental consolidated
financial statements. The balance sheet data and income statement data of
HomeCorp included in the summary financial data as of and for the five years
ended December 31, 1996 are taken from HomeCorp's audited consolidated financial
statements. The balance sheet data and income statement data included in the
summary financial data as of and for the nine months ended September 30, 1997
and 1996 are taken from the respective unaudited consolidated financial
statements of MBI and HomeCorp. These data include all adjustments which are,
in the opinion of the respective managements of MBI and HomeCorp, necessary
to present a fair statement of these periods and are of a normal recurring
nature. Results for the nine months ended September 30, 1997 are not
necessarily indicative of results for the entire year. The following
information should be read in conjunction with the audited supplemental
consolidated financial statements of MBI and the audited consolidated
financial statements of HomeCorp, and the related notes thereto, included
herein or in documents incorporated herein by reference, and in conjunction
with the unaudited pro forma combined consolidated financial information,
including the notes thereto, appearing elsewhere in this Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE" and "PRO FORMA FINANCIAL INFORMATION."
-17-
<PAGE> 23
<TABLE>
MERCANTILE BANCORPORATION INC.
SUMMARY FINANCIAL DATA
<CAPTION>
ALL ENTITIES
PRO FORMA
COMBINED
CONSOLIDATED
AS OF OR FOR AS OF OR FOR THE
THE NINE NINE MONTHS ENDED AS OF OR FOR THE
MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------- ----------------------------------------------------------
1997 1997 1996 1996 1995 1994 1993 1992
------------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER COMMON SHARE DATA
Net income<F1> $ .70 $ .92 $ 1.41 $ 2.11 $ 2.41 $ 2.06 $ 1.81 $ 1.55
Dividends declared .861 .861 .819 1.09 .88 .75 .66 .62
Book value at period end 18.12 18.07 16.05 16.74 16.29 14.48 13.41 12.11
Average shares
outstanding
(Thousands) 136,031 119,079 116,249 115,938 115,755 112,324 110,167 103,495
EARNINGS (THOUSANDS)
Interest income $1,733,141 $1,352,187 $1,156,323 $1,552,863 $1,516,156 $1,311,928 $1,269,680 $1,316,560
Interest expense 923,465 672,529 541,610 724,910 715,466 521,542 508,469 628,837
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 809,676 679,658 614,713 827,953 800,690 790,386 761,211 687,723
Provision for possible
loan losses 81,082 73,616 57,915 73,015 41,533 48,791 70,584 88,238
Other income 280,186 279,263 242,065 337,480 311,649 272,368 290,380 264,534
Other expense 883,527 702,404 541,961 718,668 640,519 645,011 666,067 616,159
Income taxes 80,560 73,071 92,614 128,535 149,898 135,896 114,768 83,773
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before
extraordinary items $ 94,693 $ 109,830 $ 164,288 $ 245,215 $ 280,389 $ 233,056 $ 200,172 $ 164,087
========== ========== ========== ========== ========== ========== ========== ==========
ENDING BALANCE SHEET
(MILLIONS)
Total assets $ 31,864 $ 29,980 $ 21,264 $ 22,030 $ 20,883 $ 19,397 $ 18,878 $ 18,398
Earning assets 28,448 26,915 19,574 20,061 18,997 17,904 17,390 16,846
Investment securities 7,814 7,320 5,027 4,746 4,964 4,895 5,234 5,148
Loans and leases, net
of unearned income 20,429 19,121 14,272 14,953 13,703 12,764 11,637 11,183
Deposits 23,624 22,112 16,976 17,336 16,172 15,137 15,435 15,295
Long-term debt 1,206 1,169 305 305 344 351 340 365
Shareholders' equity 2,502 2,355 1,824 1,946 1,915 1,643 1,510 1,322
Reserve for possible
loan losses 273 257 234 230 232 245 233 224
SELECTED RATIOS
Return on average assets .40% .59% 1.05% 1.16% 1.39% 1.22% 1.08% .93%
Return on average equity 4.98 7.12 11.58 12.95 15.64 14.57 14.06 13.32
Net interest rate
margin<F2> 3.81 4.08 4.33 4.34 4.38 4.61 4.58 4.36
Equity to assets 7.85 7.85 8.58 8.83 9.17 8.47 8.00 7.19
Reserve for possible
loan losses
Outstanding loans 1.34 1.35 1.64 1.54 1.69 1.92 2.00 2.00
Non-performing
loans 215.51 221.85 356.05 318.99 241.79 552.34 289.13 155.54
Dividend payout ratio -- 93.59 58.09 51.74 36.46 36.13 36.53 39.91
<FN>
- ------------------------
<F1> Based on weighted average common shares outstanding.
<F2> Taxable-equivalent basis. Includes tax-equivalent adjustments of
$11,612,000, $12,263,000, $16,353,000, $17,758,000, $17,962,000,
$18,598,000 and $17,891,000 for September 30, 1997 and 1996 and
December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The
tax-equivalent adjustment used for the pro forma nine month period
ending September 30, 1997 was $13,732,000. These adjustments are
based upon a federal tax rate of 35% for all periods except 1992, when
a federal tax rate of 34% was used.
</TABLE>
-18-
<PAGE> 24
<TABLE>
HOMECORP, INC.
SUMMARY FINANCIAL DATA
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net income<F1> $ .74 $ (0.42) $ 0.20 $ 0.69 $ (2.14) $ 0.92 $ 0.95
Dividends declared -- -- -- -- -- -- --
Book value at period end 13.07 12.06 12.31 12.08 11.30 13.62 12.63
Average common shares
outstanding 1,696,997 1,691,260 1,691,641 1,689,049 1,682,956 1,682,956 1,682,956
EARNINGS (THOUSANDS)
Interest income $ 18,145 $ 18,173 $ 24,381 $ 24,436 21,521 22,415 26,292
Interest expense 10,893 11,106 14,885 15,065 12,496 13,876 17,291
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,252 7,067 9,496 9,371 9,025 8,539 9,001
Provision for possible loan
losses 220 395 565 360 240 250 415
Other income 3,234 2,813 4,130 1,943 2,080 2,431 2,038
Other expense 8,094 9,480 12,499 9,004 13,644 8,313 8,097
Income taxes 830 (5) 203 743 933 801 886
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,342 $ 10 $ 359 $ 1,207 $ (3,712) $ 1,606 $ 1,641
========== ========== ========== ========== ========== ========== ==========
ENDING BALANCE SHEET (THOUSANDS)
Total assets $ 326,877 $ 340,449 $ 335,824 $ 338,027 $ 330,412 $ 333,837 $ 333,901
Earning assets 301,113 313,333 301,712 311,299 310,973 309,792 304,809
Investments 35,209 39,410 38,937 41,582 50,291 62,778 62,682
Loans and leases, net of
unearned income 265,726 272,890 262,595 266,938 246,470 232,704 228,022
Deposits 299,148 307,820 311,754 314,294 307,605 307,587 309,516
Long-term debt -- -- -- -- -- -- --
Stockholders' equity 22,322 20,424 20,858 20,424 19,029 22,926 21,262
Allowance for possible loan
losses 1,619 1,452 1,582 1,175 1,048 956 900
SELECTED RATIOS
Return on average assets 0.54% .-- % 0.11% 0.36% (1.14)% 0.48% 0.48%
Return on average equity 8.33 0.07 1.72 5.49 (17.15) 7.23 8.07
Net interest rate margin<F2> 3.18 3.00 3.04 2.98 2.98 2.77 2.88
Equity to assets 6.83 6.37 6.21 6.04 5.76 6.87 6.37
Reserve for possible loan
losses to:
Outstanding loans 0.61 0.53 0.61 0.45 0.43 0.41 0.40
Non-performing loans 90.34 54.67 73.72 3175.68 191.59 174.77 85.23
Dividend payout ratio -- -- -- -- -- -- --
<FN>
<F1> Based on weighted average common shares outstanding. Prior periods
have been restated for the 3-for-2 stock split of May, 1997.
<F2> Based on interest income on a fully tax-equivalent to basis.
</TABLE>
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<PAGE> 25
INFORMATION REGARDING SPECIAL MEETING
-------------------------------------
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of
HomeCorp Common Stock in connection with the solicitation of proxies by the
Board of Directors of HomeCorp for use at the Special Meeting and any
adjournments or postponements thereof at which the stockholders of HomeCorp
will consider and vote upon a proposal to approve the Merger Agreement and
consider and vote upon any other business that may properly be brought before
the Special Meeting or any adjournments or postponements thereof. Each copy
of this Proxy Statement/Prospectus is accompanied by the Notice of Special
Meeting of Stockholders of HomeCorp, a proxy card and a return envelope to
HomeCorp for the proxy card.
This Proxy Statement/Prospectus also is furnished by MBI to each holder
of HomeCorp Common Stock as a prospectus in connection with the issuance by
MBI of shares of MBI Common Stock upon the consummation of the Merger. This
Proxy Statement/Prospectus and the Notice of Special Meeting, proxy card is
being first mailed to stockholders of HomeCorp on , 1998.
----------
DATE, TIME AND PLACE
The Special Meeting will be held at Northern Illinois University Rockford
Education Center, 8500 East State Street, Rockford, Illinois, on February 26,
1997, at 10:00 a.m. Central Time.
RECORD DATE; VOTE REQUIRED
On the Record Date, there were 1,708,552 shares of HomeCorp Common
Stock outstanding and entitled to vote at the Special Meeting. Each such share
is entitled to one vote on each matter properly brought before the Special
Meeting. The affirmative vote of the holders of a majority of the
outstanding shares of HomeCorp Common Stock is required to approve the Merger
Agreement.
As of the Record Date, directors and executive officers of HomeCorp and
their affiliates owned beneficially, or controlled the voting of, an
aggregate of 782,006 shares of HomeCorp Common Stock, or approximately
40.93% of the outstanding shares of HomeCorp Common Stock entitled to vote at
the Special Meeting. Each of the directors and executive officers of
HomeCorp has indicated his or her intention to vote his or her shares for the
approval of the Merger Agreement at the Special Meeting. Additionally, each
director of HomeCorp, pursuant to the terms of his respective Voting
Agreement, has committed to vote his shares of HomeCorp Common Stock for
approval of the Merger Agreement. As of the Record Date, such persons who
had executed Voting Agreements or otherwise indicated they would vote for
approval of the Merger Agreement owned beneficially, directly or indirectly,
an aggregate of 554,507 shares of HomeCorp Common Stock, or approximately
32.45% of the issued and outstanding shares. See "TERMS OF THE PROPOSED
MERGER - Other Agreements."
VOTING AND REVOCATION OF PROXIES
Shares of HomeCorp Common Stock that are represented by a properly
executed proxy received prior to the vote at the Special Meeting will be
voted at such Special Meeting in the manner directed on the proxy card,
unless such proxy is revoked in the manner set forth herein in advance of
such vote. ANY HOMECORP STOCKHOLDER RETURNING AN EXECUTED PROXY CARD THAT DOES
NOT PROVIDE
-20-
<PAGE> 26
INSTRUCTIONS TO VOTE AGAINST THE APPROVAL OF THE MERGER AGREEMENT
WILL BE DEEMED TO HAVE APPROVED THE MERGER AGREEMENT. Failure to return a
properly executed proxy card or to vote in person at the Special Meeting will
have the practical effect of a vote against the approval of the Merger
Agreement.
Shares subject to abstentions will be treated as shares that are
present and voting at the Special Meeting for purposes of determining the
presence of a quorum. Because the affirmative vote of a majority of the
outstanding shares of HomeCorp Common Stock is required for approval of the
Merger Agreement, absentions will have the effect of votes against the approval
of the Merger Agreement. Broker "non-votes" (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares with respect to
which the brokers or nominees do not have discretionary power to vote without
such instructions) will not be considered as present for the purposes of
determining the presence of a quorum. Broker non-votes will, therefore, have
the effect of a vote against the approval of the Merger Agreement.
Any stockholder of HomeCorp giving a proxy may revoke it at any time
prior to the vote at the Special Meeting. Stockholders of HomeCorp wishing
to revoke a proxy prior to the vote may do so by delivering to the Secretary
of HomeCorp at 1107 East State Street, Rockford, Illinois 61104, at or before
the Special Meeting, a written notice of revocation bearing a later date than
the proxy or a later dated proxy relating to the same shares, or by attending
the Special Meeting and voting such shares in person. Attendance at the
Special Meeting will not in itself constitute the revocation of a proxy.
The Board of Directors of HomeCorp currently is not aware of any
business to be brought before the Special Meeting other than that described
herein. If, however, other matters are properly brought before such Special
Meeting, or any adjournments or postponements thereof, the persons appointed
as proxies will have discretionary authority to vote the shares represented
by duly executed proxies in accordance with their discretion and judgment as
to the best interest of HomeCorp.
SOLICITATION OF PROXIES
HomeCorp will bear its own costs of soliciting proxies, except that MBI
will pay printing and mailing expenses and registration fees incurred in
connection with preparing this Proxy Statement/Prospectus. Proxies will
initially be solicited by mail, but directors, officers and selected other
employees of HomeCorp also may solicit proxies in person or by telephone.
Directors, executive officers and any other employees of HomeCorp who solicit
proxies will not be specially compensated for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to
forward proxy materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
HOLDERS OF HOMECORP COMMON STOCK ARE REQUESTED TO COMPLETE,
DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
-21-
<PAGE> 27
TERMS OF THE PROPOSED MERGER
----------------------------
The following is a summary of the material terms and conditions of the
Merger Agreement, the text of which is attached hereto as Annex A. This
-------
summary is qualified in its entirety by the full text of the Merger
Agreement. All stockholders of HomeCorp are urged to read the Merger
Agreement in its entirety.
GENERAL DESCRIPTION OF THE MERGER
Pursuant to the Merger Agreement, subject to satisfaction or waiver of
certain conditions precedent, including receipt of all applicable regulatory
approvals, HomeCorp will be merged on the Closing Date with and into
Ameribanc. Upon consummation of the Merger, HomeCorp's corporate existence
will terminate and Ameribanc will continue as the surviving entity. At the
Effective Time, each share of HomeCorp Common Stock will be converted into
the right to receive 0.4968 of a share of MBI Common Stock. Such
consideration is subject to certain anti-dilution protections but is not
adjustable based upon the operating results, financial condition or other
factors affecting either MBI or HomeCorp prior to the consummation of the
Merger. The fair market value of MBI Common Stock received pursuant to the
Merger may fluctuate and at the consummation of the Merger may be more or
less than the current fair market value of such shares.
The amount and nature of the consideration was established through
arm's-length negotiations between MBI and HomeCorp and their respective
advisors, and reflects the balancing of a number of countervailing factors.
The total amount of the consideration reflects a price both parties concluded
was appropriate. See "-Background of and Reasons for the Merger; Board
Recommendations." The fact that the consideration is payable in shares of
MBI Common Stock reflects the desire of the parties to the Merger to have the
favorable tax attributes of a "reorganization" for federal income tax
purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
NO ASSURANCE CAN BE GIVEN THAT THE CURRENT FAIR MARKET VALUE
OF MBI COMMON STOCK WILL BE EQUIVALENT TO THE FAIR MARKET VALUE OF
MBI COMMON STOCK ON THE DATE SUCH STOCK IS RECEIVED BY A HOMECORP
STOCKHOLDER OR AT ANY OTHER TIME. THE FAIR MARKET VALUE OF MBI
COMMON STOCK RECEIVED BY A HOMECORP STOCKHOLDER MAY BE GREATER OR
LESS THAN THE CURRENT FAIR MARKET VALUE OF MBI COMMON STOCK DUE TO
NUMEROUS MARKET FACTORS.
Following the Closing Date, each stockholder of HomeCorp will be
required to submit to the Exchange Agent a properly executed letter of
transmittal and surrender to the Exchange Agent the stock certificate(s)
formerly representing the shares of HomeCorp Common Stock in order to receive
a new stock certificate(s) evidencing the shares of MBI Common Stock to which
such shareholder is entitled. As soon as practicable following the Effective
Time, the Exchange Agent will mail to each HomeCorp stockholder a notice of
consummation of the Merger and a form of letter of transmittal, together with
instructions and a return envelope to facilitate the exchange of such
holder's certificate(s) formerly representing HomeCorp Common Stock for
certificate(s) evidencing MBI Common Stock. No dividends or other
distributions will be paid to a former HomeCorp stockholder with respect to
shares of MBI Common Stock until such stockholder's letter of transmittal and
stock certificate(s) formerly representing HomeCorp Common Stock, or
documentation reasonably acceptable to the Exchange Agent in lieu of lost or
destroyed certificates, is delivered to the Exchange Agent. See "TERMS OF THE
PROPOSED MERGER - Surrender of
-22-
<PAGE> 28
HomeCorp Stock Certificates and Receipt of MBI Common Stock." No fractional
shares of MBI Common Stock will be issued in the Merger, but cash will be paid
in lieu of such fractional shares, such cash being calculated by multiplying the
holder's fractional share interest by the closing stock price of MBI Common
Stock on the NYSE Composite Tape on the Closing Date of the Merger as
reported in The Wall Street Journal. See "- Fractional Shares." The shares
of MBI Common Stock to be issued pursuant to the Merger will be freely
transferable except by certain stockholders of HomeCorp who are deemed to be
"affiliates" of HomeCorp. The shares of MBI Common Stock issued to such
affiliates will be restricted in their transferability in accordance with the
rules and regulations promulgated by the Commission. See "INFORMATION
REGARDING MBI STOCK - Restrictions on Resale of MBI Stock by Affiliates."
OTHER AGREEMENTS
In addition to and contemporaneously with the Merger Agreement, MBI and
HomeCorp executed the Option Agreement and MBI and each of the directors of
HomeCorp executed separate Voting Agreements. The following is a summary of
the material terms of the Option Agreement and the Voting Agreements:
OPTION AGREEMENT. Under the terms of the Option Agreement, HomeCorp
issued to MBI an option to purchase up to 424,470 shares of HomeCorp Common
Stock at a price per share equal to $19.75. The Option was granted by
HomeCorp as a condition and in consideration of MBI entering into the Merger
Agreement. THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPTION AGREEMENT, WHICH IS
ATTACHED AS AN EXHIBIT TO THE REGISTRATION STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE.
The Option is intended to increase the likelihood that the Merger will
be consummated in accordance with the terms of the Merger Agreement. The
occurrence of certain events described below could cause the Option to become
exercisable and thereby significantly increase the cost of the acquisition of
HomeCorp. Consequently, the Option may (i) have the effect of discouraging a
person who might now or prior to the consummation of the Merger consider or
propose the acquisition of HomeCorp (or a significant interest in HomeCorp),
even if such a person were prepared to pay a higher price per share for
HomeCorp Common Stock than the price per share implicit in the Exchange
Ratio, (ii) result in the proposal by a potential acquiror of a lower per
share price than such acquiror might otherwise have been willing to pay or
(iii) prevent a potential acquiror from accounting for the acquisition of
HomeCorp through the pooling-of-interests method for a period of two years
and thereby discourage or preclude the acquisition of HomeCorp, during such
period.
As of the Record Date, the maximum number of shares issuable pursuant
to the Option (the "MBI Option Shares") represented 19.9% of the issued and
outstanding shares of HomeCorp Common Stock after giving effect to the
exercise of the Option. The Option exercise price is $19.75 per share. In
the event MBI acquires the MBI Option Shares, MBI could vote such shares in
the election of HomeCorp directors and other matters requiring a stockholder
vote, thereby potentially having a material impact on the outcome of such
matters.
If not then in material breach of the Merger Agreement, MBI may
exercise the Option, in whole or in part, at any time or from time to time if a
Purchase Event (as defined below) has occurred; provided, however, that: (i)
to the extent the Option has not been exercised, it will terminate and be of
no further force and effect upon the earlier to occur of (A) the Effective
Time and (B) the termination of the Merger Agreement in accordance with its
terms, provided that in the case of certain terminations of the
-23-
<PAGE> 29
Merger Agreement, as specified in the Option Agreement, the Option will not
terminate until the date that is 12 months following such termination; (ii)
if the Option cannot be exercised on such day because of any injunction,
order or similar restraint issued by a court of competent jurisdiction, the
Option will expire on the thirtieth business day after such injunction, order
or restraint has been dissolved or when such injunction, order or restraint
has become permanent and is no longer subject to appeal, as the case may be;
and (iii) any such exercise will be subject to compliance with applicable
law, including the BHCA and the HOLA.
A "Purchase Event" means any of the following events: (i) HomeCorp or
its subsidiary, without having received prior written consent from MBI, has
entered into, authorized, recommended, proposed or publicly announced its
intention to enter into, authorize, recommend or propose an agreement,
arrangement or understanding with any person (other than MBI or any of its
subsidiaries) to (A) effect a merger, consolidation or similar transaction
involving HomeCorp or its subsidiary, (B) purchase, lease or otherwise
acquire 15% or more of the assets of HomeCorp or its subsidiary or (C)
purchase or otherwise acquire (including by way of merger, consolidation,
share exchange or similar transaction) beneficial ownership of securities
representing 15% or more of the voting power of HomeCorp or its subsidiary;
(ii) any person (other than MBI or any subsidiary of MBI, or HomeCorp or its
subsidiary of in a fiduciary capacity) has acquired beneficial ownership or
the right to acquire beneficial ownership of 15% or more of the voting power
of HomeCorp; or (iii) the holders of HomeCorp Common Stock have not approved
the Merger Agreement at the Special Meeting, the Special Meeting has not been
held or is cancelled prior to termination of the Merger Agreement in
accordance with its terms or the HomeCorp Board of Directors has withdrawn or
modified in a manner adverse to MBI the recommendation of HomeCorp Board of
Directors with respect to the Merger Agreement, in each case after an
Extension Event.
An "Extension Event" means any of the following events: (i) a Purchase
Event; (ii) any person (other than MBI or any of its subsidiaries) has
"commenced" (as such term is defined in Rule 14d-2 under the Exchange Act) or
has filed a registration statement under the Securities Act with respect to a
tender offer or exchange offer to purchase shares of HomeCorp Common Stock
such that, upon consummation of such offer, such person would have beneficial
ownership or the right to acquire beneficial ownership of 15% or more of the
voting power of HomeCorp; or (iii) any person (other than MBI or any
subsidiary of MBI, or HomeCorp or any subsidiary of HomeCorp in a fiduciary
capacity) has publicly announced its willingness, a proposal or an intention
to make a proposal, (x) to make an offer described in clause (ii) above or
(y) to engage in a transaction described in clause (i) above.
Subject to regulatory approval, upon the occurrence of a Purchase Event
and until 13 months thereafter, HomeCorp shall be required, upon MBI's
request, to repurchase any shares of HomeCorp Common Stock purchased by MBI,
at a price equal to the greater of the market price or the highest price per
share at which a tender or exchange offer has been made for shares of
HomeCorp Common Stock (the "Market Price"), or to purchase the Option for the
amount by which the Market Price exceeds the Option Price.
At the request of HomeCorp during the first six-month period commencing
13 months following the first occurrence of a Purchase Event, HomeCorp may
repurchase from MBI, and MBI shall sell to HomeCorp, all (but not less than
all) of the HomeCorp Common Stock acquired by MBI pursuant to the Option at a
price per share equal to the greater of (i) Market Price or (ii) the sum of
(A) the aggregate purchase price of such shares plus (B) interest on the
aggregate purchase price paid for such shares from the date of purchase to the
date of repurchase, less any dividends received on such shares.
-24-
<PAGE> 30
To the best of MBI's and HomeCorp's knowledge, no Purchase Event or
Extension Event has occurred as of the date of this Proxy
Statement/Prospectus.
VOTING AGREEMENTS. MBI and each of the directors of HomeCorp
executed a separate Voting Agreement pursuant to which each such director
agreed that he or she will vote all of the shares of HomeCorp Common Stock
that he then owned, controlled or subsequently acquires in favor of the
approval of the Merger Agreement at the Special Meeting. In addition, until
the earliest to occur of the Effective Time, the termination of the Voting
Agreements or the abandonment of the Merger, each such director further
agreed that he will not vote any such shares in favor of the approval of any
other competing acquisition proposal involving HomeCorp and a third party.
Each such director also agreed that he will not transfer shares of HomeCorp
Common Stock unless, prior to such transfer, the transferee executes an
agreement in substantially the same form as the Voting Agreement. As of the
Record Date, such directors owned beneficially, directly or indirectly, an
aggregate of 782,006 shares of HomeCorp Common Stock, or approximately 40.93%
of the issued and outstanding shares.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EMPLOYMENT AGREEMENTS. C. Steven Sjogren, President and Chief
Executive Officer of HomeCorp, and John R. Perkins, Executive Vice President
and Chief Financial Officer of HomeCorp, has entered into an employment
agreement with MBI pursuant to which each will continue to be employed by MBI
or its affiliates following the consummation of the Merger.
Pursuant to Mr. Sjogren's employment agreement, Mr. Sjogren will be
engaged as the President and Chief Executive Officer of HomeBanc prior to its
combination with Mercantile-Northern Illinois, after which time Mr. Sjogren
will serve as President and Chief Executive Officer of the Rockford, Illinois
banking unit of Mercantile-Northern Illinois and as a member of such unit's
advisory board for a period of three years commencing at the Effective Time.
Additionally, Mr. Sjogren will serve as a member of the Board of Directors of
Mercantile-Northern Illinois. In consideration of such services, Mr. Sjogren
will receive an annual base salary which shall not be less than $165,000,
inclusive of all customary directors' fees. Mr. Sjogren also will be eligible
to receive for each of the three years an annual bonus in an amount to be
determined by the Board of Directors of Mercantile-Northern Illinois,
initially up to 30% of the base salary, but in no event less than $40,000. In
addition to the base salary and annual bonus, Mr. Sjogren will receive a
one-time transition bonus in the amount of $247,500, payable in three equal
installments on each of the six-month, twelve-month and eighteen-month
anniversaries of the Effective Time, provided that he is in the employ of MBI
as of each such applicable date. If on or before the third anniversary of the
Effective Time (i) Mr. Sjogren's engagement with MBI is terminated
involuntarily by MBI other than for "cause" (as defined in the employment
agreement), (ii) Mr. Sjogren voluntarily terminates his engagement for "good
reason" (as defined in the employment agreement) or (iii) Mr. Sjogren dies or
becomes permanently disabled, MBI shall pay Mr. Sjogren an amount equal to
the sum of (x) any portion of his earned annual base salary for any period
prior to termination of his employment that is unpaid on the date of
termination, (y) the product of (1) the number of months remaining in the
three-year employment period, divided by 12, and (2) the annual base salary,
plus (z) the unpaid portion, if any, of the transition bonus, payable in
semi-monthly installments on the same date that Mr. Sjogren's annual base
salary installment would have been payable, throughout the balance of the
three-year employment period commencing on the first such date after the date
of termination. Mr. Sjogren also has agreed not to compete with MBI or its
affiliates while engaged by MBI (i) during the three-year employment period,
(ii) during any period for which the he is receiving payments and/or benefits
pursuant to the employment agreement,
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and (iii) if his employment is terminated for "cause" or is terminated by him
for other than good reason, during the period up through and including the first
anniversary of the date of termination.
Pursuant to Mr. Perkins's employment agreement, commencing at the
Effective Time, MBI will engage Mr. Perkins as an Executive Vice President
and Chief Accounting Officer of HomeBanc prior to its combination with
Mercantile-Northern Illinois, after which time Mr. Perkins will serve as
Executive Vice President and Chief Financial Officer of the Rockford,
Illinois banking unit of Mercantile-Northern Illinois and as a member of such
unit's advisory board for a period of three years commencing at the Effective
Time. Additionally, Mr. Perkins will serve as a member of the Board of
Directors of Mercantile-Northern Illinois and as Executive Vice President and
Chief Accounting Officer for Mercantile-Northern Illinois. In consideration
of such services, Mr. Perkins will receive an annual base salary which shall
not be less than $115,000, inclusive of all customary directors' fees. Mr.
Perkins also will be eligible to receive for each of the three years an
annual bonus in an amount to be determined by the Board of Directors of
Mercantile-Northern Illinois, initially up to 25% of the base salary, but in
no event less than $20,000. In addition to the base salary and annual bonus,
Mr. Perkins will receive a one-time transition bonus in the amount of
$150,000, payable in three equal installments on each of the six-month,
twelve-month and eighteen-month anniversaries of the Effective Time, provided
that he is in the employ of MBI as of each such applicable date. If on or
before the third anniversary of the Effective Time (i) Mr. Perkins's
engagement with MBI is terminated involuntarily by MBI other than for "cause"
(as defined in the employment agreement), (ii) Mr. Perkins voluntarily
terminates his engagement for "good reason" (as defined in the employment
agreement) or (iii) Mr. Perkins dies or becomes permanently disabled, MBI
shall pay to Mr. Perkins an amount equal to the sum of (x) any portion of his
earned annual base salary for any period prior to termination of his
employment that is unpaid on the date of termination, (y) the product of (1)
the number of months remaining in the three-year employment period, divided
by 12, and (2) the annual base salary, plus (z) the unpaid portion, if any,
of the transition bonus, payable in semi-monthly installments on the same
date that Mr. Perkins' annual base salary installment would have been
payable, throughout the balance of the three-year employment period
commencing on the first such date after the date of termination.
During Mr. Sjogren's and Mr. Perkins' employment with MBI, Mr. Sjogren
and Mr. Perkins will each be entitled to receive employee benefits and
customary perquisites equivalent to those provided by MBI to similarly
situated senior officers.
ADVISORY BOARD. Pursuant to the Letter Agreement dated October 29,
1997, by and among MBI and HomeBanc, all current members of the Board of
Directors of HomeBanc will be entitled to serve as advisory directors of the
Rockford, Illinois banking unit of Mercantile-Northern Illinois for a term of
two years commencing upon the Effective Time. Each director will receive
$300 for each monthly board meeting attended.
INDEMNIFICATION. MBI also has agreed that the Merger will not
diminish any indemnification obligations of HomeCorp or its subsidiary in
favor of the employees, agents, directors or officers or HomeCorp or its
subsidiary existing as of the Effective Time by operation of law or by virtue
of the Certificate of Incorporation, by-laws, contracts, resolutions or other
agreements or documents of HomeCorp or its subsidiary in effect as of the
Effective Time. To the extent that HomeCorp's existing directors' and
officers' liability insurance policy provides coverage for the acts or
omissions of the directors and officers of HomeCorp and its subsidiary prior to
the Effective Time, HomeCorp has agreed to give to such insurance carrier and to
MBI notice of any potential claims thereunder. On and after the
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Effective Time, MBI's directors' and officers' liability insurance policy will
provide coverage for the prior acts of the directors and officers of HomeCorp
and its subsidiary.
BACKGROUND OF AND REASONS FOR THE MERGER; BOARD RECOMMENDATIONS
BACKGROUND OF THE MERGER. HomeCorp was formed in 1989 as a thrift
holding company to serve as the holding company for HomeBanc. In 1990,
HomeBanc converted from a federally chartered mutual savings and loan
association to a federal stock savings and loan association.
Following the conversion, and consistent with HomeCorp's business plan,
management of HomeCorp and HomeBanc focused on improving HomeBanc's core
business of obtaining deposits from the public and originating one to
four-family mortgage loans. In addition, HomeBanc has concentrated its
effort on controlling operating expenses to improve overall profitability.
Throughout the period following the conversion, HomeCorp also
considered its strategic options, considering its market area and size, in an
environment of an accelerated rate of consolidation in the financial services
industry. These alternatives were focused on growth in community banking
that was accomplished by increased sales and marketing initiatives. These
efforts increased core deposits and loan originations. In an effort to focus
on maximizing the long-term value of stockholders' interests, management and
the Board of Directors of HomeCorp considered engaging in a business
combination.
During 1996, HomeCorp's Board of Directors was contacted by a potential
acquiror not affiliated with MBI concerning a possible sale of HomeCorp.
HomeCorp had preliminary discussions with this potential acquirer, but terms
of a potential merger were not agreed upon and the parties terminated
discussions.
In the Spring of 1997, management was contacted by MBI regarding a
possible business combination and preliminary discussions were initiated
regarding the terms and conditions of MBI's proposal. These early discussions
did not lead to further progress. However, several months later, preliminary
discussions with MBI resumed. Based on the later preliminary discussions,
the Board of Directors of HomeCorp authorized management to pursue additional
discussions with MBI and to provide MBI with information to facilitate MBI's
review of the business, assets and operations of HomeCorp and HomeBanc. In
June 1997, management of HomeCorp began to work with Charles Webb to analyze
MBI's proposal.
Additional discussions occurred between representatives of MBI and
HomeCorp in September 1997 during which period MBI conducted a due diligence
review of HomeCorp and HomeBanc. During the same period, management and the
Board of Directors of HomeCorp reviewed with HomeCorp's special legal
counsel, Silver, Freedman & Taff, L.L.P., the legal ramifications of a
business combination generally. Subsequently, in October 1997, the Board of
Directors of HomeCorp retained Charles Webb to render an opinion that the
consideration to be received in the Merger is fair, from a financial point of
view, to HomeCorp's stockholders. The HomeCorp Board of Directors also
evaluated whether the interests of the holders of HomeCorp Common Stock would
be best served by remaining independent or by pursuing a business combination
with MBI on the basis of the discussions to date. Specifically, the Board of
Directors of HomeCorp considered whether the proposed business combination
would result in a return of value to HomeCorp stockholders that could not be
achieved through HomeCorp's operations as an independent entity. The Board of
Directors of HomeCorp determined that the proposed business combination with
MBI
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<PAGE> 33
would likely provide a greater rate of return to HomeCorp stockholders
than could be achieved through HomeCorp's continued independent operations.
A draft definitive agreement was submitted by MBI in October 1997 and
negotiations continued regarding the terms and conditions of the definitive
agreement and the form of the consideration to be paid in the Merger. These
negotiations resulted in the presentation of the Merger Agreement to the
HomeCorp Board of Directors on October 27, 1997. At this meeting, the Board
of Directors received a comprehensive report on the negotiations with MBI and
the terms and conditions of the Merger Agreement were reviewed at length with
Silver, Freedman & Taff, L.L.P. The HomeCorp Board of Directors unanimously
Approved the Merger Agreement.
HOMECORP'S REASONS AND BOARD RECOMMENDATION. HomeCorp's Board
of Directors believes that the terms of the Merger Agreement, which are the
product of arm's length negotiations between representatives of MBI and
HomeCorp, are fair and in the best interests of HomeCorp and its
stockholders. In the course of reaching its determination, the HomeCorp Board
of Directors consulted with legal counsel with respect to its legal duties,
the terms of the Merger Agreement and the issues related thereto; with its
financial advisor with respect to the financial aspects and fairness of the
transaction; and with senior management regarding, among other things,
operational matters.
In reaching its determination to approve the Merger Agreement,
HomeCorp's Board of Directors considered all factors it deemed material,
which are the following:
(a) The HomeCorp Board of Directors analyzed information with
respect to the financial condition, results of operations, cash flow,
businesses and prospects of HomeCorp. In this regard, the HomeCorp
Board of Directors analyzed the option of selling HomeCorp or
continuing on a stand-alone basis. The range of values for a share
of HomeCorp Common Stock on a sale of control basis were determined
to generally exceed the present value of HomeCorp shares on a
stand-alone basis under business strategies that could be reasonably
implemented by HomeCorp.
(b) The HomeCorp Board of Directors considered the opinion of
Charles Webb that the consideration to be received by holders of
HomeCorp Common Stock pursuant to the Merger Agreement was fair to
HomeCorp stockholders from a financial point of view.
(c) The HomeCorp Board of Directors considered the current
operating environment, including, but not limited to, the continued
consolidation and increasing competition in the banking and financial
services industries, the prospect for further changes in these
industries and federal regulatory agency consolidation and the
importance of being able to capitalize on developing opportunities in
these industries.
(d) The HomeCorp Board of Directors considered the other terms
of the Merger Agreement and exhibits, including the tax-deferred
nature of the consideration to be received by the holders of HomeCorp
Common Stock pursuant to the Merger Agreement.
(e) The HomeCorp Board of Directors considered the detailed
financial analyses, pro forma and other information with respect to
HomeCorp and MBI prepared
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by Charles Webb, as well as the HomeCorp Board of Directors' own knowledge
of HomeCorp, MBI and their respective businesses. In this regard, the
latest publicly-available financial and other information for HomeCorp and
MBI were analyzed, including a comparison to publicly-available financial
and other information for other similar savings institutions.
(f) The HomeCorp Board of Directors considered the value of
HomeCorp Common Stock continuing as a stand-alone entity compared to
the effect of HomeCorp combining with MBI in light of the factors
summarized above and the current economic and financial environment,
including, but not limited to, other possible strategic alternatives,
the results of the contacts and discussions between HomeCorp and its
financial advisor and various third parties and the belief of the
HomeCorp Board of Directors and management that the Merger offered
the best transaction available to HomeCorp and its stockholders.
(g) The HomeCorp Board of Directors considered the ability of
MBI to pay the aggregate consideration in the Merger. HomeCorp's
Board of Directors reviewed MBI's liquidity, capital position and
dividend history as reflected in MBI's latest shareholder reports in
evaluating the ability of MBI to pay the aggregate consideration in
the Merger.
The foregoing discussion of the information and factors considered by
the HomeCorp Board of Directors is not intended to be exhaustive, but
constitutes the material factors considered by the HomeCorp Board of
Directors. In reaching its determination to approve and recommend the Merger
Agreement, the HomeCorp Board of Directors did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
weighed factors differently. After deliberating with respect to the Merger
and the other transactions contemplated by the Merger Agreement, considering,
among other things, the matters discussed above and the opinion of Charles
Webb referred to above, the HomeCorp Board of Directors unanimously approved
and adopted the Merger Agreement and the transactions contemplated thereby as
being in the best interests of HomeCorp and its stockholders.
FOR THE REASONS SET FORTH ABOVE, THE HOMECORP BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AS IN THE
BEST INTEREST OF HOMECORP STOCKHOLDERS AND RECOMMENDS THAT
STOCKHOLDERS OF HOMECORP VOTE FOR THE APPROVAL OF THE MERGER
---
AGREEMENT.
MBI'S REASONS AND BOARD RECOMMENDATIONS. The Executive
Committee of the Board of Directors of MBI considered a number of factors,
including, among other things, the financial condition of HomeCorp and projected
synergies that are anticipated to result from the Merger. The Executive
Committee concluded that the Merger presents an unique opportunity for MBI to
increase its presence in northern Illinois through the acquisition of an
established banking organization having operations in the targeted area.
MBI's decision to pursue discussions with HomeCorp was primarily a result of
MBI's assessment of the value of HomeCorp's banking franchise, its
substantial asset base within that area and the compatibility of the
businesses of the two banking organizations.
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<PAGE> 35
OPINION OF FINANCIAL ADVISOR TO HOMECORP
In June 1997, Webb began to work with management of HomeCorp to render
financial advisory and investment banking services to HomeCorp in connection
with strategic planning and merger and acquisition transactions.
Webb is a nationally recognized investment banking firm and, as part of
its investment banking business, is regularly engaged in the valuation of
bank, bank holding company and thrift institution securities in connection
with mergers and acquisitions, negotiated underwritings, distributions of
listed and unlisted securities, private placements and valuations for various
other purposes. Webb is familiar with the market for common stocks of
publicly traded banks, thrifts and bank and thrift holding companies. The
HomeCorp Board of Directors selected Webb on the basis of the firm's
familiarity with HomeCorp, its qualifications, reputation and its experience
and expertise in transactions similar to the Merger. Webb has acted
exclusively for the HomeCorp Board of Directors in rendering its fairness
opinion and will receive a fee for its services.
Pursuant to its engagement, Webb was asked to render an opinion as to
the fairness, from a financial point of view, of the consideration proposed
to be received by stockholders of HomeCorp in the Merger. Webb delivered its
opinion to the HomeCorp Board of Directors that, as of October 29, 1997, the
consideration was fair, from a financial point of view, to the stockholders
of HomeCorp. No limitations were imposed by the HomeCorp Board of Directors
upon Webb with respect to the investigations made or procedures followed by
it in rendering its opinion. Webb has consented to the inclusion herein of
its opinion to the HomeCorp Board of Directors and to the reference to the
entire opinion attached hereto as Annex B.
-------
THE FULL TEXT OF THE OPINION OF CHARLES WEBB IS ATTACHED AS
ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED
- -------
HEREIN BY REFERENCE. THE DESCRIPTION OF THE OPINION SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX B.
-------
HOMECORP STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY WEBB IN CONNECTION THEREWITH. CHARLES WEBB'S
OPINION IS DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED BY
THE STOCKHOLDERS OF HOMECORP AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOMECORP STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In rendering its opinion, Webb reviewed, analyzed and relied upon the
following material relating to the financial and operating condition of
HomeCorp and MBI: (i) the Merger Agreement; (ii) HomeCorp's and MBI's Annual
Reports, Proxy Statements and Form 10-K's for the years ended December 31,
1996, 1995 and 1994; (iii) HomeCorp's and MBI's Quarterly Reports on Form
10-Q for the quarters ended March 31, 1997 and June 30, 1997; (iv) certain
other internal financial information concerning the business and operations
of HomeCorp and MBI furnished to Webb by HomeCorp and MBI for the purpose of
Webb's analysis, including certain internal financial analysis prepared by
senior management of HomeCorp and MBI; (v) certain publicly available
information concerning the trading of and the trading market for the common
stock of HomeCorp and MBI; (vi) certain publicly available information with
respect to banking companies and the nature and terms of certain other
transactions that Webb considered relevant to its inquiry; (vii) certain recent
business combinations with thrifts as the acquired company, which Webb deemed
comparable in whole or in part; and (viii) other analyses that Webb considered
appropriate. Webb also held discussions with senior management of HomeCorp and
MBI concerning their past and current operations, financial condition and
prospects, as well as
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the results of regulatory examinations. Webb also considered such financial
and other factors as it deemed appropriate under the circumstances and took
into account its assessment of general economic, market and financial
conditions, and its experience in similar transactions, as well as its
experience in securities valuation and its knowledge of banks, bank holding
companies and thrift institutions generally. Webb's opinion was necessarily
based upon conditions as they existed and could be evaluated on the date
thereof and the information made available to Webb through the date thereof.
In rendering its opinion, Webb assumed and relied upon the accuracy and
completeness of the financial information provided to it by HomeCorp and MBI
or publicly available, and Webb did not attempt to verify such information
independently. Webb relied upon the respective management of HomeCorp and
MBI as to the reasonableness and achievability of the financial and operating
estimates (and the assumptions and bases therefor) provided to Webb and
assumed that such estimates reflected the best available judgments of such
management and that such estimates will be realized in the amounts and in the
time periods provided by each company's management. Webb also assumed without
independent verification that the aggregate allowances for loan losses for
HomeCorp and MBI are adequate to cover such losses. In its review, Webb did
not make any independent appraisal or evaluation of the assets or liabilities
of HomeCorp or MBI, and potential or contingent liabilities of HomeCorp or
MBI nor did Webb examine any individual loan files. Webb was informed by
HomeCorp, and assumed for purposes of its opinion, that the Merger will be
accounted for as a pooling-of-interests under generally accepted accounting
principles.
Webb reviewed with the HomeCorp Board of Directors certain financial
aspects of the proposed Merger and rendered a written opinion as to the
fairness of the consideration to be received in the Merger to the HomeCorp
Board of Directors on October 27, 1997. On October 29, 1997, Webb updated its
written opinion, which latter opinion is attached hereto as Annex B. Set
-------
forth below is a summary of the material factors considered by and the
valuation methodologies presented by Webb to the HomeCorp Board of Directors
on October 27, 1997 and utilized by Webb in connection with rendering its
opinion as to the fairness, from a financial point of view, of the
consideration to be received by the HomeCorp stockholders.
ANALYSIS OF THE MBI OFFER. Webb reviewed certain historical
information for HomeCorp and MBI and calculated the imputed value of the MBI
offer to holders of HomeCorp Common Stock. Webb calculated the multiple which
the consideration to be received in the Merger represents based on the
Exchange Ratio as set forth in the Merger Agreement of each HomeCorp share
being exchanged for .4968 shares of MBI and the closing price of MBI Common
Stock as reported in The Wall Street Journal as of October 29, 1997. Based
on the closing price of MBI as of October 29, 1997, of $49.4375, the
consideration to be received in the Merger represented a per share value of
$24.56 per share for each share of HomeCorp Common Stock. The multiples were
calculated based on HomeCorp's September 30, 1997 stated and fully diluted
book value per share of $13.08 and $12.68, respectively, and its stated and
fully diluted last 12 months earnings per share of $.99 and $.88,
respectively. The price to stated book value was 1.88 times, the price to
fully diluted book value was 1.94 times, the price to stated last 12 months
earnings per share was 24.81 times and the price to last 12 months fully
diluted earnings per share was 27.91 times.
ANALYSIS OF RECENT COMPARABLE ACQUISITION TRANSACTIONS In
rendering its opinion, Webb analyzed certain comparable merger and
acquisition transactions of both pending and completed thrift
deals, comparing the acquisition price relative to tangible book value, last
12 month earnings, total assets, total deposits and premium to core
deposits. The analysis included a comparison of the median of the above
ratios for completed and pending acquisitions, based on the following five
comparable groups: (i) all thrift acquisitions since September 30, 1996; (ii)
all thrift transactions with an aggregate deal value between $50 million and
$100 million ("Comparable Deal Value"); (iii) all acquisitions since
September 30, 1996 with the selling thrift having
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<PAGE> 37
equity to total assets of between 5.0% and 12.0% ("Comparable Equity Ratio");
(iv) all thrift acquisitions with the target thrift having assets between $300
million and $700 million ("Comparable Asset Size"); and (v) all thrift
acquisitions since September 30, 1996 located in the Midwest ("Comparable
Regional Deals").
The information in the following table summarizes the material
information analyzed by Webb with respect to the Merger. The summary does
not purport to be a complete description of the analysis performed by Webb
and should not be construed independently of the other information considered
by Webb in rendering its opinion. Selecting portions of Webb's analysis or
isolating certain aspects of the comparable transactions without considering
all analyses and factors, could create an incomplete or potentially
misleading view of the evaluation process.
<TABLE>
<CAPTION>
Price to
-------------------------------------------------------------------
Fully Earnings
Diluted Per
Book Share<F1> Assets Deposits Premium
---- --------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
CONSIDERATION - $24.56 PER SHARE 193.7% 27.9X 14.8% 16.1% 9.3%
<CAPTION>
NUMBER MEDIAN FOR ALL DEALS SINCE SEPTEMBER 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Recent Transactions
Completed 105 160.1 22.1 16.5 21.3 8.3
Pending 43 182.1 20.3 18.2 23.1 9.7
Comparable Deal Value
Completed 13 186.0 21.5 18.1 22.4 11.3
Pending 6 188.6 19.5 16.9 23.1 11.4
Comparable Equity Ratio
Completed 75 170.3 20.2 14.6 18.7 8.5
Pending 31 189.1 19.8 15.7 22.3 11.4
Comparable Asset Size
Completed 18 190.8 23.6 16.5 21.2 12.6
Pending 7 189.1 19.5 18.5 23.4 12.0
Comparable Regional Deals
Completed 32 132.4 23.0 16.8 23.6 7.8
Pending 13 143.7 26.0 20.5 27.6 8.3
<FN>
- ------------------------------
<F1> Last 12 months from September 30, 1997.
</TABLE>
Based on the above information Webb concluded that the multiples
implied by the $24.56 per share price pursuant to the Exchange Ratio, were in
the ranges of each mentioned comparable group, and relative to price to fully
diluted book and price to the last twelve months earnings per share exceeded
significantly all of the comparable groups.
No company or transaction used as a comparison in the above analysis is
identical to HomeCorp, MBI or the Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and
operating
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<PAGE> 38
characteristics of the companies and other factors that could
affect the public trading value of the companies to which they are being
compared.
The summary contained herein provides a summary description of the
material analyses prepared by Webb in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. Webb believes that
its analysis and the summary set forth above must be considered as a whole
and that selecting portions of its analysis without considering all analyses,
or selecting part of the above summary, without considering all factors and
analyses, would create an incomplete view of the process underlying the
analysis set forth in Webb's presentation and opinion. The ranges of
valuations resulting from any particular analysis described above should not
be taken to be Webb's view of the actual value of HomeCorp or MBI. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given greater weight than any other
analysis.
In preparing its analysis, Webb made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of Webb and HomeCorp. The analyses
performed by Webb are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses and do not purport to be appraisals or reflect the prices at
which a business may be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, Webb's opinion, along with its presentation to the HomeCorp Board of
Directors, was just one of the many factors taken into consideration by the
HomeCorp Board of Directors in unanimously approving the Merger Agreement.
Pursuant to the engagement letter with HomeCorp, Webb will receive a
fee of 1.0% of the total consideration paid to HomeCorp stockholders on the
Closing Date. As of the date of the Proxy Statement/Prospectus, Webb has
received $50,000 of such fee, the remainder of the fee is contingent and
payable on the completion of the Merger. HomeCorp has also agreed to
indemnify Webb against certain liabilities, including liabilities under the
federal securities laws, and to reimburse Webb for certain out-of-pocket
expenses.
CONDITIONS OF THE MERGER
The respective obligations of MBI, Ameribanc and HomeCorp to consummate
the Merger are subject to the satisfaction of certain mutual conditions,
including the following:
(1) The Merger Agreement shall be approved by the requisite
vote of holders of HomeCorp Common Stock at the Special Meeting.
(2) The Merger Agreement and the transactions contemplated
therein shall have been approved by the Federal Reserve Board and any
other federal and/or state regulatory agency whose approval is
required for the consummation of the transactions contemplated therein,
and all waiting periods after such approvals required by law or regulation
shall have expired.
(3) The Registration Statement of which this Proxy
Statement/Prospectus is a part, registering shares of MBI Common
Stock to be issued in the Merger, shall have been declared effective
and not be subject to a stop order or any threatened stop order.
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<PAGE> 39
(4) Neither HomeCorp, MBI nor Ameribanc shall be subject to any
order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the
Merger.
(5) HomeCorp, MBI and Ameribanc each shall have received from
Thompson Coburn an opinion (which opinion shall not have been
withdrawn at or prior to the Effective Time) reasonably satisfactory
in form and substance to it to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the
Code and to the effect that, as a result of the Merger, except with
respect to cash received in lieu of fractional share interests,
holders of HomeCorp Common Stock who receive MBI Common Stock in the
Merger will not recognize gain or loss for federal income tax
purposes, the basis of such MBI Common Stock will equal the basis of
the HomeCorp Common Stock for which it is exchanged and the holding
period of such MBI Common Stock will include the holding period of
the HomeCorp Common Stock for which it is exchanged, assuming that
such HomeCorp Common Stock is a capital asset in the hands of the
holder thereof as of the Effective Time.
The obligation of MBI and Ameribanc to consummate the Merger is subject
to the satisfaction, unless waived, of certain other conditions, including
the following:
(1) The representations and warranties of HomeCorp made in the
Merger Agreement shall be true and correct in all material respects
as of the Effective Time except (i) to the extent such
representations and warranties are by their express provisions made
as of a specific date, (ii) where the facts that caused the failure
of any representations or warranty to be so true and correct have not
resulted, and are not likely to result, in a Material Adverse Effect
(as defined in the Merger Agreement) on HomeCorp and its subsidiary,
taken as a whole, and (iii) for the effect of transactions
contemplated by the Merger Agreement, and all obligations required to
be performed by HomeCorp prior to the Effective Time shall have been
performed in all material respects, and MBI shall have received a
certificate of the Chairman and President of HomeCorp to that effect.
(2) HomeCorp shall have obtained any and all material permits,
authorizations, consents, waivers and approvals required of HomeCorp
for the lawful consummation of the Merger.
(3) MBI and Ameribanc shall have received an opinion of KPMG
Peat Marwick LLP, satisfactory to MBI and Ameribanc, that the Merger
will qualify for pooling-of-interests accounting treatment, which
opinion shall not have been withdrawn at or prior to the Effective
Time.
(4) Silver, Freedman & Taff L.L.P., counsel to HomeCorp, shall
have delivered to MBI an opinion dated as of the Closing Date
regarding certain legal matters.
(5) Since October 29, 1997, there shall have been no Material
Adverse Effect on HomeCorp and its subsidiary, taken as a whole.
HomeCorp's obligation to consummate the Merger is subject to the
satisfaction, unless waived, of certain other conditions, including the
following:
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(1) The representations and warranties of MBI and Ameribanc
made in the Merger Agreement shall be true and correct, in all material
respects, as of the Effective Time except (i) to the extent such
representations and warranties are by their express provisions made
as of a specific date, (ii) where the facts that caused the failure
of any representation or warranty to be so true and correct have not
resulted, and are not likely to result, in a Material Adverse Effect
on MBI and its subsidiaries, taken as a whole, and (iii) for the
effect of transactions contemplated by the Merger Agreement, and all
obligations required to be performed by MBI and Ameribanc prior to
the Effective Time shall have been performed in all material
respects, and HomeCorp shall have received a certificate from any
Executive Vice President of MBI to that effect.
(2) MBI and Ameribanc shall have obtained any and all material
permits, authorizations, consents, waivers and approvals required of
MBI or Ameribanc for the lawful consummation of the Merger.
(3) Since October 29, 1997, there shall have been no Material
Adverse Effect on MBI and its subsidiaries, taken as a whole.
(4) Thompson Coburn, counsel to MBI, shall have delivered to
HomeCorp an opinion dated as of the Closing Date regarding certain
legal matters.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains extensive representations and warranties
by HomeCorp, MBI and Ameribanc. These include, among other things,
representations and warranties of HomeCorp as to (i) the organization and
good standing of it and its subsidiary, (ii) its capital structure, (iii) its
authority relative to the execution and delivery of, and performance of its
obligations under, the Merger Agreement, (iv) the documents, including
financial statements and other reports, filed by HomeCorp with the applicable
regulatory authorities, (v) title to and condition of assets, (vi) real
property, (vii) taxes, (viii) the absence of material adverse changes since
June 30, 1997, (ix) loans, commitments and contracts, (x) the absence of
material conflicts between its obligations under the Merger Agreement and its
charter documents and material contracts to which it is a party or by which
it is bound, (xi) litigation, (xii) directors' and officers' insurance,
(xiii) compliance with laws, (xiv) labor, (xv) the existence of certain
material interests of certain persons, (xvi) allowance for loan and lease
losses and non-performing assets, (xvii) employee benefit plans and related
matters, (xviii) the conduct of HomeCorp and its subsidiary from and after
June 30, 1997, (xix) the absence of undisclosed liabilities, (xx) the
accuracy of the information supplied by HomeCorp for inclusion in this Proxy
Statement/Prospectus and related documents, (xxi) the absence of registration
obligations with respect to HomeCorp Common Stock, (xxii) the absence of
actions that would jeopardize the qualification of the Merger as a
reorganization or the receipt of certain regulatory approvals, (xxiii)
obligations to brokers and finders, (xxiv) the absence of interest rate
management instruments, (xxv) the accuracy of the statements contained in the
Merger Agreement and related documents and (xxvi) Year 2000 compliance for all
computer software and hardware.
MBI's and Ameribanc's representations and warranties include, among
other things, those as to (i) their respective organization and good
standing, (ii) their respective capital structures, (iii) their authority
relative to the execution and delivery of, and performance of their
respective obligations under, the Merger Agreement, (iv) the documents,
including financial statements and other reports, filed by MBI
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with applicable regulatory authorities, (v) the absence of material adverse
changes since June 30, 1997, (vi) the accuracy of the information supplied by
MBI or Ameribanc for inclusion in this Proxy Statement/Prospectus and related
documents, (vii) taxes, (viii) litigation, (ix) compliance with laws, (x) the
accuracy of the statements contained in the Merger Agreement and related
documents, and (xi) the absence of obligations to brokers and finders.
TERMINATION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Closing
Date, whether before or after approval by the stockholders of HomeCorp, (i)
by mutual consent of the Executive Committee of the Board of Directors of MBI
and the Board of Directors of HomeCorp, or (ii) unilaterally by the Executive
Committee of the Board of Directors of MBI or the Board of Directors of
HomeCorp: (A) at any time after September 30, 1998, if the Merger has not
been consummated by such date (provided that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained in the Merger Agreement); (B) if the Federal Reserve
Board or any other Regulatory Authority whose approval is required for
consummation of the Merger shall have issued a final nonappealable denial of
such approval; (C) if the stockholders of HomeCorp shall not have approved
the Merger Agreement at the Special Meeting; or (D) in the event of a breach
by the other party of any representation, warranty or agreement contained in
the Merger Agreement, which breach is not cured within 30 days after written
notice thereof is given to the party committing such breach or is not waived
by such other party. The Executive Committee of the Board of Directors of
Mercantile may terminate the Agreement in certain circumstances if
environmental investigations of all real property owned, leased or operated
by HomeCorp as of October 29, 1997 indicate that the estimated cost of
corrective or remedial action with regard to such properties would exceed
$750,000 in the aggregate. No assurance can be given that the Merger will be
consummated on or before September 30, 1998 or that MBI or HomeCorp will not
elect to terminate the Merger Agreement if the Merger has not been
consummated on or before such date.
In the event of the termination of the Merger Agreement, it shall
become void and there shall be no liability on the part of any party except,
that (i) confidentiality and indemnification obligations shall survive
termination, (ii) MBI shall pay all printing, mailing and filing expenses
with respect to the Registration Statement and this Proxy
Statement/Prospectus and (iii) in the case of termination due to continued
material breach after notice and opportunity to cure, the breaching party
shall not be relieved of liability to the non-breaching party arising from
the willful nonperformance of any covenant in the Merger Agreement.
Any provision of the Merger Agreement, including, without limitation,
the conditions to the consummation of the Merger and the restrictions
described under "- Business Pending the Merger," may be (i) waived in writing
at any time by the party that is, or whose stockholders or shareholders are,
entitled to the benefits thereof, or (ii) amended at any time by written
agreement of the parties approved by or on behalf of their respective Boards
of Directors or Executive Committees, whether before or after the Special
Meeting; provided, however, that after approval of the Merger Agreement by
the stockholders of HomeCorp at the Special Meeting no such modification may
(i) alter or change the amount or kind of consideration to be received by the
HomeCorp stockholders pursuant to the Merger, or (ii) adversely affect the
tax treatment to HomeCorp stockholders as a result of receiving the shares of
MBI Common Stock in the Merger.
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INDEMNIFICATION
HomeCorp, MBI and Ameribanc have agreed to indemnify each other and the
officers, directors and controlling persons of each other against any losses,
claims, damages or liabilities to which any such party may become subject
under federal or state laws or regulations, to the extent that such loss,
claim, damage or liability is based primarily upon information furnished to
the party subject to such liability by the other party, or out of an omission
by such other party to state a necessary or material fact in the Registration
Statement of which this Proxy Statement/Prospectus is a part.
CLOSING DATE
The Merger will be consummated and become effective upon the later of
(i) the issuance of a certificate of merger by the Office of the Secretary of
State of the State of Missouri or (ii) the filing of a certificate of merger
with the Office of the Secretary of State of the State of Delaware. Under
the Merger Agreement, unless otherwise agreed to by the parties, the Closing
Date shall occur on such date as MBI shall notify HomeCorp in writing but (i)
not earlier than the satisfaction of the following conditions (a) the receipt
of the requisite approval of the Merger Agreement by the stockholders of
HomeCorp and (b) the approval of the Merger by the Federal Reserve Board and
any other Regulatory Agency whose approval is required, and all waiting
periods for such approvals have been satisfied (the "Approval Date"), and
(ii) not later than the first business day of the first full calendar month
beginning at least five business days after the Approval Date.
SURRENDER OF HOMECORP STOCK CERTIFICATES AND RECEIPT OF MBI COMMON
STOCK
At the Effective Time, each outstanding share of HomeCorp Common Stock
will be converted into the right to receive 0.4968 of a share of MBI Common
Stock. See "- General Description of the Merger." Each holder of HomeCorp
Common Stock, upon submission to the Exchange Agent of a properly executed
letter of transmittal and surrender to the Exchange Agent of the stock
certificate(s) formerly representing shares of HomeCorp Common Stock, will be
entitled to receive a stock certificate(s) evidencing the shares of MBI
Common Stock to which such stockholder is entitled.
As soon as practicable following the Effective Time, the Exchange Agent
will mail to each HomeCorp stockholder of record as of the Effective Time
notification of the consummation of the Merger. The Exchange Agent also will
provide a letter of transmittal and instructions as to the procedure for the
surrender of the stock certificates evidencing the HomeCorp Common Stock and
the receipt of shares of MBI Common Stock. It will be the responsibility of
each holder of HomeCorp shares to submit all certificates formerly evidencing
such holder's shares of HomeCorp Common Stock to the Exchange Agent. No
dividends or other distribution will be paid to a former HomeCorp stockholder
with respect to shares of MBI Common Stock until such stockholder's properly
completed letter of transmittal and stock certificates formerly representing
HomeCorp Common Stock, or, in lieu thereof, such evidence of a lost,
stolen or destroyed certificate and/or such insurance bond as the Exchange
Agent may reasonably require in accordance with customary exchange practices,
are delivered to the Exchange Agent. All dividends or other distributions on
the MBI Common Stock declared between the Closing Date and the date of the
surrender of a HomeCorp stock certificate will be held for the benefit of the
stockholder and will be paid to the stockholder, without interest thereon,
upon the surrender of such stock certificate(s) or documentation and/or
insurance bond in lieu thereof.
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FRACTIONAL SHARES
No fractional shares of MBI Common Stock will be issued to the former
stockholders of HomeCorp in connection with the Merger. Each holder of
HomeCorp Common Stock who otherwise would have been entitled to receive a
fraction of a share of MBI Common Stock shall receive in lieu thereof cash,
without interest, in an amount equal to the holder's fractional share
interest multiplied by the closing stock price of MBI Common Stock on the
NYSE Composite Tape on the Closing Date as reported in The Wall Street
Journal. Cash received by HomeCorp stockholders in lieu of fractional shares
may give rise to taxable income. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER."
EFFECT ON STOCK OPTION AND EMPLOYEE BENEFIT PLANS
MBI has agreed to assume the Stock Plans and, upon consummation of the
Merger, all outstanding HomeCorp Options will be converted into rights with
respect to MBI Common Stock. Beginning at the Effective Time, (i) each
HomeCorp Option assumed by MBI will be exercisable solely for shares of MBI
Common Stock, (ii) the number of shares of MBI Common Stock subject to the
HomeCorp Options outstanding as of the Effective Time will equal the number
of shares of HomeCorp Common Stock subject to each HomeCorp Option
outstanding as of the Effective Time multiplied by the Exchange Ratio and
(iii) the per share exercise price for each HomeCorp Option will be adjusted
by dividing the exercise price as of the Effective Time by the Exchange Ratio
and rounding to the nearest cent, subject to adjustment as appropriate to
reflect any stock split, stock dividend, capitalization or similar
transaction subsequent to the Effective Time. MBI has agreed, at and after
the Effective Time, to reserve sufficient shares of MBI Common Stock for
issuance with respect to the HomeCorp Options under the Stock Option Plan to
be assumed by MBI. MBI will also file with the Commission, and obtain the
effectiveness of, a registration statement with respect to such options.
The Merger Agreement provides that Ameribanc will honor all employment,
severance and other compensation contracts between HomeCorp or its subsidiary
and any current or former director, officer, employee or agent thereof, along
with all provisions for vested benefits or other vested amounts earned or
accrued through the Effective Time under HomeCorp's employee plans. The
HomeCorp employee plans will continue as plans of Ameribanc until such time
as the former employees of HomeCorp and its subsidiary are integrated into
MBI's employee benefit plans that are available to other employees of HomeCorp
and its subsidiaries. MBI will take such steps as are necessary or required to
integrate the former employees of Homecorp and its subsidiary into MBI's
employee benefit plans available to other employees of MBI and its
subsidiaries as soon as practicable after the Effective Time, with (i) full
credit for prior service with HomeCorp or its subsidiary for purposes of
vesting and eligibility for participation (but not benefit accruals under any
defined benefit plan), and co-payments and deductibles, and (ii) waiver of
all waiting periods and pre-existing condition exclusions or penalties.
REGULATORY APPROVAL
In addition to the approval of the Merger Agreement by the HomeCorp
stockholders, the obligations of the parties to effect the Merger are subject
to prior approval of the Federal Reserve Board. As a bank holding company,
MBI is subject to regulation under the BHCA. MBI filed the requisite
applications required by the Merger with the Federal Reserve Board, which
granted its approval of the Merger on January 8, 1998.
Under the BHCA, the Federal Reserve Board could have withheld approval of
the Merger if, among other things, it determined that the effect of the Merger
would be to substantially lessen competition
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in the relevant market. In reviewing the applications and the proposed Merger,
the Federal Reserve Board considered whether the combined organization met the
requirements of the Community Reinvestment Act of 1977, as amended, by assessing
the involved entities' respective records of meeting the credit needs of the
local communities in which they are chartered, consistent with the safe and
sound operation of such institutions. In addition, the Federal Reserve Board
also examined the financial and managerial resources and future prospects of the
combined organization and analyzed the capital structure and soundness of the
resulting entity. The Federal Reserve Board has the authority to deny an
application if it concludes that the combined organization would have
inadequate capital.
There can be no assurance that the United States Department of Justice
will not challenge the Merger during the waiting period set aside for such
challenges after receipt of approval from the Federal Reserve Board. See
"SUPERVISION AND REGULATION."
MBI and HomeCorp are not aware of any governmental approvals or actions
that may be required for consummation of the Merger other than as described
above. Should any other approval or action be required, it is presently
contemplated that such approval or action would be sought. There can be no
assurance that any necessary regulatory approvals or actions will be timely
received or taken, that no action will be brought challenging such approval
or action or, if such a challenge is brought, as to the result thereof, or
that any such approval or action will not be conditioned in a manner that
would cause the parties to abandon the Merger. See "SUPERVISION AND
REGULATION."
BUSINESS PENDING THE MERGER
The Merger Agreement provides that, during the period from October 29,
1997 to the Effective Time, HomeCorp will conduct its business according to
the ordinary and usual course consistent with past practices and use its best
efforts to maintain and preserve its business organization, employees and
advantageous business relationships and retain the services of its officers
and key employees.
Furthermore, from October 29, 1997 to the Effective Time, except as
provided in the Merger Agreement, HomeCorp will not, and will not permit its
subsidiary to, without the prior written consent of MBI:
(1) declare, set aside or pay any dividends or other
distributions, directly or indirectly, in respect of its capital
stock (other than dividends from the HomeCorp subsidiary to
HomeCorp);
(2) enter into or amend any employment, severance or similar
agreement or arrangement with any director, officer or employee, or
materially modify any of the HomeCorp employee plans or grant any
salary or wage increase or materially increase any employee benefit
(including incentive or bonus payments), except normal individual
increases in compensation to employees consistent with past practice,
or as required by law or contract, and except for such increases of
which HomeCorp notifies MBI in writing and which MBI does not
disapprove within ten days of the receipt of such notice;
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<PAGE> 45
(3) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement in
principle with respect to, any merger, consolidation or business
combination (other than the Merger), any acquisition of a material
amount of assets or securities, any disposition of a material amount
of assets or securities or any release or relinquishment of any
material contract rights;
(4) propose or adopt any amendments to its Certificate of
Incorporation or Charter of HomeCorp or any subsidiary of HomeCorp,
as the case may be, or their respective by-laws;
(5) issue, sell, grant, confer or award any capital stock
options, warrants, conversion rights or other rights, except HomeCorp
may issue shares of HomeCorp Common Stock upon exercise of the
HomeCorp Options outstanding on October 29, 1997 and pursuant to the
Option Agreement, or effect any stock split or adjust, combine,
reclassify or otherwise change its capitalization as it existed on
October 29, 1997;
(6) purchase, redeem, retire, repurchase or exchange, or
otherwise acquire or dispose of, directly or indirectly, any capital
stock, options, warrants, conversion rights or other rights, whether
pursuant to the terms of such capital stock, options, warrants,
conversion rights or other rights or otherwise;
(7) (i) without first consulting with and obtaining the written
consent of MBI, cause or permit HomeBanc to enter into, renew or
increase any loan or credit commitment (including stand-by letters of
credit) to, or invest or agree to invest in any person or entity or
modify any of the material provisions or renew or otherwise extend
the maturity date of any existing loan or credit commitment
(collectively, "Lend to") in an amount in excess of $300,000 or in
any amount which, when aggregated with any and all loans or credit
commitments of HomeCorp and its subsidiary to such person or entity,
would be equal to or in excess of $500,000; provided, however, that
HomeCorp or its subsidiary may make any such loan or credit
commitment in the event (A) HomeCorp or its subsidiary has delivered
to MBI or its designated representative a notice of its intention to
make such loan and such information as MBI or its designated
representative may reasonably require in respect thereof and (B) MBI
or its designated representative shall not have reasonably objected
to such loan by giving written or facsimile notice of such objection
within two (2) business days following the delivery to MBI or its
designated representative of the notice of intention and information
as aforesaid; provided further, however, that nothing shall prohibit
HomeCorp or its subsidiary from honoring any contractual obligation
in existence on the date of the Merger Agreement. Notwithstanding
the above, HomeCorp shall be authorized, without first consulting
with MBI or obtaining MBI's prior written consent, to increase the
aggregate amount of any credit facilities theretofore established in
favor of any person or entity (each a "Pre-Existing Facility"),
provided that the aggregate amount of any and all such increases
shall not be in excess of the lesser of ten percent (10%) of such
Pre-Existing Facilities or $25,000;
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<PAGE> 46
(8) directly or indirectly, including through its officers,
directors, employees or other representatives:
(i) initiate, solicit or encourage any discussions,
inquiries or proposals with any third party (other than MBI or
Ameribanc) relating to the disposition of any significant
portion of the business or assets of HomeCorp or its subsidiary
or the acquisition of the capital stock (or rights or options
exercisable for, or securities convertible or exchangeable
into, capital stock) of HomeCorp or its subsidiary or the
merger of HomeCorp or its subsidiary with any person (other
than MBI or Ameribanc) or any similar transaction (each such
transaction being referred to herein as an "Acquisition
Transaction"), or
(ii) provide any third party with information or
assistance or negotiate with any third party with respect to an
Acquisition Transaction, and HomeCorp shall promptly notify MBI
orally of all the relevant details relating to all inquiries,
indications of interest and proposals which it or any of its
subsidiaries may receive with respect to any Acquisition
Transaction;
(9) take any action that would (i) materially impede or delay
the consummation of the transactions contemplated by the Merger
Agreement or the ability of MBI or HomeCorp to obtain any approval of
any Regulatory Authority required for the transactions contemplated
by the Merger Agreement or to perform its covenants and agreements
under the Merger Agreement, (ii) prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368 of
the Code or (iii) prevent the Merger from qualifying for
pooling-of-interests accounting treatment;
(10) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or
assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual,
corporation or other entity;
(11) materially restructure or change its investment securities
portfolio, through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported, or execute individual
investment transactions of greater than $2,000,000 for U.S. Treasury
or Federal Agency Securities and $250,000 for all other investment
instruments;
(12) agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction or
knowingly take or omit to take any other action which would make any
of HomeCorp's representations and warranties in the Merger Agreement
untrue or incorrect in any material respect if made anew after
engaging in such activity, entering into such transaction, or taking
or omitting such other act; or
(13) enter into, increase or renew any loan or credit commitment
(including standby letters of credit) to any executive officer or
director of HomeCorp or any subsidiary of HomeCorp, any holder of 10%
or more of the outstanding shares of HomeCorp Common Stock, or any
entity controlled, directly or indirectly, by any of the foregoing or
engage in any transaction with any of the foregoing which is of the
type or nature sought to be regulated in 12 U.S.C. Section 371c and
12 U.S.C. Section 371c-1,
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without first obtaining the prior written consent of MBI, which consent
shall not be unreasonably withheld.
The Merger Agreement also provides that during the period from October
29, 1997 to the Effective Time, MBI and Ameribanc shall not, and shall not
permit any of their subsidiaries to, without the prior written consent of
HomeCorp, agree in writing or otherwise take any action that is prohibited of
HomeCorp by subsections (9) and (12) above.
ACCOUNTING TREATMENT
The Merger is intended to be accounted for under the
pooling-of-interests method of accounting. It is a condition to MBI's and
Ameribanc's consummation of the Merger, unless otherwise waived, that KPMG Peat
Marwick LLP, MBI's independent accountants, deliver to MBI and Ameribanc a
letter stating that the Merger will qualify for pooling-of-interests accounting
treatment, provided, however, that this condition shall not be deemed waived
by MBI to the extent that (i) the failure of KPMG Peat Marwick LLP to deliver
such a letter or (ii) the withdrawal by KPMG Peat Marwick LLP of such a
letter, is due solely to the actions of MBI's affiliates with respect to
their shares of MBI Common Stock or HomeCorp Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
-----------------------------------------------------
The following discussion is based upon an opinion of Thompson Coburn,
counsel to MBI ("Counsel"), and except as otherwise indicated, reflects
Counsel's opinion. The discussion is a general summary of the material
United States federal income tax ("federal income tax") consequences of the
Merger to certain HomeCorp stockholders and does not purport to be a complete
analysis or listing of all potential tax considerations or consequences
relevant to a decision whether to vote for the approval of the Merger. The
discussion does not address all aspects of federal income taxation that may
be applicable to HomeCorp stockholders in light of their status or personal
investment circumstances, nor does it address the federal income tax
consequences of the Merger that are applicable to HomeCorp stockholders
subject to special federal income tax treatment including (without
limitation) foreign persons, insurance companies, tax-exempt entities,
retirement plans, dealers in securities, persons who acquired their HomeCorp
Common Stock pursuant to the exercise of employee stock options or otherwise
as compensation, and persons who hold their HomeCorp Common Stock as part of
a "straddle," "hedge" or "conversion transaction." Each stockholder's
individual circumstances may affect the tax consequences of the Merger to
such stockholder. In addition, the discussion does not address the effect of
any applicable state, local or foreign tax laws, or the effect of any federal
tax laws other than those pertaining to the federal income tax. AS A
RESULT, EACH HOMECORP STOCKHOLDER IS URGED TO CONSULT HIS OR HER
OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH STOCKHOLDER. The discussion assumes that shares of HomeCorp
Common Stock are held as capital assets (within the meaning of Section 1221 of
the Code) at the Effective Time.
HomeCorp has received an opinion from Counsel to the effect that,
assuming the Merger occurs in accordance with the Merger Agreement, the
Merger will constitute a "reorganization" for federal income tax purposes
with the following federal income tax consequences:
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(1) HomeCorp stockholders will recognize no gain or loss
as a result of the exchange of their HomeCorp Common Stock solely for
shares of MBI Common Stock pursuant to the Merger, except with
respect to cash received in lieu of fractional shares, if any, as
discussed below.
(2) The aggregate adjusted tax basis of the shares of MBI
Common Stock received by each HomeCorp stockholder in the Merger
(including any fractional share of MBI Common Stock deemed to be
received, as described in paragraph 4 below) will be equal to the
aggregate adjusted tax basis of the shares of HomeCorp Common Stock
surrendered.
(3) The holding period of the shares of MBI Common Stock
received by each HomeCorp stockholder in the Merger (including any
fractional share of MBI Common Stock deemed to be received, as
described in paragraph 4 below) will include the holding period of
the shares of HomeCorp Common Stock exchanged therefor.
(4) A HomeCorp stockholder who receives cash in the
Merger in lieu of a fractional share of MBI Common Stock will be treated
as if the fractional share had been received by such stockholder in the
Merger and then redeemed by MBI in return for the cash. The receipt
of such cash will cause the recipient to recognize capital gain or
loss equal to the difference between the amount of cash received and
the portion of such holder's adjusted tax basis in the shares of MBI
Common Stock allocable to the fractional share.
Counsel's opinion is subject to the conditions and assumptions stated
therein and relies upon various representations made by MBI, HomeCorp and
certain stockholders of HomeCorp. If any of these representations or
assumptions is inaccurate, the tax consequences of the Merger could differ
from those described herein. Counsel's opinion also is based upon the Code,
regulations proposed or promulgated thereunder, judicial precedent relating
thereto, and current administrative rulings and practice, all of which are
subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences discussed herein. The opinion is available
without charge upon written request to Jon W. Bilstrom, General Counsel and
Secretary, Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri
63166-0524. The receipt of Counsel's opinion again as of the Closing Date is
a condition to the consummation of the Merger. An opinion of counsel, unlike
a private letter ruling from the Internal Revenue Service (the "Service"),
has no binding effect on the Service. The Service could take a position
contrary to Counsel's opinion and, if the matter were litigated, a court may
reach a decision contrary to the opinion. Neither MBI nor HomeCorp has
requested an advance ruling as to the federal income tax consequences of the
Merger, and the Service is not expected to issue such a ruling.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER TO CERTAIN HOMECORP
STOCKHOLDERS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR
FACTS AND CIRCUMSTANCES OF EACH HOMECORP STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES
ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO EACH
HOMECORP STOCKHOLDER. ACCORDINGLY, EACH HOMECORP STOCKHOLDER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
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<PAGE> 49
APPRAISAL RIGHTS OF STOCKHOLDERS OF HOMECORP
--------------------------------------------
Pursuant to Section 262 of the DGCL, holders of HomeCorp Common Stock
will not have appraisal rights. Section 262 of the DGCL provides an
exception from appraisal rights provisions in circumstances where the
stockholder seeking to exercise such rights owns shares in a widely-held,
publicly-traded corporation and is to receive shares of a widely-held,
publicly-traded corporation.
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PRO FORMA FINANCIAL INFORMATION
-------------------------------
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth for the periods indicated selected
historical per share data of MBI and HomeCorp and the corresponding pro forma
and pro forma equivalent per share amounts giving effect to the proposed
Merger, the acquisition of Roosevelt and the proposed acquisitions of Horizon
and CBT. The data presented is based upon the supplemental consolidated
financial statements and related notes of MBI and the consolidated financial
statements and related notes of HomeCorp and Roosevelt included in this Proxy
Statement/Prospectus or in documents incorporated herein by reference, and the
pro forma combined consolidated balance sheet and income statements, including
the notes thereto, appearing elsewhere herein. This information should be read
in conjunction with such historical and pro forma financial statements and
related notes thereto. The assumptions used in the preparation of this table
appear in the notes to the pro forma financial information appearing elsewhere
in this Proxy Statement/Prospectus. This data is not necessarily indicative of
the results of the future operations of the combined organization or the actual
results that would have occurred if the Merger, the completed acquisition of
Roosevelt and the proposed acquisitions of Horizon and CBT had been consummated
prior to the periods indicated.
<TABLE>
<CAPTION>
MBI/ MBI/ MBI/
HOMECORP HOMECORP MBI/ALL ENTITIES ALL ENTITIES
MBI HOMECORP PRO FORMA PRO FORMA PRO FORMA PRO FORMA
REPORTED REPORTED COMBINED<F1> EQUIVALENT<F2> COMBINED<F3> EQUIVALENT<F2>
-------- -------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Book Value per Share:
September 30, 1997 $18.070 $13.07 $18.090 $ 8.99 $18.120 $ 9.00
December 31, 1996 16.740 12.31 16.580 8.24 16.050 7.97
Cash Dividends Declared per Share:
Nine months ended September 30, 1997 $ .861 $ -- $ .861 $ .43 $ .861 $ .43
Year ended December 31, 1996 1.090 -- 1.090 .54 1.090 .54
Year ended December 31, 1995 .880 -- .880 .44 .880 .44
Year ended December 31, 1994 .750 -- .750 .37 .750 .37
Earnings per Share:
Nine months ended September 30, 1997 $ .920 $ .74 $ .930 $ .46 $ .700 $ .35
Year ended December 31, 1996 2.110 .20 2.100 1.04 1.490 .74
Year ended December 31, 1995 2.410 .68 2.400 1.19 2.390 1.19
Year ended December 31, 1994 2.060 (2.14) 2.050 1.02 2.060 1.02
Market Price per Share:
At October 28, 1997<F4> $48.000 $20.25 $48.000 $23.00 $48.000 $23.00
At January 20, 1998<F4> 52.625 24.25 52.625 26.14 52.625 26.14
<FN>
- ---------------------
<F1> Includes the effect of pro forma adjustments for HomeCorp, Roosevelt,
Horizon and CBT, as appropriate. See "PRO FORMA FINANCIAL INFORMATION -
Notes to Pro Forma combined Consolidated Financial Statements."
<F2> Based on the pro forma combined per share amounts multiplied by 0.4968,
the conversion ratio applicable to one share of HomeCorp Common Stock
in the Merger. Further explanation of the assumptions used in the
preparation of the pro forma combined consolidated financial
statements is included in the notes to pro forma financial
statements. See "PRO FORMA FINANCIAL INFORMATION - Notes to Pro
Forma Combined Consolidated Financial Statements."
<F3> Includes the effect of pro forma adjustments for HomeCorp, Roosevelt,
Horizon and CBT as appropriate. Due to the immateriality of the financial
condition and results of operations of Regional to that of MBI, does
not include the effect of pro forma adjustments for Regional. See
"PRO FORMA FINANCIAL INFORMATION--Notes to Pro Forma Combined
Consolidated Financial Statements."
<F4> The market value of MBI Common Stock disclosed as of October 28, 1997,
the last trading day preceding the public announcement of the Merger,
and as of January 20, 1998, the latest available date prior to the
distribution of the Proxy Statement/Prospectus, is based on the last sale
price as reported on the NYSE Composite Tape. The market value of HomeCorp
Common Stock disclosed as of October 24, 1997, the last day on which
HomeCorp common stock traded preceding the public announcement of the
Merger, and as of January 20, 1998, the last available date prior to
the distribution of the Proxy Statement/Prospectus, is based upon the last
sale price as reported on the Nasdaq National Market.
</TABLE>
-45-
<PAGE> 51
PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RECENT ACQUISITIONS. MBI has completed or announced a number of
acquisitions during the years covered by the pro forma financial statements
that follow. Set forth below is a table that summarizes the completed and
pending acquisitions, including the name of the acquired entity, the date of
consummation of the acquisition, the assets and deposits of the acquired
entities at the date of consummation for the completed acquisitions, the
consideration paid in cash and/or shares of MBI stock and the accounting
method utilized.
<TABLE>
ACQUISITIONS COMPLETED BY MBI (1994-PRESENT)
<CAPTION>
CONSIDERATION
---------------------
GROSS ACCOUNTING
NAME DATE ASSETS DEPOSITS CASH SHARES METHOD
- ---- ---- ------ -------- ---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Roosevelt Financial Group, Inc. July 1, 1997 $7,251,985 $5,317,514 $374,477 18,948,884 Purchase
Mark Twain Bancshares, Inc. Apr. 25, 1997 3,227,972 2,519,474 73 24,088,713 Pooling
Regional Bancshares, Inc. Mar. 5, 1997 171,979 135,954 12,300 900,625 Purchase
TODAY'S Bancorp, Inc. Nov. 7, 1996 501,418 432,104 34,912 1,690,587 Purchase
First Financial Corporation of America Nov. 1, 1996 87,649 76,791 3,253 388,113 Purchase
Peoples State Bank Aug. 22, 1996 95,657 75,149 -- 488,756 Purchase
Metro Savings Bank, F.S.B. Mar. 7, 1996 80,857 73,843 5 296,853 Purchase
Security Bank of Conway, F.S.B. Feb. 9, 1996 102,502 89,697 1 482,946 Purchase
Hawkeye Bancorporation Jan. 2, 1996 1,978,540 1,739,811 80 11,838,294 Pooling
First Sterling Bancorp, Inc. Jan. 2, 1996 167,610 147,588 1 782,126 Pooling<F1>
Southwest Bancshares, Inc. Aug. 1, 1995 187,701 155,628 1 1,012,463 Pooling<F1>
AmeriFirst Bancorporation, Inc. Aug. 1, 1995 155,521 130,179 1 992,034 Pooling<F1>
Plains Spirit Financial Corporation July 7, 1995 400,754 276,887 6,697 1,951,770 Purchase
TCBankshares, Inc. May 1, 1995 1,422,798 1,217,740 -- 7,124,999<F2> Pooling
Central Mortgage Bancshares, Inc. May 1, 1995 654,584 571,105 8 3,806,585 Pooling
UNSL Financial Corp. Jan. 3, 1995 508,346 380,716 11 2,367,161 Pooling
Wedge Bank Jan. 3, 1995 195,716 152,865 1 1,454,931 Pooling<F1>
United Postal Bancorp, Inc. Feb. 1, 1994 1,260,765 1,025,252 39 8,447,930 Pooling
Metro Bancorporation Jan. 3, 1994 370,175 333,183 6 2,457,417 Pooling
<CAPTION>
PENDING ACQUISITIONS BY MBI
<S> <C> <C> <C> <C> <C> <C>
Horizon Bancorp, Inc. 1st Qtr 1998 $ 550,678 $470,385 -- 2,550,000<F3> Pooling
HomeCorp, Inc. 1st Qtr 1998 326,877 299,148 -- 951,380<F3> Pooling
CBT Corporation 2nd Qtr 1998 1,044,679 741,829 -- 5,120,929<F3> Pooling
<FN>
- -------------------------
<F1> The historical financial statements of MBI were not restated for the
acquisition due to the immateriality of the acquiree's financial
condition and results of operations to those of MBI.
<F2> In addition to MBI Common Stock issued, MBI assumed, through an
exchange, the outstanding, non-convertible preferred stock of
TCBankshares, Inc. Such preferred stock was redeemed in the first
quarter of 1996.
<F3> Estimated number of shares to be issued in acquisition.
</TABLE>
PRO FORMA FINANCIAL STATEMENTS. The following unaudited pro forma
combined consolidated balance sheet gives effect to the Merger as if it was
consummated on September 30, 1997.
The pro forma combined consolidated income statements for the nine
months ended September 30, 1997 and for the years ended December 31, 1996,
1995 and 1994 set forth the results of operations of MBI combined with the
results of operations of HomeCorp, Horizon and CBT as if the respective mergers
had occurred as of the first day of the period presented.
-46-
<PAGE> 52
MBI acquired Roosevelt on July 1, 1997, which acquisition was accounted
for under the purchase method of accounting. Accordingly, the historical
results of operations of MBI include the results of operations of Roosevelt
from July 1, 1997 forward. Consistent with the Commission's rules regarding
the treatment of acquisitions accounted for as purchases in pro forma
presentations, the pro forma combined consolidated income statements for the
year ended December 31, 1996 and the nine-month period ended September 30,
1997 include the results of operations of Roosevelt but the pro forma
combined consolidated income statements for the years ended December 31, 1995
and 1994 do not.
The unaudited pro forma combined consolidated financial statements
should be read in conjunction with the accompanying Notes to the Pro Forma
Combined Consolidated Financial Statements and with the historical financial
statements of MBI, HomeCorp, Roosevelt, Horizon and CBT. The historical interim
financial information for the nine months ended September 30, 1997, used as a
basis for the pro forma combined consolidated financial statements, includes
all necessary adjustments, which, in management's opinion, are necessary to
present the data fairly. These pro forma combined consolidated financial
statements may not be indicative of the results of operations that actually
would have occurred if the completed and proposed acquisitions had been
consummated on the dates assumed above or of the results of operations that
may be achieved in the future.
Due to the immateriality of the results of operations of Regional to
that of MBI, individually and in the aggregate, the unaudited pro forma
combined consolidated financial statements contained herein do not reflect
the completed acquisition of Regional for any period prior to the acquisition
date of such entity.
-47-
<PAGE> 53
<TABLE>
MERCANTILE BANCORPORATION INC.
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(THOUSANDS)
(UNAUDITED)
<CAPTION>
MBI/HOMECORP
PRO FORMA
HOMECORP COMBINED
MBI<F1> HOMECORP ADJUSTMENTS CONSOLIDATED HORIZON
------- -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,043,236 $ 11,648 $ (4,567)<F2> $ 1,050,317 $ 11,036
Due from banks - interest
bearing 303,276 178 303,454 --
Federal funds sold and
repurchase agreements 171,703 -- 171,703 3,106
Investments in debt and equity
securities
Trading 137,761 -- 137,761 --
Available-for-sale 6,904,529 11,729 6,916,258 172,811
Held-to-maturity 277,311 23,480 300,791 14,490
----------- -------- -------- ----------- --------
Total 7,319,601 35,209 -- 7,354,810 187,301
Loans and leases 19,120,797 265,726 19,386,523 328,798
Reserve for possible loan
losses (257,261) (1,618) (258,880) (4,479)
----------- -------- -------- ----------- --------
Net loans and leases 18,863,536 264,107 -- 19,127,643 324,319
Intangible assets 821,726 600 822,326 2,009
Credit card sale receivable 372,835 -- 372,835
Other assets 1,084,450 15,135 22,322 <F3> 1,099,585 22,908
(22,322)<F4>
----------- -------- -------- ----------- --------
Total Assets $29,980,363 $326,877 $ (4,567) $30,302,673 $550,679
=========== ======== ======== =========== ========
LIABILITIES
Deposits
Non-interest bearing $ 3,134,713 $ 4,976 $ 3,139,689 $ 51,623
Interest bearing 18,308,044 294,172 18,602,216 418,762
Foreign 669,483 -- 669,483 --
----------- -------- -------- ----------- --------
Total Deposits 22,112,240 299,148 -- 22,411,388 470,385
Short-term borrowings 3,771,713 2,400 3,774,113 3,136
Bank notes 175,000 -- 175,000 --
Long-term debt 1,019,092 1,019,092 27,352
Company-obligated mandatorily
redeemable preferred
securities of Mercantile
Capital Trust I 150,000 -- 150,000 --
Other liabilities 397,639 3,007 400,646 3,060
----------- -------- -------- ----------- --------
Total Liabilities 27,625,684 304,555 -- 27,930,239 503,933
SHAREHOLDERS' EQUITY
Common Stock 1,304 17 9 <F3> 1,313 666
(17)<F4>
Capital surplus 939,387 6,610 2,051 <F3> 941,438 12,372
(6,610)<F4>
Retained earnings 1,419,402 15,695 15,695 <F3> 1,435,097 35,606
(15,695)<F4>
Treasury stock (5,414) (4,567)<F2> (5,414) (1,898)
4,567 <F3>
----------- -------- -------- ----------- --------
Total Shareholders' Equity 2,354,679 22,322 (4,567) 2,372,434 46,746
----------- -------- -------- ----------- --------
Total Liabilities and
Shareholders' Equity $29,980,363 $326,877 $ (4,567) $30,302,673 $550,679
=========== ======== ======== =========== ========
<CAPTION>
MBI/ALL
ENTITIES
PRO FORMA
HORIZON/CBT COMBINED
CBT ADJUSTMENTS CONSOLIDATED
--- ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 31,456 $ (7,220)<F5> $ 1,058,825
(26,764)<F8>
Due from banks - interest
bearing -- 303,454
Federal funds sold and
repurchase agreements -- 174,809
Investments in debt and equity
securities
Trading -- 137,761
Available-for-sale 210,418 7,299,487
Held-to-maturity 61,192 376,473
----------- -------- -----------
Total 271,610 -- 7,813,721
Loans and leases 713,314 20,428,635
Reserve for possible loan
losses (9,435) (272,794)
----------- -------- -----------
Net loans and leases 703,879 -- 20,155,841
Intangible assets 5,923 830,258
Credit card sale receivable 372,835
Other assets 31,811 46,746 <F6> 1,154,304
(46,746)<F7>
117,215 <F9>
(117,215)<F10>
----------- -------- -----------
Total Assets $ 1,044,679 $(33,984) $31,864,047
=========== ======== ===========
LIABILITIES
Deposits
Non-interest bearing $ 73,055 $ 3,264,367
Interest bearing 668,774 19,689,752
Foreign -- 669,483
----------- -------- -----------
Total Deposits 741,829 -- 23,623,602
Short-term borrowings 159,103 3,936,352
Bank notes -- 175,000
Long-term debt 10,023 1,056,467
Company-obligated mandatorily
redeemable preferred
securities of Mercantile
Capital Trust I -- 150,000
Other liabilities 16,509 420,215
----------- -------- -----------
Total Liabilities 927,464 -- 29,361,636
SHAREHOLDERS' EQUITY
Common Stock 4,100 24 <F6> 1,383
(666)<F7>
46 <F9>
(4,100)<F10>
Capital surplus 16,042 3,896 <F6> 938,666
(12,372)<F7>
(6,668)<F9>
(16,042)<F10>
Retained earnings 97,073 35,606 <F6> 1,567,776
(35,606)<F7>
97,073 <F9>
(97,073)<F10>
Treasury stock -- (7,220)<F5> (5,414)
7,220 <F6>
1,898 <F7>
(26,764)<F8>
26,764 <F9>
----------- --------
Total Shareholders' Equity 117,215 (34,233) 2,502,411
----------- -------- -----------
Total Liabilities and
Shareholders' Equity $ 1,044,679 $(33,984) $31,864,047
=========== ======== ===========
See Notes to Pro Forma Combined Consolidated Financial Statements.
</TABLE>
-48-
<PAGE> 54
<TABLE>
MERCANTILE BANCORPORATION INC.
PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
ROOSEVELT
FOR THE
MBI/ SIX
HOMECORP MONTHS
PRO FORMA ENDED
HOMECORP COMBINED JUNE 30,
MBI<F1> HOMECORP ADJUSTMENTS CONSOLIDATED 1997<F13> HORIZON
------- ------- ----------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 1,352,187 $18,145 $(171)<F11> $ 1,370,161 $272,169 $30,186
Interest Expense 672,529 10,893 683,422 178,306 15,313
------------ ------- ----- ------------ -------- -------
Net Interest Income 679,658 7,252 (171) 686,739 93,863 14,873
Provision for Possible
Loan Losses 73,616 220 73,836 3,474 811
------------ ------- ----- ------------ -------- -------
Net Interest Income
after Provision
for Possible Loan
Losses 606,042 7,032 (171) 612,903 90,389 14,062
Other Income
Trust 71,688 -- 71,688 -- 119
Service charges 72,625 729 73,354 13,018 1,564
Credit card fees 16,421 9 16,430 --
Net loss from
financial instruments -- -- -- -- (35,630)
Securities gains
(losses) 4,901 (9) 4,892 -- 42
Other 113,628 2,505 116,133 10,038 1,351
------------ ------- ----- ------------ -------- -------
Total Other Income 279,263 3,234 -- 282,497 (12,574) 3,076
Other Expenses
Salaries and employee
benefits 307,350 4,111 311,461 23,717 5,650
Net occupancy and
equipment 86,031 959 86,990 9,291 1,712
Loss on the sale of
credit card loans 50,000 -- -- 50,000 -- --
Other 259,023 3,024 262,047 36,555 3,063
------------ ------- ----- ------------ -------- -------
Total Other
Expenses 702,404 8,094 -- 710,498 69,563 10,425
------------ ------- ----- ------------ -------- -------
Income Before
Income Taxes 182,901 2,172 (171) 184,902 8,252 6,713
Income Taxes 73,071 830 (62)<F12> 73,839 7,630 1,625
------------ ------- ----- ------------ -------- -------
Net Income $ 109,830 $ 1,342 $(109) $ 111,063 $ 622 $ 5,088
============ ======= ===== ============ ======== =======
Per Share Data
Average Common Shares
Outstanding<F22> 119,079,189 119,935,431
Net Income $ 0.92 $ .93
<CAPTION>
MBI/
ALL
ENTITIES
ROOSEVELT/ PRO FORMA
HORIZON/CBT COMBINED
CBT ADJUSTMENTS CONSOLIDATED
--- ----------- ------------
<S> <C> <C> <C>
Interest Income $ 61,899 $ (271)<F15> $ 1,733,141
(1,003)<F20>
Interest Expense 29,844 858 <F15> 923,465
15,722 <F16>
------------ -------- ------------
Net Interest Income 32,055 (17,854) 809,676
Provision for Possible
Loan Losses 2,961 -- 81,082
------------ -------- ------------
Net Interest Income
after Provision
for Possible Loan
Losses 29,094 (17,854) 728,594
Other Income
Trust 1,628 73,435
Service charges 2,493 90,429
Credit card fees -- 16,430
Net loss from
financial instruments -- (35,630)
Securities gains
(losses) 17 4,951
Other 3,049 130,571
------------ -------- ------------
Total Other Income 7,187 -- 280,186
Other Expenses
Salaries and employee
benefits 12,205 353,033
Net occupancy and
equipment 2,829 100,822
Loss on the sale of
credit card loans -- 50,000
Other 7,830 20,177 <F14> 329,672
------------ -------- ------------
Total Other
Expenses 22,864 20,177 833,527
------------ -------- ------------
Income Before
Income Taxes 13,417 (38,031) 175,253
Income Taxes 3,893 (5,969)<F17> 80,560
(97)<F19>
(361)<F21)
------------ -------- ------------
Net Income $ 9,524 $(31,604) $ 94,693
============ ======== ============
Per Share Data
Average Common Shares
Outstanding<F22> 136,031,359
Net Income $ .70
See Notes to Pro Forma Combined Consolidated Financial Statements.
</TABLE>
-49-
<PAGE> 55
<TABLE>
MERCANTILE BANCORPORATION INC.
PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
MBI/
HOMECORP
PRO FORMA
HOMECORP COMBINED
MBI<F1> HOMECORP ADJUSTMENTS CONSOLIDATED ROOSEVELT<F10> HORIZON
------- -------- ----------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 1,552,863 $24,381 $(228)<F11> $ 1,577,016 $640,311 $36,588
Interest Expense 724,910 14,885 739,795 462,724 18,762
------------ ------- ----- ------------ -------- -------
Net Interest Income 827,953 9,496 (228) 837,221 177,587 17,826
Provision for Possible
Loan Losses 73,015 565 73,580 1,262 1,241
------------ ------- ----- ------------ -------- -------
Net Interest Income
after Provision for
Possible Loan Losses 754,938 8,931 (228) 763,641 176,325 16,585
Other Income
Trust 86,616 -- 86,616 -- 68
Service charges 88,916 857 89,773 17,157 2,035
Credit card fees 27,962 9 27,971 -- --
Net loss from financial
instruments -- -- -- (76,634) --
Securities gains
(losses) (83) (10) (93) -- (1)
Other 134,069 3,274 137,343 23,510 1,950
------------ ------- ----- ------------ -------- -------
Total Other Income 337,480 4,130 -- 341,610 (35,967) 4,052
Other Expense
Salaries and employee
benefits 365,729 5,122 370,851 42,304 7,275
Net occupancy and
equipment 103,715 1,223 104,938 18,081 2,169
Other 249,224 6,154 255,378 63,024 4,144
------------ ------- ----- ------------ -------- -------
Total Other
Expense 718,668 12,499 -- 731,167 123,409 13,588
------------ ------- ----- ------------ -------- -------
Income Before
Income Taxes 373,750 562 (228) 374,084 16,949 7,049
Income Taxes 128,535 203 (82)<F12> 128,656 5,835 1,622
------------ ------- ----- ------------ -------- -------
Net Income $ 245,215 $ 359 $(146) $ 245,428 $ 11,114 $ 5,427
============ ======= ===== ============ ======== =======
Per Share Data
Average Common Shares
Outstanding<F22> 115,938,311 116,794,553
Net Income $ 2.11 $ 2.10
<CAPTION>
MBI/
ALL ENTITIES
ROOSEVELT/ PRO FORMA
HORIZON/CBT COMBINED
CBT ADJUSTMENTS CONSOLIDATED
--- ----------- ------------
<S> <C> <C> <C>
Interest Income $ 77,646 $ (361)<F18> $ 2,329,862
(1,338)<F20>
Interest Expense 36,242 10,290 <F15> 1,303,188
35,375 <F16>
------------ -------- ------------
Net Interest Income 41,404 (47,364) 1,026,674
Provision for Possible
Loan Losses 2,883 78,966
------------ -------- ------------
Net Interest Income
after Provision for
Possible Loan Losses 38,521 (47,364) 947,708
Other Income
Trust 2,111 88,795
Service charges 3,341 112,306
Credit card fees -- 27,971
Net loss from financial
instruments -- (76,634)
Securities gains
(losses) 35 (59)
Other 3,245 166,048
------------ -------- ------------
Total Other Income 8,732 -- 318,427
Other Expense
Salaries and employee
benefits 15,592 436,022
Net occupancy and
equipment 3,584 128,772
Other 11,806 40,355 <F15> 374,707
------------ -------- ------------
Total Other
Expense 30,982 40,355 939,501
------------ -------- ------------
Income Before
Income Taxes 16,271 (87,719) 326,634
Income Taxes 4,646 (16,439)<F17> 123,708
(130)<F19>
(482)<F21>
------------ -------- ------------
Net Income $ 11,625 $(70,668) $ 202,926
============ ======== ============
Per Share Data
Average Common Shares
Outstanding<F22> 136,038,325
Net Income $ 1.49
</TABLE>
-50-
<PAGE> 56
<TABLE>
MERCANTILE BANCORPORATION INC.
PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
MBI/HOMECORP
PRO FORMA
HOMECORP COMBINED
MBI<F1> HOMECORP ADJUSTMENTS CONSOLIDATED HORIZON
------- -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,516,156 $24,436 $(228)<F11> $ 1,540,364 $33,216
Interest Expense 715,466 15,065 730,531 17,343
------------ ------- ----- ------------ -------
Net Interest Income 800,690 9,371 (228) 809,833 15,873
Provision for Possible Loan Losses 41,533 360 41,893 875
------------ ------- ----- ------------ -------
Net Interest Income after Provision
for Possible Loan Losses 759,157 9,011 (228) 767,940 14,998
Other Income
Trust 77,115 -- 77,115 29
Service charges 82,459 668 83,127 1,574
Credit card fees 20,366 7 20,373 --
Securities gains (losses) 4,338 4 4,342 48
Other 127,371 1,264 128,635 1,641
------------ ------- ----- ------------ -------
Total Other Income 311,649 1,943 -- 313,592 3,292
Other Expense
Salaries and employee benefits 346,156 4,542 350,698 7,280
Net occupancy and equipment 95,896 1,172 97,068 1,981
Other 198,467 3,290 201,757 4,482
------------ ------- ----- ------------ -------
Total Other Expense 640,519 9,004 -- 649,523 13,743
------------ ------- ----- ------------ -------
Income Before Income Taxes 430,287 1,950 (228) 432,009 4,547
Income Taxes 149,898 743 (82)<F12> 150,559 1,005
------------ ------- ----- ------------ -------
Net Income $ 280,389 $ 1,207 $(146) $ 281,450 $ 3,542
============ ======= ===== ============ =======
Per Share Data
Average Common Shares
Outstanding<F22> 115,754,877 116,611,119
Net Income $ 2.41 $ 2.40
<CAPTION>
MBI/ALL
ENTITIES
PRO FORMA
HORIZON/CBT COMBINED
CBT ADJUSTMENTS CONSOLIDATED
--- ----------- ------------
<S> <C> <C> <C>
Interest Income $ 75,762 $ (361)<F18> $ 1,647,643
(1,338)<F20>
Interest Expense 35,588 783,462
------------ -------- ------------
Net Interest Income 40,174 (1,699) 864,181
Provision for Possible Loan Losses 1,106 43,874
------------ ----- ------------
Net Interest Income after Provision
for Possible Loan Losses 39,068 (1,699) 820,307
Other Income
Trust 1,469 78,613
Service charges 3,656 88,357
Credit card fees -- 20,373
Securities gains (losses) 268 4,658
Other 2,779 133,055
------------ ------- ------------
Total Other Income 8,172 -- 325,056
Other Expense
Salaries and employee benefits 15,798 373,776
Net occupancy and equipment 3,045 102,094
Other 11,632 217,871
------------ ------- ------------
Total Other Expense 30,475 -- 693,741
------------ ------- ------------
Income Before Income Taxes 16,765 (1,699) 451,622
Income Taxes 4,741 (130)<F19> 155,693
(482)<F21>
------------ ------- ------------
Net Income $ 12,024 $(1,087) $ 295,929
============ ======= ============
Per Share Data
Average Common Shares
Outstanding<F22> 123,574,458
Net Income $ 2.39
See Notes to Pro Forma Combined Consolidated Financial Statements.
</TABLE>
-51-
<PAGE> 57
<TABLE>
MERCANTILE BANCORPORATION INC.
PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
MBI, HOMECORP
ALL ENTITIES
PRO FORMA
HOMECORP COMBINED
MBI<F1> HOMECORP ADJUSTMENTS CONSOLIDATED HORIZON
------- -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,311,928 $21,521 $(228)<F11 $ 1,333,221 $28,197
Interest Expense 521,542 12,496 534,038 12,175
------------ ------- ----- ------------ -------
Net Interest Income 790,386 9,025 (228) 799,183 16,022
Provision for Possible Loan Losses 48,791 240 49,031 695
------------ ------- ----- ------------ -------
Net Interest Income after Provision
for Possible Loan Losses 741,595 8,785 (228) 750,152 15,327
Other Income
Trust 71,972 -- 71,972 --
Service charges 80,057 589 80,646 1,289
Credit card fees 27,352 6 27,358 --
Securities gains (losses) 2,888 127 3,015 --
Other 90,099 1,358 91,457 2,048
------------ ------- ----- ------------ -------
Total Other Income 272,368 2,080 -- 274,448 3,337
Other Expense
Salaries and employee benefits 336,426 4,380 340,806 6,531
Net occupancy and equipment 91,755 1,091 92,846 1,444
Other 216,830 3,833 220,663 4,509
------------ ------- ----- ------------ -------
Total Other Expense 645,011 9,304 -- 654,315 12,484
------------ ------- ----- ------------ -------
Income Before Income Taxes 368,952 1,561 (228) 370,285 6,180
Income Taxes 135,896 933 (82)<F12> 136,747 1,604
------------ ------- ----- ------------ -------
Net Income Before Cumulative
Effect of Change in Accounting
Principles $ 233,056 $ 628 $(146) $ 233,538 $ 4,576
============ ======= ===== ============ =======
Per Share Data
Average Common Shares
Outstanding<F22> 112,323,722 113,179,964
Net Income Before Cumulative
Effect of Change in Accounting
Principles $ 2.06 $ 2.05
<CAPTION>
PRO FORMA
HORIZON/CBT COMBINED
CBT ADJUSTMENTS CONSOLIDATED
--- ----------- ------------
<S> <C> <C> <C>
Interest Income $ 65,857 $ (361)<F18> $ 1,425,576
(1,338)<F20>
Interest Expense 27,161 573,374
------------ ------- ------------
Net Interest Income 38,696 (1,699) 852,202
Provision for Possible Loan Losses 1,361 51,087
------------ ------- ------------
Net Interest Income after Provision
for Possible Loan Losses 37,335 (1,699) 801,115
Other Income
Trust 1,413 73,385
Service charges 2,821 84,756
Credit card fees -- 27,358
Securities gains (losses) (136) 2,879
Other 2,415 95,920
------------ ------- ------------
Total Other Income 6,513 -- 284,298
Other Expense
Salaries and employee benefits 14,014 361,351
Net occupancy and equipment 2,686 96,976
Other 11,429 236,601
------------ ------- ------------
Total Other Expense 28,129 -- 694,928
------------ ------- ------------
Income Before Income Taxes 15,719 (1,699) 390,485
Income Taxes 4,233 (130)<F19> 141,972
(482)<F21>
------------ ------- ------------
Net Income Before Cumulative
Effect of Change in Accounting
Principles $ 11,486 $(1,087) $ 248,513
============ ===== ============
Per Share Data
Average Common Shares
Outstanding<F22> 120,143,303
Net Income Before Cumulative
Effect of Change in Accounting
Principles $ 2.06
See Notes to Pro Forma Combined Consolidated Financial Statements.
</TABLE>
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<PAGE> 58
MERCANTILE BANCORPORATION INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<F1> Represents MBI's restated historical consolidated financial statements
reflecting the acquisition of Hawkeye Bancorporation, effective
January 2, 1996, and Mark Twain, effective April 25, 1997. Such
acquisitions were accounted for as poolings-of-interests. The
acquisition of First Sterling Bancorp, Inc. ("Sterling") by MBI and
the acquisition of Northland Bancshares, Inc. by Mark Twain were also
accounted for as poolings-of-interests; however, due to the
immateriality of the financial condition and results of operations of
Sterling and Northland Bancshares, Inc. to that of MBI and Mark
Twain, the historical financial statements were not restated.
Therefore, Sterling and Northland Bancshares, Inc. are included in
these pro forma financial statements only from their respective
acquisition dates forward. Each of Security Bank of Conway, F.S.B.,
Metro Savings Bank, F.S.B., Peoples State Bank, First Financial
Corporation of America, TODAY'S Bancorp, Inc., Regional Bancshares,
Inc. and First City Bancshares, Incorporated, each of which was
accounted for as a purchase, is included in these pro forma financial
statements only from its respective acquisition date forward. The
full impact of these acquisitions is immaterial to the Pro Forma
Combined Consolidated Financial Statements.
MBI completed its acquisition of Roosevelt on July 1, 1997. The
acquisition of Roosevelt was accounted for as a purchase; as such,
historical financial statements were not restated. The full impact
of the Roosevelt acquisition is included in the pro forma combined
consolidated income statement for the nine months ended September 30,
1997 and for the year ended December 31, 1996.
All per share data reflects the 3-for-2 stock split declared by MBI on
July 16, 1997, which was distributed on October 1, 1997.
<F2> In conjunction with the proposed acquisition of HomeCorp, MBI plans to
repurchase up to 95,138 shares of MBI Common Stock in the open
market. The assumed repurchase price per share is $48.00, the
closing price of MBI Common Stock on October 28, 1997, the last
business date before the announcement of the Merger Agreement between
MBI and HomeCorp.
<F3> Acquisition of HomeCorp with 951,380 shares of issued MBI Common Stock,
including up to 95,138 reissued treasury shares, based on the
exchange ratio of 0.4968 of a share of MBI Common Stock per share of
HomeCorp Common Stock. The number of shares of MBI Common Stock,
which represents the aggregate number of shares to be issued in the
Merger, was calculated as follows:
-53-
<PAGE> 59
<TABLE>
<S> <C>
Shares of HomeCorp Common Stock 1,707,527
Maximum number of shares of
Home Corp Common Stock
which could be issued pursuant
to HomeCorp's stock option plans 207,489
----------
Maximum number of shares
of HomeCorp Common Stock
to be cancelled in the Merger 1,915,016
Exchange Ratio x .4968
----------
Aggregate number of shares 951,380
of MBI Common Stock ==========
to be issued in the Merger
</TABLE>
<F4> Elimination of MBI's investment in HomeCorp.
<F5> In conjunction with the proposed acquisition of Horizon, MBI plans to
repurchase 153,000 shares of MBI Common Stock in the open market.
The assumed repurchase price per share is $47.1875, the closing price
of MBI Common Stock on July 30, 1997, the last business date before
the announcement of the merger agreement between MBI and Horizon.
<F6> Acquisition of Horizon with 2,550,000 shares of issued MBI Common Stock,
including 153,000 reissued treasury shares, based on the exchange
ratio of 4.0301 of a share of MBI Common Stock per share of Horizon
common stock.
<F7> Elimination of MBI's investment in Horizon.
<F8> In conjunction with the proposed acquisition of CBT, MBI plans to
repurchase 507,371 shares of MBI Common Stock in the open market.
The assumed repurchase price per share is $52.75, the closing
price of MBI Common Stock on January 9, 1998, the last business
day before the announcement of the merger agreement between
MBI and CBT.
<F9> Acquisition of CBT with 5,120,929 shares of issued MBI Common Stock,
including 507,371 reissued treasury shares, based on the exchange
ratio of .6513 of a share of MBI Common Stock per share of CBT
Common Stock.
<F10> Elimination of MBI's investment in CBT.
<F11> Interest income foregone as a result of MBI repurchasing 95,138 treasury
shares in conjunction with the acquisition of HomeCorp by MBI. The
assumed interest rate is 5%.
<F12> Income tax benefit associated with interest income foregone as the
result of repurchasing shares in conjunction with the acquisition of
HomeCorp by MBI. The assumed effective tax rate is 36%.
<F13> The acquisition of Roosevelt was accounted for as a purchase
transaction. Included herein is the amortization of goodwill over a
15-year period (see footnote 14 below) and interest expense related
to the issuance of subordinated debt securities and notes as
described in footnotes 15 and 16 below. The impact of interest income
lost on the cash consideration and stock buybacks is immaterial to
the Pro Forma Combined Consolidated Financial Statements through
September 30, 1997. Goodwill is considered nondeductible. The
income tax benefit associated with taxable income statement
adjustments is computed at an effective tax rate of 36%.
<F14> The pro forma excess of cost over fair value of net assets acquired was
$605,320,000 for Roosevelt as of June 30, 1997. The annual amount of
goodwill amortization, given a 15-year amortization period, is
$40,355,000.
-54-
<PAGE> 60
<F15> On January 29, 1997, MBI issued $150,000,000 of subordinated debt
securities, which were issued at a floating rate equal to the
three-month LIBOR plus 85 basis points. The rate assumed in
calculating the expense for the Pro Forma Combined Consolidated
Financial Statements is 6.86%.
<F16> On June 11, 1997, MBI issued $200,000,000 of 7.3% subordinated notes due
2007, $150,000,000 of 6.8% senior notes due 2001 and $150,000,000 of
7.05% senior notes due 2004.
<F17> Income tax benefit associated with interest expense on debt issues (see
footnotes 15 and 16 above). The assumed effective tax rate is 36%.
<F18> Interest income foregone as the result of MBI repurchasing 153,000
treasury shares in conjunction with the acquisition of Horizon by
MBI. The assumed interest rate is 5%.
<F19> Income tax benefit associated with interest income foregone as the
result of repurchasing shares in conjunction with the acquisition of
Horizon by MBI. The assumed effective tax rate is 36%.
<F20> Interest income foregone as the result of MBI repurchasing 507,371
treasury shares in conjunction with the acquisition of CBT by
MBI.
<F21> Income tax benefit associated with interest income foregone as the
result of repurchasing shares in conjunction with the acquisition of
CBT by MBI. The assumed effective tax rate is 36%.
<F22> The computation of year-to-date average shares as restated for the
poolings-of-interests with Mark Twain and Hawkeye Bancorporation, as
well as for the 3-for-2 stock split distributed on October 1, 1997,
is as follows:
-55-
<PAGE> 61
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEARS ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------------
SEPT. 30, 1997 1996 1995 1994
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Shares of MBI Common Stock issued
and outstanding 119,079,189 115,938,311 115,754,877 112,323,722
Shares of MBI Common Stock to be issued
in the HomeCorp acquisition, net of
treasury shares 856,242 856,242 856,242 856,242
Shares of MBI Common Stock to be issued in
the Horizon acquisition, net of treasury
shares 2,397,000 2,397,000 2,397,000 2,397,000
Shares of MBI Common Stock issued
in the Roosevelt acquisition 18,948,884 18,948,884
Shares of MBI Common Stock issued
in the CBT acquisition, net of treasury
shares 4,566,339 4,566,339 4,566,339 4,566,339
Less effect of MBI shares issued
in the Roosevelt acquisition being
outstanding since July 1, 1997 (6,316,295)
Less effect of treasury share purchases (3,500,000) (6,668,451)
----------- ----------- ----------- -----------
Pro Forma Combined 136,031,359 136,038,325 123,574,458 120,143,303
=========== =========== =========== ===========
</TABLE>
-56-
<PAGE> 62
INFORMATION REGARDING HOMECORP
------------------------------
FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement/Prospectus, the words or phrases
"will likely result", "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. MBI and
HomeCorp caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. MBI and
HomeCorp wish to advise readers that the factors listed below could affect
HomeCorp's financial performance and could cause HomeCorp's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
MBI and HomeCorp do not undertake, and specifically decline any
obligation, to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The following information regarding HomeCorp should be read in
conjunction with the audited and unaudiated financial statements and notes
thereto contained in this Proxy Statement/Prospectus.
GENERAL
HomeCorp is a Delaware corporation formed in 1989 as a thrift holding
company to serve as the holding company for HomeBanc, a federal savings bank.
HomeBanc was organized in 1889 as the Swedish Building and Loan Association.
HomeBanc converted to a federally chartered mutual savings and loan
association in 1967 and a federal stock savings bank in 1990.
As a community oriented savings bank, HomeBanc offers a range of retail
banking services through its nine full service offices and one limited
service office located in Winnebago, Stephenson and Lee Counties, Illinois.
Included in the nine full service offices is a supermarket office in Rockford
which opened in April 1995. HomeBanc is principally engaged in the business
of attracting deposits from the general public and using such deposits,
together with borrowings and other funds, to originate residential mortgage,
consumer and small business loans. HomeBanc sells the majority of its
residential mortgage originations with servicing retained. HomeBanc's
balance sheet reflects these sales together with the increasing origination
of consumer and small business loans. The consumer loan portfolio increased
$19.5 million, or 35%, during 1996 while commercial business loans increased
$2.2 million, or 56%. HomeBanc also, to a lesser extent, originates
construction and commercial real estate loans primarily on properties located
in its market area as well as construction and land loans in the western and
northern suburban Chicago markets.
Since 1993 HomeBanc has purchased participating interests in permanent
and construction loans on multi-family and commercial properties located
primarily in southern Wisconsin. HomeBanc purchased participating interests
in seven loans totaling $7.2 million during 1996. HomeBanc intends to continue
the purchase of such participations secured by properties located in Midwestern
states. The loans
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<PAGE> 63
are adjustable rate or short-term, fixed rate loans. In current market
conditions, non-residential lending activities may be more profitable than
residential.
In the past, HomeBanc through its subsidiary Home Federal Service
Corporation, made substantial investments in real estate development
projects, principally in the western and northern suburbs of Chicago. As a
result of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), HomeBanc has made no new commitments for real estate
development projects since 1989. HomeBanc also offers brokerage and related
services through its affiliation with Invest Financial Corporation, a
full-service investment brokerage program.
HomeBanc intends to continue to emphasize consumer and small business
lending in its principal lending markets, as well as its traditional
residential lending. Subject to regulatory restrictions and the volume and
mix of construction activity in the real estate market, HomeBanc also intends
to continue to emphasize residential construction lending. In addition,
HomeBanc will continue to manage as well as reduce its existing real estate
development investments.
MARKET AREA
HomeBanc serves its customers through six full service offices located
in the Rockford, Illinois metropolitan area, two full service offices located
in the Freeport, Illinois area, and one full service and one limited service
office located in Dixon, Illinois. The Rockford metropolitan area has a
population of approximately 348,000, making it the second most highly
populated metropolitan area in the State of Illinois, and is located
approximately 55 miles west of the Chicago suburbs. This market area is
characterized by a diverse economic base that features a variety of
manufacturing and service firms. Major corporations headquartered or having
substantial operations in or around the Rockford area include the Chrysler
Corporation, the Newell Company, Sundstrand Corporation, Ingersoll Milling
Machine Company and Clarcor. Motorola opened a repair facility in Rockford
during 1995 and a manufacturing facility in a community approximately 25
miles from Rockford. Freeport is located approximately 30 miles west of
Rockford and has a manufacturing based economy. Dixon is located 45 miles
southwest of Rockford and has a manufacturing and agricultural economy.
LENDING ACTIVITIES - GENERAL
The principal lending activity has been the origination of fixed and
adjustable rate conventional real estate loans to enable borrowers to
purchase or refinance owner-occupied homes. In addition, in order to
increase the yield and interest rate sensitivity of its portfolio, HomeBanc
originates and purchases consumer, commercial real estate, construction,
commercial business loans and land loans. Loan applications are initially
approved at various levels of authority, depending on the type, amount and
loan-to-value ratio of the loan. Mortgage loan commitments of more than
$250,000 must be approved by a majority of the members present at a duly
convened meeting of HomeBanc's Senior Loan Committee. The Committee is
comprised of the President, Executive Vice President, Senior Vice
President-Commercial Lending and Vice President-Commercial Credit
Administration. At least three Committee members are required for a quorum.
Commercial business loans of more than $150,000 must be approved by
HomeBanc's Senior Loan Committee. Such loans in excess of $750,000 must be
approved by the Loan Committee of the Board of Directors, comprised of three
outside Directors and the President.
-58-
<PAGE> 64
Specific credit criteria and lending limitations are established for
consumer loan officers. Any deviations from established guidelines require
the approval of the Senior Loan Committee. All loans are ratified by the
Board of Directors.
-59-
<PAGE> 65
The following table sets forth information concerning the composition of
HomeBanc's loan portfolio, in dollar amounts and in percentages (before
deductions for unearned discounts, loans in process, deferred fees and
discounts and allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential $126,108 47.4% $153,986 58.2% $173,698 69.5%
Commercial 40,086 15.1 38,850 14.7 38,813 15.5
Construction 13,482 5.1 9,354 3.5 5,548 2.2
Land 4,415 1.6 2,335 0.9 1,611 0.7
-------- ----- -------- ----- -------- -----
Total Real Estate Loans 184,091 69.2 204,525 77.3 $219,670 87.9
Other Loans:
Consumer Loans
Automobile 53,249 20.0 38,687 14.6 14,602 5.8
Home Equity and Improvement 21,168 8.0 16,268 6.1 12,297 4.9
Other 1,374 0.5 1,293 0.5 1,213 0.5
-------- ----- -------- ----- -------- -----
Total Consumer Loans $ 75,791 28.5 $ 56,248 21.2 $ 28,112 11.2
Commercial Business Loans 6,243 2.3 4,007 1.5 2,211 0.9
-------- ----- -------- ----- -------- -----
Total Other Loans 82,034 30.8 60,255 22.7 30,323 12.1
-------- ----- -------- ----- -------- -----
Total Loans $266,125 100.0% $264,780 100.0% $249,993 100.0%
======== ===== ======== ===== ======== =====
LESS
Unearned Discount $ 210 $ 270 $ 623
Loans in Process 5,639 2,753 3,343
Deferred Fees and Discount (446) (440) (331)
Allowance for Loan Losses 1,582 1,175 1,048
-------- -------- --------
Total Loans Receivable, Net $259,140 $261,022 $245,310
======== ======== ========
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1993 1992
--------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
Residential $171,089 73.1% $178,081 77.6%
Commercial 27,917 11.9 18,801 8.2
Construction 11,379 4.9 10,210 4.4
Land 3,361 1.4 3,386 1.5
-------- ----- -------- -----
Total Real Estate Loans $213,746 91.3 210,478 91.7
Other Loans:
Consumer Loans
Automobile 7,341 3.1 6,806 3.0
Home Equity and Improvement 10,238 4.4 9,668 4.2
Other 896 0.4 1,686 0.7
-------- ----- -------- -----
Total Consumer Loans $ 18,475 7.9 $ 18,160 7.9
Commercial Business Loans 1,921 0.8 966 0.4
-------- ----- -------- -----
Total Other Loans 20,396 8.7 19,126 8.3
-------- ----- -------- -----
Total Loans $234,142 100.0% $229,604 100.0%
======== ===== ======== =====
LESS
Unearned Discount $ 761 $ 1,102
Loans in Process 2,561 1,039
Deferred Fees and Discount (57) (41)
Allowance for Loan Losses 956 900
-------- --------
Total Loans Receivable, Net $229,921 $226,604
======== ========
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<PAGE> 66
The following table shows the fixed and adjustable rate composition of
HomeBanc's loan portfolio, in dollar amounts and in percentages (before
deductions for unearned discounts, loans in process, deferred fees and
discounts and allowance for loan losses) as of the dates indicated.
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
Real Estate:
Residential $ 77,679 29.2% $ 93,155 35.2% $107,055 42.8%
Commercial 16,071 6.0 12,854 4.8 17,382 7.0
Construction 400 0.2 168 0.1 459 0.2
Land 1,611 0.6 216 0.1 74 0.0
-------- ----- -------- ----- -------- -----
Total Real Estate Loans 95,761 36.0 106,393 40.2 124,970 50.0
Consumer 61,117 23.0 44,649 16.8 18,633 7.4
Commercial Business 3,037 1.1 2,062 0.8 1,005 0.4
-------- ----- -------- ----- -------- -----
Total Fixed Rate Loans $159,915 60.1% $153,104 57.8% $144,608 57.8%
======== ===== ======== ===== ======== =====
Adjustable Rate Loans
Real Estate:
Residential 48,429 18.2 60,831 23.0 66,643 26.7
Commercial 24,015 9.0 25,996 9.8 21,431 8.6
Construction 13,082 4.9 9,186 3.5 5,089 2.0
Land 2,804 1.1 2,119 0.8 1,537 0.6
-------- ----- -------- ----- -------- -----
Total Real Estate Loans 88,330 33.2 98,132 37.1 94,700 37.9
Consumer 14,674 5.5 11,599 4.4 9,479 3.8
Commercial Bus. 3,206 1.2 1,945 0.7 1,206 0.5
-------- ----- -------- ----- -------- -----
Total Adjustable Rate Loans 106,210 39.9 111,676 42.2 105,385 42.2
-------- ----- -------- ----- -------- -----
Total Loans 266,125 100.0 264,780 100.0 249,993 100.0
======== ===== ======== ===== ======== =====
LESS
Unearned Discount $ 210 $ 270 $ 623
Loans in Process 5,639 2,753 3,343
Deferred Fees and Discount (446) (440) (331)
Allowance for Loan Losses 1,582 1,175 1,048
-------- -------- --------
Total Loans Receivable,
Net $259,140 $261,022 $245,310
======== ======== ========
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1993 1992
--------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed Rate Loans
Real Estate:
Residential $111,653 47.7% $103,083 44.9%
Commercial 9,479 4.0 5,055 2.2
Construction -- -- -- 0.0
Land -- -- -- 0.0
-------- ----- -------- -----
Total Real Estate Loans 121,132 51.7 108,138 47.1
Consumer 9,566 4.1 9,141 4.0
Commercial Business 844 0.4 629 0.3
-------- ----- -------- -----
Total Fixed Rate Loans $131,542 56.2% $117,908 51.4%
======== ===== ======== =====
Adjustable Rate Loans
Real Estate:
Residential 59,437 25.4 74,998 32.7
Commercial 18,438 7.9 13,746 6.0
Construction 11,379 4.9 10,210 4.4
Land 3,361 1.4 3,386 1.5
-------- ----- -------- -----
Total Real Estate Loans 92,615 39.6 102,340 44.6
Consumer 8,909 3.8 9,019 3.9
Commercial Bus. 1,076 0.4 337 0.1
-------- ----- -------- -----
Total Adjustable Rate Loans 102,600 43.8 111,696 48.6
-------- ----- -------- -----
Total Loans 234,142 100.0 229,604 100.0
======== ===== ======== =====
LESS
Unearned Discount 761 $ 1,102
Loans in Process 2,561 1,039
Deferred Fees and Discount (57) (41)
Allowance for Loan Losses 956 900
-------- --------
Total Loans Receivable,
Net $229,921 $226,604
======== ========
</TABLE>
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<PAGE> 67
The following schedule illustrates the contractual maturity of
HomeBanc's loan portfolio, at December 31, 1996. Loans which have adjustable
or floating interest rates are shown as maturing in the period during which
the loan is due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. Loan maturities are
stated at principal value.
<TABLE>
<CAPTION>
REAL ESTATE
RESIDENTIAL LOANS COMMERCIAL CONSTRUCTION LAND
------------------- ------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 334 8.14% $ 1,097 9.42% $10,969 8.93% $1,903 9.31%
After 1 year:
1 to 2 years 1,934 6.90 1,562 8.74 -- -- -- --
2 to 3 years 3,965 7.76 3,400 8.89 106 9.25 1,272 9.23
3 to 5 years 6,391 8.16 4,858 9.06 -- -- 580 9.00
5 to 10 years 18,961 8.28 12,087 8.89 2,000 8.44 75 7.90
10 to 15 years 49,644 7.85 876 9.65 -- -- 59 8.93
15 to 25 years 17,461 8.24 10,251 8.13 -- -- 461 8.99
Over 25 years 27,418 7.95 5,955 8.27 407 7.81 65 9.07
-------- ---- ------- ---- ------- ---- ------ ----
Total $126,108 $40,086 $13,482 $4,415
======== ======= ======= ======
<CAPTION>
CONSUMER<F1> COMMERCIAL BUSINESS TOTAL
------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 2,556 8.83% $3,208 .02% $ 20,067 8.98%
After 1 year:
1 to 2 years 5,346 8.95 669 8.73 9,511 8.48
2 to 3 years 11,619 8.94 469 8.48 20,831 8.71
3 to 5 years 53,964 8.56 1,709 8.94 67,502 8.57
5 to 10 years 1,865 10.23 43 10.75 35,031 8.60
10 to 15 years 441 11.45 -- -- 51,020 7.92
15 to 25 years -- -- -- -- 28,173 8.21
Over 25 years -- -- 145 6.40 33,900 8.00
------- ----- ------ ----- -------- ----
Total $ 75,791 $6,243 $266,125
======= ====== ========
<FN>
- ----------------------------
<F1> Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
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<PAGE> 68
Of the $246.1 million of loans due after December 31, 1997, $156.4
million, or 63.6%, have fixed rates of interest and $89.7 million, or 36.4%,
have adjustable rates of interest.
HomeBanc does not maintain a predetermined rollover policy for
construction, land and other non-amortizing or balloon loans. Individual
loans are renewed at maturity as determined by management on a case-by-case
basis after consideration of the borrower's historical performance and
current market considerations.
Management believes the possible future volume of loan renewals or
rollovers would not significantly impact the maturity information presented
above.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
Historically, HomeBanc originated for retention in its own portfolio
fixed rate loans secured by one to four-family residential real estate. In
order to meet consumer demand, HomeBanc has continued to originate fixed rate
residential loans. For several years, HomeBanc has sold fixed rate mortgage
loans with maturities of 28 years or more into the secondary loan market. In
April 1993 HomeBanc amended its sales program in response to the historically
low interest rates to include fixed rate mortgage loans with original
maturities of 20 years. During 1994, HomeBanc began selling all fixed rate
mortgage loans. During 1995, management began selling certain adjustable
rate mortgage originations. As of December 31, 1996, HomeBanc originated
adjustable rate mortgages with initial adjustment periods ranging from six
months to five years for retention. The majority of adjustable rate mortgage
originations are HomeBanc's fixed payment six month adjustable rate
mortgages, marketed by HomeBanc as "Trombone" loans.
HomeBanc originates its Trombone loans based upon fully indexed rates
and 30- or 15-year amortization periods. The resulting term to maturity of
such loans is generally between 13 to 30 years. The interest rates on
Trombone loans generally adjust every six months to a margin over six-month
U.S. Treasury securities and carry 2% annual and 5% to 6% lifetime interest
rate caps; however, the borrower's fixed payment does not change. The
Trombone loan provides borrowers with the predictability of fixed payments
while providing HomeBanc with an interest rate sensitive asset with no
negative amortization. The Trombone loan avoids a common risk to adjustable
rate mortgage borrowers and lenders. That risk is the potential for a
significant increase in monthly loan payments over time. As of December 31,
1996, HomeBanc had $36.6 million of fixed payment adjustable rate mortgages
in its portfolio.
At December 31, 1996, loans secured by residential real estate totaled
$126.1 million and represented 47.4% of HomeBanc's total loan portfolio. Of
the total residential loans, $48.4 million had adjustable interest rates.
This compares to $154.0 million of one- to four-family residential mortgage
loans at December 31, 1995, with $60.8 million of such loans having
adjustable interest rates. In view of HomeBanc's expanding consumer and
commercial lending, management anticipates that the residential mortgage
loans will continue to decline as a percentage of HomeCorp's loan portfolio.
As of December 31, 1996, most of HomeBanc's one- to four-family residential
real estate loans were secured by properties located in its primary market
area.
Adjustable rate mortgage rate adjustments are based upon changes in
prevailing rates for comparable term U.S. Treasury securities plus a margin,
and are generally limited to 2% maximum annual adjustments (1% semi-annual
adjustments for six month adjustable rate loans) as well as a maximum
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aggregate adjustment over the life of the loan (generally 5% to 6%).
Accordingly, the interest rates on these loans are not necessarily as rate
sensitive as HomeBanc's cost of funds. Generally, HomeBanc's adjustable rate
mortgages are not convertible into fixed rate loans, do not permit negative
amortization of principal and carry no prepayment penalty. HomeBanc
originates adjustable rate mortgages with terms to maturity of up to 30 years
and qualifies its semi-annual and annual adjustable rate mortgage borrowers
based on the maximum interest rate to which the loan could adjust in the
second year. HomeBanc originates adjustable rate mortgages with interest
rates fixed for periods of three to five years. These borrowers are
qualified based upon the starting rates of the loans.
Adjustable rate mortgages entail risks resulting from potential
increased payment obligations by the borrower as a result of repricing.
Further, non-trombone adjustable rate mortgages offered by HomeBanc, as well
as by many other institutions, sometimes provide for initial rates of
interest below the rates that would prevail were the index used for pricing
applied initially. These loans are subject to increased risk of delinquency
or default as the higher, fully-indexed rate of interest subsequently comes
into effect in replacement of the initial lower rate.
In underwriting one- to four-family residential real estate loans,
HomeBanc evaluates both the borrower's ability to make monthly payments and
the value of the property securing the loan. It is HomeBanc's policy that
all loans in excess of 80% of the appraised value of the property be insured
by a private mortgage insurance company approved by HomeBanc for the amount
of the loan in excess of 80% of the appraised value. In addition, HomeBanc
requires borrowers to obtain title and fire and casualty insurance in an
amount not less than the amount of the loan. HomeBanc also carries mortgage
single interest insurance which protects HomeBanc against certain types of
uninsured property damage. Real estate loans originated by HomeBanc
generally contain a "due on sale" clause allowing HomeBanc to declare the
unpaid principal balance due and payable upon the sale of the security
property. HomeBanc enforces these due on sale clauses to the extent
permitted by law.
CONSTRUCTION AND LAND LENDING
HomeBanc makes construction loans primarily to builders and developers
for the construction of one- to four-family residences and commercial real
estate and the development of one- to four-family lots in HomeBanc's primary
lending areas. HomeBanc also makes similar construction loans in the western
and northern suburbs of Chicago. Historically, HomeBanc primarily originated
loans to builders purchasing developed lots from HomeBanc's real estate
development subsidiary. HomeBanc has continued its lending relationships
with selected builders even though HomeBanc's subsidiary is phasing-out its
development business. At December 31, 1996, loans secured by homes or
projects under construction and land (including loans in process) aggregated
$17.9 million, or 6.7%, of HomeBanc's total loan portfolio as compared to
$11.7 million, or 4.4%, of the loan portfolio one year earlier. HomeBanc
added a loan officer during 1995 to focus strictly upon construction loan
originations. As of December 31, 1996, HomeBanc had no loans outstanding to
its real estate development subsidiary or any entity in which the subsidiary
participated. The December 31, 1996 loan balance was comprised primarily of
residential construction loans made to non-affiliated borrowers in HomeBanc's
primary lending market.
Most of HomeBanc's construction and land loans have been originated with
adjustable rates of interest tied to the prime rate of interest and have
terms of three years or less. Construction and land loans are generally made
in amounts of up to a maximum loan-to-value ratio of 80% (75% in the case of
commercial real estate) based upon an independent appraisal. Many of
HomeBanc's construction and
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land loans provide an interest reserve for the payment of interest and
fees from the loan proceeds. HomeBanc also obtains personal guarantees for
substantially all of its construction and land loans.
HomeBanc purchased $2.0 million in participating interests in two
construction loans totaling $9.3 million during 1996. The two loans are
funding the construction of two multi-family buildings, one located in
eastern Iowa and the second in southern Wisconsin. Approximately $148,000
was advanced on the two loans at December 31, 1996. HomeBanc has committed
to purchase $2.0 million in participating interests in the end loans for the
multi-family properties.
HomeBanc's construction loan agreements generally provide that pro rata
principal repayments must be made as individual units are sold to third
parties so that the remaining loan balance is in proportion to the value of
the remaining security. Loan proceeds are disbursed in increments through an
independent title company as construction progresses. The amount of each
disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified fee inspector who inspects the project in
connection with each disbursement request. HomeBanc periodically reviews the
progress of the underlying construction project.
The application process for construction and land loans includes a
submission to HomeBanc of plans, specifications and costs of the project to
be constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
HomeBanc's construction and land loans may involve larger principal
balances than do its one- to four-family residential loans. The maximum
amount that HomeBanc or any institution may lend to any one borrower was
reduced, effective August 9, 1989, from an amount equal to its regulatory
capital (which was $25.6 million at September 30, 1989 prior to the
implementation of the new capital requirements) to the greater of 15% of
unimpaired capital and surplus or $500,000. This lower limit significantly
reduced HomeBanc's ability to make large construction, commercial real estate
or land loans without selling participations. HomeBanc's
loans-to-one-borrower limit at December 31, 1996, was $3.4 million.
The table below sets forth by type of security property, the number and
amount of HomeBanc's construction and land loans at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT NON-
NUMBER LOAN PRINCIPAL PERFORMING OR
OF LOANS COMMITMENT BALANCE OF CONCERN
-------- ---------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Land acquisition and
development 36 $ 4,415 $ 4,415 $ --
Multi-family 2 2,000 148 --
Single family 54 11,482 7,815 --
-- ------- ------- -----
Total net construction
and land loans 92 $17,897 $12,378 $ --
== ======= ======= =====
</TABLE>
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<PAGE> 71
The following table presents the locations and types of properties
securing HomeBanc's construction and land loans at December 31, 1996. The
amounts shown do not reflect allowances for losses.
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT NON-
NUMBER LOAN PRINCIPAL PERFORMING OR
OF LOANS COMMITMENT BALANCE OF CONCERN
-------- ---------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Winnebago, Stephenson, Carroll,
Boone and Ogle Counties, Illinois
Land developments 34 $ 4,075 $ 4,075 --
Single family 49 9,954 6,513 --
Multi-family -- -- -- --
---
Total 83 14,029 10,588 --
DuPage, McHenry and
Lake Counties, Illinois
Land developments 2 340 340 --
Single family 5 1,528 1,302 --
Multi-family -- -- -- --
--- ------- ------- ---
Total 7 1,868 1,642 --
Southern Wisconsin:
Land developments -- -- -- --
Single family -- -- -- --
Multi-family 1 1,000 74
--- ------- ------- ----
Total 1 1,000 74 --
Eastern Iowa:
Land developments -- -- -- --
Single family -- -- -- --
Multi-family 1 1,000 74 --
--- ------- ------- ----
Total 1 1,000 74 --
Total net construction and land
loans 92 $17,897 $12,378 $ --
=== ======= ======= ====
</TABLE>
Construction and land lending generally affords HomeBanc an opportunity
to receive interest at rates higher than those obtainable from residential
lending and to receive higher origination and other loan fees. In addition,
construction and land loans are generally made with adjustable rates of
interest and for relatively short terms. Nevertheless, construction and land
lending is generally considered to involve a higher level of credit risk than
one- to four-family residential lending due to the concentration of principal
in a limited number of loans and borrowers and the effects of general
economic conditions on development projects, real estate developers and
managers. In addition, the nature of these loans is such that they are more
difficult to evaluate and monitor. HomeBanc's risk of loss on a construction
or land loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of construction or
development cost proves to be inaccurate, HomeBanc may be required to advance
funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, HomeBanc may be
confronted, at or prior to the maturity of the loan, with a project with a
value that is insufficient to assure full repayment. Because HomeBanc
usually provides financing for the entire estimated cost of the project,
including anticipated interest, and, in some cases, an amount intended to
cover initial carrying costs until sufficient units can be sold, defaults in
repayment generally do not occur during the construction or development
period and it is therefore difficult to identify problem loans at an early
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stage. When loan payments become due, borrowers may experience cash flow from
the property that is not adequate to service total debt. In such cases,
HomeBanc may be required to modify the terms of the loan.
HomeBanc intends to continue to emphasize construction and land loans
depending on market conditions, funding limitations and regulatory
restrictions.
COMMERCIAL REAL ESTATE LENDING
HomeBanc also purchases and originates permanent loans secured by
commercial real estate in order to increase the yield on, and the proportion
of interest rate sensitive loans in, its portfolio. At December 31, 1996,
$40.1 million, or 15.1%, of HomeBanc's loan portfolio, consisted of permanent
loans secured by commercial real estate.
HomeBanc has originated and purchased both adjustable and fixed rate
commercial real estate loans, although $4.5 million of the total $11.7
million in commercial real estate loans originated and purchased in 1996 had
adjustable rates. Most of its fixed rate commercial real estate loans have
terms of 15 years or less. Adjustable rate commercial real estate loans have
terms of up to 30 years. Rates on HomeBanc's adjustable rate commercial real
estate loans are generally tied to a specific treasury rate or to the prime
rate of interest. Some adjust in a manner consistent with HomeBanc's fixed
payment adjustable rate mortgages.
Commercial real estate loans are generally written in amounts of up to
75% of the appraised value of the underlying property. Appraisals on
properties securing commercial real estate loans originated by HomeBanc are
performed by an independent appraiser designated by HomeBanc at the time the
loan is made. All appraisals on commercial real estate loans are reviewed by
HomeBanc's management. In addition, HomeBanc's underwriting procedures
require verification of the borrower's credit history, income and financial
statements, banking relationships, references and income projections for the
property and the criteria already discussed for construction and development
loans. Borrowers are generally personally liable for all or a portion of
most of HomeBanc's commercial real estate loans.
At December 31, 1996, HomeBanc had five commercial real estate loans to
one borrower with indebtedness in excess of $3.4 million, HomeBanc's legal
lending limit. All the loans were grandfathered under the applicable
regulations. The borrower had total loans outstanding of $4.0 million, all
of which were current as of December 31, 1996. There were ten other
commercial real estate borrowers with loans in excess of $1.0 million as of
December 31, 1996, all of which were participating interests in multi-family
and commercial real estate loans acquired by HomeBanc during the past four
years. At December 31, 1996, all of these loans were performing in
accordance with their respective terms.
The table below sets forth by type of security property the number and
amount of HomeBanc's commercial real estate loans including $24.9 million of
purchased participations at December 31, 1996. All of the loans in the table
below originated by HomeBanc are secured by property located in HomeBanc's
primary lending areas.
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<PAGE> 73
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT NON-
NUMBER PRINCIPAL PERFORMING OR
OF LOANS BALANCE OF CONCERN
-------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Small business facilities 64 $ 9,259 972
Apartments and condominiums 64 24,874 2,495
Office buildings 6 2,402 --
Industrial real estate 6 779 --
University and church properties 1 15 --
Hotels 1 1,820 --
Shopping Centers 1 937 --
--- ------- -----
Total commercial real estate
loans 143 $40,086 3,467
=== ======= =====
</TABLE>
The hotel loan totaling $1.8 million was repaid shortly after year end.
Commercial real estate loans generally present a higher level of risk than
loans secured by one- to four-family residences. This greater risk is due to
several factors, including the concentration of principal in a limited number
of loans and borrowers, the effects of general economic conditions on income
producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured
by multi-family and commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
Commercial real estate loans also involve many of the same risks discussed
above regarding construction and land loans.
HomeBanc intends to continue its origination of commercial real estate
loans. Such loans or participating interests in such loans may be purchased
in the future based upon the volume of HomeBanc originations.
CONSUMER LENDING
Management considers consumer lending to be a significant component of
its strategic plan. Specifically, consumer loans generally have shorter
terms to maturity and/or adjustable rates, thus reducing HomeBanc's exposure
to changes in interest rates, and carry higher rates of interest than do
residential mortgage loans. In addition, management believes that the
offering of consumer loan products helps to expand and create stronger ties
to its existing customer base. For these reasons, HomeBanc has increased its
emphasis on consumer lending in recent periods. Originations of consumer
loans totaled $54.2 million, $50.0 million and $20.5 million during the years
ended December 31, 1996, 1995 and 1994, respectively. The increases are
primarily the result of higher automobile loan originations. The vast
majority of the increase was the result of loans originated indirectly
through local automobile dealers with whom HomeBanc maintains ongoing
relationships. While individual loans are referred through automobile
dealers, every loan is underwritten and approved by a HomeBanc loan officer.
Although origination volumes have increased substantially, management
remains committed to maintaining HomeBanc's asset quality standards. The
consumer loan portfolio delinquency rate declined to 0.1% at December 31,
1996 from 0.4% at December 31, 1995. Net consumer charge-offs were $69,000
during 1996 and $24,000 during 1995.
HomeBanc offers a variety of secured consumer loans, including
automobile loans, home equity loans and lines of credit. In addition,
HomeBanc also offers home improvement loans and unsecured
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consumer loans. Consumer loans totaled $75.8 million at December 31, 1996, or
28.5% of HomeBanc's total loan portfolio.
During 1993, HomeBanc implemented a home improvement loan program that
allows customers to borrow up to one-hundred percent of the value of their
improvements. HomeBanc is insuring its loan balances against principal loss
with an independent insurance company. Insurance premiums are paid by
HomeBanc based upon the aggregate outstanding principal balance insured. If
an insured loan becomes delinquent, the insurance company will purchase it at
face value from HomeBanc. A total of $1.1 million of such home improvement
loans were outstanding as of December 31, 1996. Two loans have required
repurchase by the independent insurance company since the inception of this
program.
HomeBanc initiated targeted home improvement and home equity loan
promotions during 1995. In 1996 and 1995 HomeBanc promoted the loans to
existing Bank mortgage customers without a second mortgage. The programs
have been successful in building outstanding balances of the second
mortgages, with home equity and improvement loans totaling $21.1 million,
$16.3 million and $12.2 million at December 31, 1996, 1995 and 1994,
respectively.
HomeBanc's automobile loans are fixed rate, while the equity line
interest rates adjust on a monthly basis, and are based on the six-month
Treasury securities or the prime rate plus a margin.
The underwriting standards employed by HomeBanc for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is of primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse
personal circumstances. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount that can be recovered on such loans. Although the level of
delinquencies in HomeBanc's consumer loan portfolio has generally been low
there can be no assurance that delinquencies will not increase in the future.
In the future, HomeBanc will continue to emphasize consumer lending,
especially automobile loans and equity lines of credit.
COMMERCIAL BUSINESS LENDING
A formal commercial, or small business, lending program was initiated
by HomeBanc in 1991. This program was expanded during 1995 as a part of
HomeBanc's community banking focus. At December 31, 1996, HomeBanc's
commercial business loan portfolio totaled $6.2 million. HomeBanc's
commercial business lending activities encompass loans with a variety of
purposes and security, including loans to finance accounts receivable,
inventory and equipment. HomeBanc focused its loan origination efforts upon
local manufacturing and related businesses during 1996. HomeBanc had one
borrower with an outstanding loan balance in excess of $400,000 at December
31, 1996. Total indebtedness of this borrower was $404,000. All of
HomeBanc's commercial business loans outstanding as of December 31, 1996,
have been to borrowers in its primary lending areas.
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In addition to the outstanding loan balance, the development of
commercial business relationships has provided other benefits to HomeBanc.
Checking and other deposit products have been generated from borrowers.
Also, HomeBanc has been able to offer commercial loan products to its
commercial deposit customers who previously had not considered HomeBanc for
their business borrowing needs.
Commercial business loan net charge-offs were $13,000 for the year ended
December 31, 1996. There were three delinquent business loans totaling
$31,000 as of December 31, 1996.
The underwriting standards employed by HomeBanc for commercial business
loans concentrate upon loan investigation and credit analysis. Loan
investigation procedures include, but are not limited to, a review of credit
bureau inquiries, state and county lien searches and/or verification of
indebtedness. Credit analysis procedures include the review of financial
information, including financial statements, cash flow analysis, comparison
to specific industry operating statistics and other information as deemed
appropriate considering the size and structure of the desired credit.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF REAL ESTATE LOANS
HomeBanc originates real estate loans through commissioned internal loan
production personnel located in HomeBanc's branch offices. Walk-in customers
and referrals from real estate brokers and builders are also important
sources of loan originations.
HomeBanc has purchased and sold whole real estate loans and
participation interests in real estate loans to and from the FHLMC and FNMA
as well as private investors, such as thrift institutions and banks. During
1993 HomeBanc began purchasing participation interests in multi-family and
commercial real estate mortgage loans from Midwest thrift institutions
familiar to management of HomeBanc. The underwriting standards and
procedures of HomeBanc are applied in the purchase of the participations.
HomeBanc purchased seven loan participations totaling $7.2 million from two
Wisconsin based thrifts during 1996.
Management intends to continue its purchase program, concentrating upon
adjustable rate and short term (three to five years) fixed rate loans.
Management prefers to purchase participations in loans secured by
multi-family properties, although office buildings and other commercial
properties would be accepted if the borrowers and properties have a
demonstrated history of performance. To date, the properties securing the
loans have been located primarily in southern Wisconsin. The potential risks
associated with out of market area lending include HomeBanc's lack of control
over loan servicing and its inability to closely monitor the properties.
Borrowers have established credit histories with the lead lending
institutions. Management intends to limit participation purchases to
properties located in the Midwest. One participation was non-performing and
two were greater than 90 days delinquent and still accruing at December 31,
1996.
HomeBanc has sold its originations of 30-year fixed rate residential
mortgage loans for many years. Beginning in 1994, HomeBanc began selling
originations of 15-year fixed rate residential mortgage loans. During 1995,
HomeBanc began selling some of the adjustable rate residential mortgage
loans originated. Approximately 96% of the residential mortgage loan
originations were sold into the secondary market during 1996 as compared to
approximately 80% during 1995. HomeBanc originated $28.4 million of
adjustable rate mortgage loans during 1996, of which $11.3 million were sold.
During the fourth quarter of 1996, management determined that adjustable
mortgage loans would be originated for
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portfolio. The determination of whether adjustable rate mortgages are
originated for sale or portfolio is based upon consideration of HomeBanc's
liquidity position, its calculated exposure to interest rate risk and the
consumer demand for adjustable rate mortgage products. HomeBanc originated $5.2
million of adjustable rate mortgages for portfolio during the fourth quarter of
1996. Management intends to utilize adjustable rate mortgage originations to
supplement the mortgage portfolio during 1997. As most loans are sold with
servicing retained, HomeBanc's mortgage loans servicing portfolio increased to
$162.9 million at December 31, 1996 from $125.8 million at December 31, 1995.
Gross fee revenue from the servicing of mortgage loans increased to $481,000 for
the twelve months ended December 31, 1996 as compared to $362,000 for the
twelve months ended December 31, 1995. The future growth of HomeBanc's
servicing portfolio will depend not only upon the level of loan originations
and sales, but also upon the rate of prepayments experienced within the
servicing portfolio. Management intends to continue the sale of the majority
of residential mortgage loan originations.
HomeCorp adopted Statement of Financial Accounting Standard Number 122,
"Accounting for Mortgage Servicing Rights" ("Statement No. 122") on January
1, 1996. Statement No. 122 requires that an allocation of costs be made
between loans and their related servicing rights for loans originated with a
definitive plan to sell with servicing rights retained. The impact of this
process is to recognize a separate asset for servicing rights that will
increase the gain on sale of loans when the servicing rights are retained.
The servicing rights, once established, are amortized as an offset to
servicing income. Amortization of servicing rights totaled $71,000 during
1996, which reduced the gross revenue generated from the servicing function.
The servicing rights established on the balance sheet subject the reported
earnings from loan servicing to greater volatility based upon the rate of
repayment of the underlying loans. Capitalized servicing rights totaled
$534,000 at December 31, 1996. While management intends to continue the sale
of loans with servicing retained during 1997, the impact of servicing rights
upon the reported operating earnings of HomeCorp will be reviewed regularly
to determine whether continued growth of the servicing portfolio is desirable
given the administrative costs and potential volatility of the servicing
asset established.
HomeBanc sold a $1.0 million participating interest in a commercial real
estate loan during 1995. The loan was sold to provide additional lending
authority to the borrower, with whom HomeBanc has made various real estate
related loans. Management does not anticipate the sale of additional
commercial real estate loans or participations unless it is deemed necessary
to continue HomeBanc's lending relationship with a borrower.
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<PAGE> 77
The following table shows the loan origination, purchase, sale and
repayment activities of HomeBanc for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
LOANS ORIGINATED
Adjustable Rate:
Real estate:
Residential $ 28,364 $ 24,302 $28,668 $ 6,108 $ 28,908
Commercial 276 218 239 237 98
Construction 15,503 12,031 5,947 1,411 2,094
Land 1,624 1,061 432 2,235 1,758
Non-Real Estate:
Consumer 11,582 9,192 3,551 6,030 7,734
Commercial Business 2,827 2,594 1,372 1,004 345
-------- -------- ------- -------- --------
Total adjustable rate 60,176 49,398 40,209 17,025 40,937
Fixed rate:
Real estate:
Residential 33,469 45,272 26,926 108,032 65,254
Commercial 4,225 1,989 3,817 1,534 1,719
Construction 1,338 2,591 582 -- --
Land 1,649 35 17 -- --
Non-Real Estate:
Consumer 42,649 40,778 16,956 7,215 3,676
Commercial business 2,711 1,124 544 627 605
-------- -------- ------- -------- --------
Total fixed rate 86,041 91,789 48,842 117,408 71,254
Total loans originated 146,217 141,187 89,051 134,433 112,191
LOANS PURCHASED
Real estate:
Commercial 5,202 7,205 7,547 7,470 --
Construction 2,000 3,408 1,044 2,027 --
-------- -------- ------- -------- --------
Total loans purchased 7,202 10,613 8,591 9,497 --
Total additions 153,419 151,800 97,642 143,930 112,191
LOANS SOLD
Residential real estate loans 59,444 55,782 20,050 43,916 29,476
Commercial real estate loans -- 1,000 -- -- --
Student loans -- -- -- 1,055 926
-------- -------- ------- -------- --------
Total loans sold 59,444 56,782 20,050 44,971 30,402
Principal repayments 92,630 80,231 61,628 95,618 100,220
-------- -------- ------- -------- --------
Total reductions 152,074 137,013 81,678 140,589 130,622
Net increase (decrease) in other items (2,820) 1,052 (483) 32 178
Net increase (decrease) $ (1,475) $ 15,839 $15,481 $ 3,373 $(18,253)
======== ======== ======= ======== ========
</TABLE>
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NON-PERFORMING ASSETS, CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
When a borrower fails to make a required payment on a loan, HomeBanc
attempts to cause the delinquency to be cured by contacting the borrower. If
the delinquency continues for a period of 90 days, HomeBanc usually
institutes appropriate action to foreclose on the property.
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1996, in dollar amount and as a
percentage of HomeBanc's total loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL
REAL ESTATE REAL ESTATE CONSTRUCTION AND LAND
------------------------- ------------------------- ------------------------
PERCENT PERCENT PERCENT
OF OF OF
TOTAL TOTAL TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS
------ ------ ----- ------ ------ ----- ------ ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 48 $1,169 0.5% 2 $ 135 0.1% 1 $ 39 --
60-89 days 3 48 -- 1 68 -- -- -- --
90 days and over 7 237 0.1 4 3,269 1.2 -- -- --
--- ------ --- -- ------ --- --- ------ ---
Total delinquent
loans 58 $1,454 0.6% 7 $3,472 1.3% 1 $ 39 --%
=== ====== === == ====== === === ====== ===
</TABLE>
<TABLE>
<CAPTION>
CONSUMER COMMERCIAL BUSINESS TOTAL
------------------------- ------------------------- ------------------------
PERCENT PERCENT PERCENT
OF OF OF
TOTAL TOTAL TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS
------ ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-50 days 25 $ 267 0.1% 2 $ 22 --% 78 $1,632 0.6%
60-89 days 4 17 -- 1 9 -- 9 142 0.1
90 days and over 22 85 -- -- -- -- 33 3,591 1.3
--- ------ --- -- ------ --- --- ------ ---
Total delinquent
loans 51 $ 369 0.1% 3 $ 31 -- 120 $5,365 2.0%
=== ====== === == ====== === === ====== ===
</TABLE>
-73-
<PAGE> 79
HomeCorp, Inc. classifies loans and other assets such as debt and equity
securities considered to be of lesser quality as "substandard," "doubtful" or
"loss" assets. For the portion of assets classified as "loss," HomeCorp
either establishes a specific allowance of 100% of the amount classified or
charges off such amount. In addition, management may establish a general
allowance for losses based on assets classified as "substandard" and
"doubtful" or based on the general quality of the asset portfolio of
HomeBanc. HomeBanc's significant classified assets are described below. As
of December 31, 1996, there were $13.4 million of assets classified pursuant
to this policy.
The table below sets forth the amounts and categories of HomeBanc's
non-performing assets. Loans are generally placed on non-accrual status when
the loan becomes 90 days contractually delinquent or when the collection of
principal and/or interest otherwise becomes doubtful. For all years
presented, HomeBanc had no troubled debt restructurings, which involve
forgiving a portion of interest or principal on any loans or making loans at
a rate materially less than that of market rates.
In addition to the non-performing loans, there were two loans totaling
$1.4 million representing participating interests in multi-family mortgage
loans that were 90 days delinquent at December 31, 1996 but which continued
on an accrual basis. The participating interests represent interests in
loans to a single borrower. The properties, located in southern Wisconsin,
had been sold on contract by the borrower and the contract buyer filed for
bankruptcy protection under Chapter 11. Cash flow from the properties is
currently diverted to a bankruptcy trustee for distribution. It is
anticipated that funds will be released to the participating banks as senior
secured creditors and that such funds will return the loans to a current
status and maintain scheduled payments. Based upon the current and
historical lease performance of the buildings, their current physical
condition and the economic condition of the area in which the buildings are
located, accrual status was considered appropriate.
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-Accruing Loans:
Residential $ 237 $ 11 $ 339 $ 377 $ 398
Construction -- -- -- -- --
Land -- -- -- 452 630
Commercial real estate 1,824 -- 99 211 --
Consumer 85 26 109 18 28
------- ------- ------ ------ ------
Total 2,146 37 547 1,058 1,506
------- ------- ------ ------ ------
Accruing Past Due Loans:
Commercial real estate 1,445 -- -- -- --
------- ------- ------ ------ ------
Foreclosed Assets:
Residential -- 49 59 142 23
Commercial real estate 5,617 5,638 -- -- --
Land 4,681 4,553 3,994 3,306 3,553
------- ------- ------ ------ ------
Total 10,298 10,240 4,053 3,448 3,576
------- ------- ------ ------ ------
Total $13,339 $10,277 $4,600 $4,506 $4,632
======= ======= ====== ====== ======
Total non-accruing loans and
foreclosed real estate as a
percentage of total assets 3.54% 3.04% 1.39% 1.35% 1.39%
------- ------- ------ ------ ------
Unallocated allowance for losses $ 2,132 $ 1,625 $1,498 $1,406 $1,350
======= ======= ====== ====== ======
</TABLE>
-74-
<PAGE> 80
For the year ended December 31, 1996, accrued interest receivable which
would have been recorded with respect to non-accruing loans had such loans
been current in accordance with their original terms, amounted to
approximately $126,000. The amount that was included in interest income on
such loans for the year ended December 31, 1996, was approximately $101,000.
The December 31, 1996 non-performing loan total consisted primarily of
two loans. The loans had balances of $1,050,000 and $774,000. The
$1,050,000 loan represented a participating interest in a mortgage loan
originated in December 1993 for a senior housing facility located in central
Wisconsin. The borrower experienced cash flow problems; however, an entity
unrelated to the borrower that had purchased federal tax credits generated by
the facility returned the loan to current status after year end. The
$774,000 loan is secured by a commercial building that had been renovated and
is leased to retail businesses. The lease-up has progressed more slowly than
anticipated. This borrower has a $197,000 loan with HomeBanc in addition to
the delinquent loan. The $197,000 loan was current at December 31, 1996, but
was considered an impaired loan. The properties securing the two loans were
subsequently foreclosed on and sold, resulting in a loss to HomeBanc (net of
reserves) of $39,000.
The remaining balance of non-performing loans at December 31, 1996
consisted primarily of single family mortgages secured by properties within
HomeBanc's primary lending area.
The December 31, 1996 real estate owned balance of $9.6 million
consisted of two properties. A $5.4 million shopping center loan was
transferred to real estate owned during 1995. The center is located in
HomeBanc's primary market area and was approximately 97% leased at December
31, 1996. The center generated $471,000 of net operating income during 1996.
Management is actively marketing the center for sale and will continue to
operate the center until its sale.
The other significant asset in real estate owned, totaling $4.2 million,
represents a 50% interest in a land acquisition loan to a Michigan limited
partnership. The parcel, a former quarry, consists of 364 acres of
undeveloped land located near Northville, Michigan. Regulations governing
the operation of a mining property require appropriate restoration before
residential development is allowed. A dispute arose with the prior owners
regarding the proper restoration of the land. Consequently, HomeBanc and its
partner determined to undertake mass earthwork sufficient to remedy the
condition. HomeBanc made an additional investment of $1.2 million in the
property during 1995 related to the earthwork project. The property was
subsequently sold in September 1997. A settlement is being negotiated with
the prior owners and no loss is anticipated with aspect to the property.
ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED REAL ESTATE
Allowances are established when management determines that it is
probable that HomeBanc will not collect all principal and interest on a loan.
Based upon this continuing analysis, a total of $565,000 was recorded as
provision for loan losses during 1996. The allowance for loan losses is
maintained at an amount considered adequate to provide for potential losses.
Although management believes that it uses the best information available
to make such determinations, future adjustments to the allowance for losses
on loans may be necessary, and net earnings could be significantly affected,
if circumstances differ substantially from the assumptions used in making the
initial determinations. At December 31, 1996, HomeBanc had an allowance for
losses on loans of $1.6 million.
-75-
<PAGE> 81
Real estate properties acquired through foreclosure are initially
recorded at the lower of the related loan balance, net of any allowance for
loss (charge-off at time of transfer), or fair value at the date of
foreclosure. Valuations are periodically updated by management and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated selling costs.
A total of $100,000 was recorded as provision for losses on foreclosed
real estate during 1996. The allowance, totaling $550,000 at December 31,
1996, is maintained at a level believed adequate to provide for potential
losses.
The following table sets forth an analysis of HomeBanc's allowance for
losses on loans. There has been no loan loss activity on construction,
financial or agricultural loans.
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,175 $1,048 $ 956 $900 $668
Charge-Offs:
Residential 76 102 141 115 69
Commercial 13 103 -- -- --
Consumer 74 36 18 84 139
------ ------ ------ ---- ----
Total charge-offs 163 241 159 199 208
Recoveries:
Residential -- -- 2 -- 10
Commercial 5 8 9 5 15
Total recoveries 5 8 11 5 25
------ ------ ------ ---- ----
Net charge-offs 158 233 148 194 183
Provision for losses on loan 565 360 240 250 415
Balance at end of period $1,582 $1,175 $1,048 $956 $900
====== ====== ====== ==== ====
Ratio of net charge-offs during the
period to average loans
outstanding during the period .06% .09% .06% .09% .09%
====== ====== ====== ==== ====
</TABLE>
-76-
<PAGE> 82
The allowance for losses on loans as of the dates indicated allocated by
type of loan is summarized below with the percentage of loans in each
category to total loans:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential $ 128 47.4% $ 193 58.2% $ 225 69.5% $301 73.1% $528 77.6%
Commercial 261 15.1 139 14.6 179 15.5 183 11.9 74 8.2
Construction & Land 179 6.7 72 4.5 42 2.9 179 6.3 34 5.9
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Total 568 404 446 663 636
Consumer 853 28.5 659 21.2 452 11.2 235 7.9 235 7.9
Commercial Business 161 2.3 112 1.5 150 .9 58 .8 29 .4
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
$1,582 $1,175 $1,048 $956 $900
====== ====== ====== ==== ====
</TABLE>
MORTGAGE-BACKED AND INVESTMENT SECURITIES
HomeBanc has used mortgage-backed securities to supplement loan
originations and as a means of addressing asset liability management
objectives. The mortgage-backed securities included in the held to maturity
portfolio totaled $18.9 million at December 31, 1996, a reduction of $5.6
million from the December 31, 1995 balance. The portfolio was approximately
44% adjustable rate and 56% fixed rate securities as of December 31, 1996.
All of the adjustable securities are indexed to short term treasuries.
Included in fixed rate securities are $701,000 of collateralized mortgage
obligations which, based upon their anticipated cash flow characteristics,
have a weighted average life of three to five years. No mortgage-backed
securities were purchased for the held to maturity portfolio during 1996 or
1995. Management intends to continue to re-deploy cash flows from the
mortgage-backed securities portfolio into the loan portfolio.
Approximately $2.6 million of mortgage-backed securities were in the
available-for-sale portfolio at December 31, 1996. There were no purchases
of mortgage-backed securities for the available-for-sale portfolio during
1996, although HomeBanc securitized $2.1 million of adjustable mortgage loans
that were recorded in available-for-sale. Approximately $1.5 million in
mortgage-backed securities were sold from the available-for-sale portfolio
during 1996. The sales were lower balance FHLMC balloon pools with 1997
maturities.
Certain mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity. Investments in
mortgage-backed securities can also compensate for reduced loan demand.
HomeBanc's mortgage-backed securities available for sale portfolio is
recorded at its fair value. The held to maturity portfolio is included in
the financial statements at amortized cost. For information regarding the
carrying and market values of HomeBanc's mortgage-backed securities.
Under HomeBanc's risk-based capital requirement, most mortgage-backed
securities have a risk weight of 20% in contrast to the 50% risk weight
carried by residential loans.
HomeBanc's mortgage-backed securities portfolio contained no corporate
securities rated below investment grade or derivative securities.
Additionally, as of December 31, 1996, the mortgage-backed securities
portfolio contained no securities of any issuer, excluding the United States
Government or its agencies, with an aggregate book value in excess of 10% of
HomeCorp's stockholders' equity.
-77-
<PAGE> 83
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were held to maturity at December 31, 1996.
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT DUE IN
------------------------------------------------------------------------------------------------
BALANCE OUTSTANDING: DECEMBER
6 MONTHS 6 MONTHS 1-3 3-5 5-10 10-20 OVER 20 31, 1999
OR LESS TO 1 YR. YEARS YEARS YEARS YEARS YEARS YEARS
------- -------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ -- $ -- $3,016 $ 7 $ 776 $ 663 $1,705 $ 6,167
Weighted Average Yield 5.58% 7.75% 6.50% 6.85% 7.20% 6.28%
Federal National
Mortgage Association $ -- $ -- $ -- $1,178 $2,793 $ -- $2,530 $ 6,501
Weighted Average Yield 6.36% 5.97% 7.32% 6.57%
Government National
Mortgage Association $ -- $ -- $ -- $ 37 $ -- $ -- $3,663 $ 3,700
Weighted Average Yield 7.10% 6.93% 6.93%
Small Business
Administration $ -- $ -- $ -- $ -- $ -- $1,398 $ -- $ 1,398
Weighted Average Yield 6.64% 6.64%
Agency for Inter-
National Development $ -- $ -- $ -- $ -- $ 23 $ -- $ -- $ 23
Weighted Average Yield 7.50% 7.50%
Collateralized
Mortgage Obligations $ -- $ -- $ -- $ -- $ -- $ 701 $ 369 $ 1,070
Weighted Average Yield 5.89% 7.32% 6.39%
Total $ -- $ -- $3,016 $1,222 $3,592 $2,762 $8,267 $18,859
===== ===== ====== ====== ====== ====== ====== =======
Weighted Average Yield <F1> --% --% 5.58% 6.39% 6.09% 6.50% 7.12% 6.54%
===== ===== ====== ====== ====== ====== ====== =======
<FN>
- ------------------------------
<F1> Yields have been computed based upon historical amortized cost.
</TABLE>
-78-
<PAGE> 84
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were available for sale at December 31, 1996.
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT DUE IN
---------------------------------------------------------------------------------------------
BALANCE OUTSTANDING DECEMBER
6 MONTHS 6 MONTHS 1-3 3-5 5-10 10-20 OVER 20 31, 1999
OR LESS TO 1 YR. YEARS YEARS YEARS YEARS YEARS YEARS
------- -------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ -- $ -- $ -- $ -- $ -- $ -- $2,044 $2,044
Weighted Average Yield 7.26% 7.26%
Federal National
Mortgage Association $ -- $ -- $ 545 $ -- $ -- $ -- $ -- $ 545
Weighted Average Yield 5.78% 5.78%
----- ----- ----- ----- ----- ----- ------ ------
TOTAL $ -- $ -- $ 545 $ -- $ -- $ -- $2,044 $2,589
===== ===== ===== ===== ===== ===== ====== ======
WEIGHTED AVERAGE
YIELD <F1> --% --% 5.78% --% --% --% 7.26% 6.95%
===== ===== ===== ===== ===== ===== ====== ======
<FN>
- --------------------------------
<F1> Yields have been computed based upon historical amortized cost.
</TABLE>
The $12.5 million available-for-sale portfolio contained $8.6 million in
debt securities, $1.2 million in mutual fund shares and $15,000 in equity
securities in addition to mortgage-backed securities noted above.
Based on historical experience, HomeBanc believes that its
mortgage-backed securities will be prepaid significantly in advance of the
date of maturity.
As a savings bank, HomeBanc must maintain minimum levels of investments
that are liquid assets as specified by OTS. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, HomeBanc has
maintained its liquid assets above the minimum requirements imposed by the
regulations and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows.
The majority of HomeBanc's interest bearing assets are amortizing loans that
provide regular cash flows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. As of December 31,
1996, HomeBanc's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was 8.2%.
-79-
<PAGE> 85
The amortized cost and fair values of investment securities classified
as held-to-maturity at the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ----- --------- ----- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
United States Treasury and
Federal agency obligations $5,502 $5,471 $6,504 $6,412 $ 9,494 $ 8,844
Other securities -- -- -- -- 3,181 3,147
------ ------ ------ ------ ------- -------
Total $5,502 $5,471 $6,504 $6,412 $12,675 $11,991
====== ====== ====== ====== ======= =======
</TABLE>
The amortized cost and fair values of investment and mortgage-backed
securities available-for-sale as of December 31, 1996, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ----- --------- ----- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage $ 2,044 $ 2,105 $2,061 $2,051 $3,143 $3,033
Federal National Mortgage 545 539 669 662 2,994 2,860
Mutual Fund Shares 1,253 1,228 1,253 1,223 1,187 1,129
Investment Securities 8,619 8,625 4,376 4,375 -- --
------- ------- ------ ------ ------ ------
Total $12,461 $12,497 $8,359 $8,311 $7,324 $7,022
======= ======= ====== ====== ====== ======
</TABLE>
The following table presents the contractual maturities and weighted
average yields of investment securities held to maturity at December 31, 1996
The yields contained in the table below have been computed on a tax
equivalent basis.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
----------------------------------------------------------------------------------------------------------
WITHIN ONE OVER ONE TO OVER FIVE TO OVER TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
--------------- ------------------- -------------- -------------- ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States
Treasury and
Federal agency
obligations -- -- $5,502 5.41% -- -- -- -- $5,502 5.41%
</TABLE>
HomeBanc's investment securities portfolio at December 31, 1996
contained no securities of any issuer, excluding the United States Government
or its agencies, with an aggregate book value in excess of 10% of HomeCorp's
stockholders' equity. HomeBanc's investment securities portfolio also
contained no corporate securities rated below investment grade or derivative
securities.
HomeBanc intends to maintain a held-to-maturity and available-for-sale
investment securities portfolio comprised of adjustable rate and short term
fixed rate securities as a means of complying with current regulatory
liquidity requirements.
-80-
<PAGE> 86
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal
source of HomeBanc's funds for use in lending and for other general business
purposes. In addition to deposits, HomeBanc obtains funds through loan
repayments, loan sales and cash flows generated from operations (including
interest credited to deposit accounts), and net deposit inflows. Scheduled
loan payments are a relatively stable source of funds, while loan prepayments
and deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions. HomeBanc intends to continue to
sell the majority of its residential mortgage originations.
DEPOSITS. HomeBanc attracts both short-term and long-term deposits
from the general public by offering a wide variety of accounts and rates. In
recent years, HomeBanc has relied increasingly on short-term accounts and
other deposit alternatives that are more responsive to market interest rates
than the passbook accounts and regulated fixed interest rate, fixed-term
certificates that were HomeBanc's primary source of deposits prior to 1978.
HomeBanc offers regular passbook accounts, checking accounts, NOW accounts,
various money market accounts and fixed interest rate certificates with
varying maturities.
HomeBanc utilized Federal Home Loan Bank advances for approximately five
months during 1996 and may use short term advances in the future to
compensate for seasonal fluctuations in deposit and certain loan balances.
-81-
<PAGE> 87
The following table sets forth the dollar amount of savings deposits, by
interest rate range, in the various types of deposit programs offered by
HomeBanc at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
- --------------------
1.00 - 1.99 $ 100 0.1% $ -- --% $ -- --%
2.00 - 3.99 -- -- 3,243 1.0 28,190 9.2
4.00 - 4.99 18,797 6.0 21,560 6.9 49,846 16.2
5.00 - 7.99 203,236 65.1 202,049 64.3 142,105 46.2
8.00 - 9.99 1,805 0.6 3,538 1.1 6,846 2.2
-------- ----- -------- ----- -------- -----
Total Certificate Accounts $223,938 71.8% $230,390 73.3% $226,987 73.8%
======== ===== ======== ===== ======== =====
Other Accounts:
Passbook Accounts 22,167<F1> 7.1 23,443 7.4 $ 24,103 7.9
Money Market Accounts 30,805<F2> 8.1 28,566 9.1 28,073 9.1
NOW & Checking Accts. 34,844 13.0 31,895 10.2 28,442 9.2
-------- ----- -------- ----- -------- -----
Total Other Accounts 87,816 28.2 83,904 26.7 80,618 26.2
-------- ----- -------- ----- -------- -----
Total Deposits $311,754 100.0% $314,294 100.0% $307,605 100.0%
======== ===== ======== ===== ======== =====
<FN>
- ------------------------------
<F1> HomeBanc's interest rate on passbook accounts was 1.75% as of December
31, 1996.
<F2> HomeBanc's interest rates on money market deposit accounts varied from
1.78% to 3.70% based upon account balance, as of December 31, 1996.
</TABLE>
-82-
<PAGE> 88
The following table allocates HomeBanc's deposit types by weighted
average rate and average amount for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- -------------------------------- --------------------------------
RESIDENTIAL COMMERCIAL
REAL ESTATE REAL ESTATE CONSTRUCTION AND LAND
--------------------------------- -------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE BALANCE OF TOTAL RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate
accounts $225,519 72.4% 5.9% $231,376 74.3% 5.9% $218,066 72.2% 5.1%
Passbook
accounts 23,710 7.6 1.8 23,880 7.7 1.8 25,777 8.5 1.8
Money Market
accounts 27,858 9.0 3.1 27,247 8.8 2.9 30,668 10.2 2.4
NOW accounts 25,144 8.1 0.9 23,414 7.5 0.8 22,562 7.5 0.8
Non interest
bearing deposits 9,109 2.9 -- 5,400 1.7 -- $ 4,732 1.6 --
-------- ----- -------- ----- -------- -----
Total $311,340 100.0% $311,317 100.0% $301,805 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the savings flows at HomeBanc during the
periods indicated. Net decrease refers to the amount of deposits during a
period less the amount of withdrawals during the period. While total
deposits declined in 1996 as compared to 1995, core deposits, comprised of
checking, NOW, money market and passbook savings, experienced an increase.
Management continues to focus upon building the core deposit base of HomeBanc
and undertook extensive staff sales training during 1996. The training will
be ongoing throughout HomeBanc and will promote not only original sales of
Bank products, but also additional product sales to established customers.
Management followed a generally conservative pricing strategy throughout 1996
for time deposits. The focus of HomeBanc for 1997 will be to obtain
continued growth of core deposit relationships and may place greater emphasis
upon such relationships than growth of the deposit base in the aggregate.
Much of the 1995 deposit growth came in core deposits, with NOW and checking
account growth resulting from a checking account marketing campaign focused
upon an expanded offering of checking accounts, increased cross-selling of
HomeBanc's commercial borrower base and the operation of HomeBanc's in-store
supermarket office, which opened in April 1995.
Management followed a generally conservative pricing strategy during
1994 although special pricing promotions were offered on selected deposit
products throughout the year. Additionally, management believed the increase
in market interest rates experienced throughout 1994 generated renewed
interest in deposit products as opposed to mutual funds and other alternative
investments.
-83-
<PAGE> 89
Deposit flows at savings institutions may also be influenced by external
factors such as governmental credit policies and, particularly in recent
periods, depositors' perceptions of the adequacy of federal insurance of
accounts.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 994
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Opening balance $ 314,294 $ 307,605 $ 307,586
Deposits 610,950 525,105 501,593
Withdrawals (623,953) (528,696) (510,169)
Interest credited 10,363 10,280 8,595
Ending balance 311,754 314,294 307,605
Net increase (decrease) (2,540) 6,689 19
Percent increase (decrease) (0.81)% 2.17% .01%
</TABLE>
HomeBanc has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious.
HomeBanc manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, HomeBanc believes that its passbook and certificate accounts are
relatively stable sources of deposits. However, the ability of HomeBanc to
attract and maintain deposits, and the rates paid on these deposits, have
been and will continue to be significantly affected by market conditions.
The following table sets forth the time remaining until maturity of
HomeBanc's certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of
deposit (less than
$100,000) $36,388 $31,631 $23,399 $104,216 $195,634
Certificates of
deposit ($100,000
or more) 6,836 4,005 4,500 12,963 28,304
------- ------- ------- -------- --------
Total certificates
of deposit $43,224 $35,636 $27,899 $117,179 $223,938
======= ======= ======= ======== ========
</TABLE>
-84-
<PAGE> 90
The following table shows rate and maturity information for HomeBanc's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
1.00- 5.00- 7.00- 8.00- 10.00- Percent
4.99% 6.99% 7.99% 9.99% 10.99% Total of Total
----- ----- ----- ----- ------ ----- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate Accounts
Maturing in
Quarter Ending:
March 31, 1997 $10,327 $ 26,173 $ 6,603 $ 121 $ -- $ 43,224 19.30%
June 30, 1997 4,534 26,619 4,482 1 -- 35,636 15.91
September 30, 1997 640 13,063 194 48 -- 13,945 6.23
December 31, 1997 160 13,506 159 129 -- 13,954 6.23
March 31, 1998 963 13,922 1,588 186 -- 16,659 7.44
June 30, 1998 448 20,831 56 443 -- 21,778 9.73
September 30, 1998 125 8,350 -- 336 -- 8,811 3.94
December 31, 1998 912 9,642 11 172 -- 10,737 4.79
March 31, 1999 720 8,230 -- 107 -- 9,057 4.04
June 30, 1999 -- 3,589 -- 98 -- 3,687 1.65
September 30, 1999 -- 4,288 -- 28 -- 4,316 1.93
December 31, 1999 39 5,278 4,971 18 -- 10,306 4.60
Thereafter 29 8,704 22,977 118 -- 31,828 14.21
------- -------- ------- ------ ----- -------- ------
Total $18,897 $162,195 $41,041 $1,805 $ -- $223,938 100.00%
======= ======== ======= ====== ===== ======== ======
</TABLE>
BORROWINGS. HomeBanc's other sources of funds have included advances
from the FHLBank of Chicago as well as other borrowings. As a member of the
FHLBank of Chicago, HomeBanc is required to own capital stock in the FHLBank
of Chicago and is authorized to apply for advances from the FHLBank of
Chicago. Each FHLBank credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLBank of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on
the size of the advances and repayment provisions.
HomeBanc utilized short term advances during 1996 as a means of funding
the seasonal growth of the construction loan portfolio and the purchase of
participating interests in multi-family and commercial mortgage loans. The
advances were repaid through the seasonal reduction of the construction loan
portfolio, the sale of residential mortgage loans, and the repayment of
participating interests purchased in prior years. Management may utilize
advances in the future in similar circumstances or if it is believed the
advances represent a more cost effective means of funding asset growth.
FHLBank advances were utilized during 1995 primarily as a means of
funding the purchase of participating interests in multi-family and
commercial mortgage loans. The advances were repaid through the sale of
residential mortgages and deposit growth.
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The following table sets forth the maximum and average month-end
balances of FHLB advances and other borrowing during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Maximum Balance:
FHLBank advances $14,100 $13,850 $2,400
Other -- -- 237
Average Balance:
FHLBank advances 2,408 1,581 26
Other -- -- 219
Weighted average
interest rate of
FHLBank advances 5.69% 6.14% 4.49%
Weighted average
interest rate of other
borrowing -- -- 7.76
<FN>
- ------------------------
There were no FHLBank advances outstanding at December 31, 1996, 1995 or
1994.
</TABLE>
SUBSIDIARY ACTIVITIES
In order to benefit from the strength of the western and northern
suburban Chicago economy and real estate market, and to increase its
non-interest income, in the early 1980s, HomeBanc began to increase its real
estate development activities in that market. At December 31, 1996,
HomeBanc's total investment in real estate developments as presented in the
consolidated balance sheet was $5.1 million. These developments have been
operated through Home Federal Service Corporation, a wholly owned direct
subsidiary of HomeBanc, and consist of unconsolidated joint ventures owned
50% by HomeBanc.
Under the terms of HomeBanc's development agreements, HomeBanc (and its
subsidiary) generally provided funds to acquire and develop the real estate
in exchange for a percentage (generally 35%-50%) of the profits thereon. A
developer or builder acted as operating manager of the development. Fees and
profits due to the operating manager are negotiated on a case-by-case basis
and may not be paid to the manager until HomeBanc has been reimbursed for its
investment in the development. Home Federal Service Corporation realized net
income of $431,000 for the year ended December 31, 1996.
HomeBanc has historically participated in loans to the unconsolidated
joint ventures generally in an amount equal to its ownership interest.
HomeBanc recognized interest income on its participation loan balance at the
rate provided for in the joint venture agreements. During 1996, 1995 and
1994, HomeBanc recognized $-0-, $-0- and $665,000, respectively, in interest
income on loans to the unconsolidated joint ventures. HomeBanc had no loans
outstanding to its unconsolidated joint ventures as of December 31, 1996.
Interest capitalization on the real estate projects is discontinued upon
completion of the development phase, or during the development phase when
HomeBanc determines market conditions indicate collectability of such
interest is uncertain.
The following table sets forth information concerning all HomeBanc's
investments in real estate developments at December 31, 1996.
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<TABLE>
<CAPTION>
ORIGINATION DESCRIPTION OF THE UNITS SOLD
LOCATION OF DEVELOPMENT DATE PROPERTY OR UNDER CONTRACT
- ----------------------- ----------- ------------------------- -----------------
<S> <C> <C> <C>
Geneva, Illinois 07/89 <F1> 533 single family lots, 355
37 acres commercial and 16
championship golf course
Naperville, Illinois 11/85 279 single family lots, 279
85 acres commercial real 83
estate
Naperville, Illinois 05/86 300 single family lots, 300
680 multi-family units, 680
32 acres commercial 29
real estate
</TABLE>
<TABLE>
<CAPTION>
HOMEBANC TOTAL REMAINING
LOCATION OF DEVELOPMENT INVESTMENT <F2> COMMITMENT COMMITMENT <F3>
- ----------------------- --------------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Geneva, Illinois $4,879 $12,058 $223
Naperville, Illinois 95 -- --
Naperville, Illinois 121 -- --
------ ------- ----
$5,095 $12,058 $223
====== ======= ====
<FN>
- ------------------------------
<F1> Investment was committed to prior to April 12, 1989.
<F2> Amounts presented on a consolidated basis. HomeBanc offsets cash
balances on deposit in excess of loans and deferred revenues from its
investment in real estate figures.
<F3> Includes amounts which may be funded by HomeBanc incrementally as
construction and development progresses, amounts to guarantee
satisfactory performance which may never been funded on the specific
projects and amounts representing profits which have been recognized
by HomeBanc but have not been distributed to HomeBanc in cash. These
profit amounts are included, on a consolidated basis, in the $5.1
million investment in real estate.
</TABLE>
Real estate development activities involve each of the risks described
above with respect to real estate development lending. In addition, real
estate developments typically produce negative cash flow during the early
stages thereof. Most of HomeBanc's real estate developments also have been
in the same market, the western and northern suburbs of Chicago, and are
therefore subject to the risk that this market could become overbuilt or that
real estate values in this market could decline. Finally, as an equity
investor rather than a lender on a real estate project, HomeBanc is required
to share in any losses on a project rather than require the borrower to
absorb the losses thereon.
Federal thrift institutions generally may invest up to 2% of their
assets in subsidiaries, plus an additional 1% if such investment is for
community purposes. HomeBanc's permissible investment in its subsidiary
under this regulation at December 31, 1996, was $6.7 million. On the same
date, its investment (including loans as well as direct investments) in its
subsidiary was $699,000.
COMPETITION
HomeBanc faces strong competition both in originating real estate and
other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings
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institutions, commercial banks and mortgage bankers making loans secured by
real estate located in HomeBanc's market areas. Commercial banks and finance
companies provide vigorous competition in consumer lending. HomeBanc competes
for real estate and other loans principally on the basis of the interest rates
and loan fees it charges, the types of loans it originates and the quality of
services it provides to borrowers.
HomeBanc faces substantial competition in attracting deposits from other
savings institutions, commercial banks, money market funds, credit unions and
other investment vehicles. HomeBanc attracts a significant amount of
deposits through its branch offices primarily from the communities in which
those branch offices are located; therefore, competition for those deposits
is principally from other savings institutions and commercial banks located
in the same communities. HomeBanc competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours
and convenient branch locations with interbranch deposit and withdrawal
privileges at each. HomeBanc opened its first supermarket branch during
April 1995. Not only does this location provide an entry into supermarket
banking, but it also provides HomeBanc with an office location in an area of
Rockford that is experiencing rapid growth both from a residential and
business, primarily retail, perspective.
Management considers its primary market area to be the Rockford,
Freeport and Dixon metropolitan areas. HomeBanc has also directed a portion
of its real estate development lending and investment activity to the western
and northern Chicago suburbs. Although HomeBanc has developed relationships
with a number of developers, builders and lenders in the market, HomeBanc's
overall lending volume in this market has not constituted a significant
percentage of the total lending activity in this large market.
The authority to offer money market deposits and the expanded lending
and other powers authorized for thrift institutions by federal and state
legislation have resulted in increased competition for both deposits and
loans between thrift institutions and other financial institutions such as
commercial banks.
EMPLOYEES
At September 30, 1997, HomeCorp and its subsidiary had a total of 197
employees, including 41 part-time employees. None of the employees of
HomeCorp and its subsidiary are represented by any collective bargaining
group. Management considers its employee relations to be good.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994
CHANGES IN FINANCIAL CONDITION. HomeCorp's December 31, 1996
balance sheet reflects the continuing focus upon community banking. The
consumer loan portfolio increased $19.5 million, or 35% during 1996 while the
commercial business loan portfolio increased $2.2 million, or 56%. Consumer
growth is largely due to the origination of indirect automobile loans. All
such loans are underwritten and approved by HomeBanc loan officers. Strong
growth also was generated in home equity and improvement loans, an area of
specific focus for HomeBanc. HomeBanc's involvement with the small business
community continued to provide steady growth in the business loan portfolio.
Relationships established through small business lending generally result in
HomeBanc providing additional services, such as checking and related services.
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<PAGE> 94
The mortgage loan portfolio declined $26.6 million, or 14% during 1996.
Included with mortgages is HomeBanc's construction portfolio. Construction
lending is another focus area of HomeBanc experiencing growth. Construction
loans increased $6.1 million, or 67%, during 1996. The decline within the
remaining mortgage loan portfolio was the result of repayments on HomeBanc's
residential mortgages. HomeBanc continues to sell all fixed interest rate
residential mortgage loans originated as well as certain adjustable rate
loans.
Investment in real estate developments increased $1.0 million during
1996. HomeCorp and its partner (each with a 50% interest) are funding the
operating expenses of one real estate development venture, allowing the
venture to utilize net cash flows to repay indebtedness. HomeCorp's $5.1
million investments in real estate developments at December 31, 1996 was
comprised of three developments in suburban Chicago. The remaining property
is residential and commercial lots in substantially completed projects.
Core deposits of HomeBanc, defined as checking, NOW, Money Market and
passbook savings, increased 5% during 1996, representing $3.9 million. This
is the result of promotional efforts and a focus of HomeBanc's employees upon
the generation of core banking relationships. The decline in deposits in 1996
was noted in longer term (24 months and greater) certificates of deposit and
jumbo deposits.
HomeBanc's suit in the United States Court of Federal Claims against the
United States for breach of contract with regard to the utilization as
capital of the supervisory goodwill, which was created when HomeBanc acquired
failing institutions in the 1980s, has been stayed pending the outcome of an
appeal in another case that was heard by the United States Supreme Court.
While the Supreme Court ruled favorably on the issue in the other case,
HomeCorp's suit has yet to be heard. As the other case involved facts that
were somewhat different than HomeCorp's, there can be no assurance as to the
outcome when it is heard.
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, and the net interest margin. The table does not
reflect any effect of income taxes. All average balances are monthly
averages. The yields and costs include the fees that are considered
adjustments to yield.
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<PAGE> 95
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable, net $267,857 $21,788 8.13% $262,097 $21,316 8.13% $238,958 $18,198 7.62%
Mortgage-backed securities 21,415 1,241 5.80 26,694 1,534 5.75 29,551 1,621 5.49
Investment securities
held to maturity 7,844 454 5.79 13,827 848 6.13 16,250 842 5.18
Investment securities
available for sale 10,590 662 6.25 6,471 380 5.87 9,631 497 5.16
Federal funds and
interest-bearing deposits 4,420 236 5.34 5,883 358 6.09 8,692 363 4.18
Total interest-earning assets 312,126 24,381 7.81 314,972 24,436 7.76 303,082 21,521 7.10
Non-interest-earning assets 26,933 21,993 21,648
Total assets $339,059 $336,965 $324,730
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing checking and
MMDA $ 41,885 $ 694 1.66 $ 38,299 $ 609 1.59 $ 39,732 $ 582 1.46
Savings deposits 34,827 785 2.25 36,242 775 2.14 39,275 782 1.99
Other time deposits 225,519 13,269 5.88 231,326 13,584 5.87 218,066 11,115 5.10
Borrowed funds 2,408 137 5.69 1,581 97 6.14 276 17 7.76
Total interest-bearing
liabilities 304,639 14,885 4.89 307,448 15,065 4.90 297,349 12,496 4.20
Other liabilities 13,598 9,783 8,590
Total liabilities $318,237 $317,231 $305,939
Stockholders' equity 20,822 19,734 18,791
Total liabilities and
stockholders' equity $339,059 $336,965 $324,730
Net interest income/interest
rate spread 9,496 2.92% 9,371 2.90% 9,025 2.90%
Net earning assets/net yield on
average interest-earning
assets $ 7,487 3.04% $ 7,524 2.98% $ 5,733 2.98%
Average interest-earning assets
to average interest-bearing
liabilities 102.46% 102.45% 101.93%
</TABLE>
RATE/VOLUME ANALYSIS. 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 for
the periods shown. For each category in interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii)
changes in volume (i.e., changes in volume multiplied by old rate). For
purposes of this table, changes attributable to both rate and proportionately
to volume that cannot be segregated have been allocated proportionately to
volume and to rate.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
---------------------------------- -----------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
---- ------ ---------- ---- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable $ -- $ 472 $ 472 $1,274 $1,844 $3,118
Mortgage-backed securities 13 (306) (293) 75 (162) (87)
Investment securities (45) (349) (394) 142 (136) 6
Investment held for sale 26 256 282 62 (179) (117)
Federal funds and interest-
bearing deposits (40) (82) (122) 133 (138) (5)
Total interest-earning assets (46) (9) (55) 1,686 1,229 2,915
Interest-Bearing Liabilities:
Interest-bearing checking and MMDA 27 58 85 49 (22) 27
Savings deposits 40 (30) 10 56 (63) (7)
Other time deposits 23 (338) (315) 1,762 707 2,469
Borrowed funds (7) 47 40 (4) 84 80
Total interest-bearing liabilities 83 (263) (180) 1,863 706 2,569
Net interest income $ (129) $ 254 $ 125 $ (177) $ 523 $ 346
</TABLE>
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995. HomeCorp's 1996
earnings were impacted by Congressional legislation that provided for a
special assessment on all institutions insured under the Savings Association
Insurance Fund ("SAIF"). HomeCorp's special assessment totaled $2.0 million
which resulted in a net after tax reduction in net income of $1.2 million, or
$1.06 per share. Excluding this special assessment, HomeCorp's 1996 earnings
were $1.6 million, or $1.36 per share. This represents a 33% increase in net
earnings from the 1995 total of $1.2 million, or $1.03 per share.
NET INTEREST INCOME. Net interest income totaled $9.5 million for
1996, an increase from $9.4 million from the prior year. HomeCorp's net
interest margin improved to 3.04% during 1996 from 2.98% during 1995. The
asset yield increased to 7.81% from 7.76% while HomeCorp's cost of funds
decreased to 4.89% from 4.90%. The increased asset yield resulted from the
continuing shift of assets into the loan portfolio from the investment and
mortgage-backed securities portfolios. The average outstanding balance of the
consumer loan portfolio increased $25.1 million in 1996 as compared to 1995.
The decline in cost of funds is largely the result of the shift within the
deposit base into core deposits from longer term certificates of deposit. The
cost of HomeCorp's time deposits remained practically unchanged at 5.88%, as
compared to 5.87% in 1995.
PROVISION FOR LOAN LOSSES. HomeCorp established provisions for loan
losses of $565,000 during 1996, an increase from $360,000 in 1995. The
increase during 1996 is due to the continuing growth in the loan portfolio as
well as the increasing proportion of the portfolio consisting of consumer and
commercial loans. Net charge-offs actually decreased during 1996 from 1995,
totaling $158,000 as compared to $233,000. The allowance represented .61% of
net outstanding loans at December 31, 1996, an increase from .45% at December
31, 1995.
NON-INTEREST INCOME. HomeCorp experienced growth within all areas
of non-interest income in 1996 as compared to 1995. Loan fees and service
charges increased $244,000, or 16.7% between 1996 and 1995. The increase was
due largely to the growth experienced in the number of retail and business
checking accounts, which provided increased service charge revenue. Loan fees
benefited from the
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increased mortgage loan servicing portfolio. Loans serviced for others increased
$37.1 million during 1996 to a total of $162.9 million at December 31, 1996.
HomeCorp continued to sell the majority of residential mortgage loan
originations on a servicing retained basis during 1996. The majority of the
servicing portfolio balance at December 31, 1996 consisted of fixed rate loans.
Gains from the sale of mortgage loans, mortgage-backed and investment
securities increased to $933,000 from $297,000 between 1996 and 1995. A total
of $58.9 million of mortgage loans were sold during 1996, an increase of $3.1
million from 1995.
HomeCorp adopted Statement No. 122, on January 1, 1996. Statement No.
122 requires that an allocation of costs be made between loans and their
related servicing rights for loans originated with a definitive plan to sell
with servicing rights retained. The impact of this process is to recognize a
separate asset for servicing rights that will increase the gain on sale of
loans when the servicing rights are retained. Gain on sale increased $582,000
as a result of the adoption of this accounting pronouncement, which
represents the servicing rights recognized from loans sold during 1996. The
servicing rights, once established, are amortized as an offset to servicing
income.
Income from real estate developments increased to $861,000 for the year
ended December 31, 1996 from a loss of $54,000 during 1995. The 1996 income
is due primarily to the sale of commercial land parcels from two of the
partnerships in which HomeBanc's subsidiary is a partner. Single family lot
sales also increased in 1996 over the prior year. As of December 31, 1996,
the real estate developments in which HomeBanc's subsidiary maintains an
interest contained approximately 23 acres of developed commercial land and
183 single family lots, all but 90 of which were fully developed.
Operations of real estate owned represent the net operating income from
a shopping center foreclosed upon by HomeBanc late in the third quarter of
1995. The increase in operating income for 1996, totaling $356,000,
represents an additional nine months of operations during 1996 as compared to
1995. The shopping center is listed for sale.
NON-INTEREST EXPENSES AND INCOME TAXES. Operating expenses,
excluding the special SAIF assessment, increased $1.1 million in 1996 from
1995. Compensation and benefits increased $580,000, which reflects the impact
of additional lending personnel and increased pension costs. Data processing
costs increased $76,000 during the twelve months ended December 31, 1996 as
compared to the twelve months ended December 31, 1995. The increase is the
result of HomeBanc's increasing customer base, particularly in the core
deposit area, which tend to be the higher transaction volume accounts. The
increase in the number of loans serviced, for HomeBanc's portfolio and for
others, contributed to the increase as well. Other operating expenses
increased $282,000 in 1996 compared to 1995. The largest increase within
other expenses was REO expense, which increased $123,000 primarily due to
costs associated with the Michigan land parcel. The costs are predominately
legal fees incurred in pursuing the damage claim against the prior owners of
the parcel.
HomeCorp established a provision of $246,000 for costs to be incurred in
the resolution of a $2.0 million credit enhancement. The enhancement involves
an apartment building that has fallen short of original cash flow
projections. HomeCorp agreed to incur this loss in order to enable the
borrower to refinance the property with an unrelated lender, thereby
releasing the enhancement.
Income tax expense declined in both amount and as a percentage of
pre-tax book income in 1996 as compared to 1995. Total expense declined
$540,000 between 1996 and 1995. Tax expense for
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<PAGE> 98
1996 represented 36.1% of pre-tax income compared to 38.1% for 1995. The decline
in the effective tax rate is due largely to an increase in interest revenues of
U.S. Government and Agency securities, which is not taxable for state tax
purposes.
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994. HomeCorp generated net
income of $1.2 million, or $1.03 per share for 1995 compared to $628,000 in
1994 prior to the recognition of the accounting change recording the
elimination of goodwill. A change in accounting for goodwill during 1994
resulted in a $4.3 million charge against earnings, generating a net loss of
$3.7 million for 1994. The 1994 loss is also net of approximately $808,000 of
goodwill amortization that was recorded in addition to the impact of the
accounting change.
NET INTEREST INCOME. Net interest income increased $346,000 between
1995 and 1994, representing a 3.8% increase. Interest revenues increased $2.9
million, or 13.5%, for the year ended December 31, 1995 compared to the prior
year. This increase was primarily the result of HomeCorp's increased loan
portfolio. The average balance of the loan portfolio increased $23.1 million,
or 9.7%, during 1995.
The consumer loan portfolio increased $28.1 million, or 100.0% during
1995. Interest revenue from consumer loans correspondingly increased $1.9
million, or 109.4% between 1995 and 1994. All non-loan interest-bearing asset
categories declined in average outstanding balance during 1995 as funds were
redeployed into loan originations and participation purchases.
The average portfolio yield increased to 8.13% from 7.62% due to the
origination during 1995 of higher yielding consumer and commercial loans, the
purchase of participating interests in mortgage loans and the upward
repricing of some of HomeCorp's adjustable rate loans. HomeCorp's adjustable
rate loans are primarily based upon Treasury indices or prime rate.
The yield on all interest-bearing assets increased to 7.76% during 1995
from 7.10% for 1994.
Interest expense increased $2.6 million, or 20.6%, during 1995 compared
to 1994. The cost of deposits increased due to the upward repricing of the
time deposit base in the earlier months of 1995. During the first several
months of 1995, certificate of deposit customers moved predominately into
longer term, higher rate accounts, thereby increasing the overall cost of
deposits. HomeCorp utilized short term Federal Home Loan Bank of Chicago
advances throughout the year primarily as a means of funding the purchase of
loan participations. The average outstanding balance of borrowings was $1.5
million, with a cost of 6.14%. There were no outstanding advances as of
December 31, 1995.
PROVISION AND ALLOWANCE FOR LOAN LOSSES. A total of $360,000 was
recorded as provision for loan losses during 1995, an increase from $240,000
during 1994. The provision was increased in consideration of the increased
loan portfolio as well as increased percentage of the portfolio in consumer
and commercial balances. Net charge-offs were $233,000 during 1995, providing
for an increase of $127,000 in the allowance for loan losses. The allowance
represented .45% of net outstanding loans at December 31, 1995, an increase
from .43% as of December 31, 1994.
NON-INTEREST INCOME. Loan fees and service charges declined between
1995 and 1994. During 1994, HomeCorp recognized approximately $185,000 in
deferred fee amortization on a single real estate development loan. Excluding
this single item, loan fees and service charges increased $154,000, or
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11.8% during the twelve months ended December 31, 1995 compared to the year
earlier period. Loan fees increased $134,000 or 24.3%, between years, due
largely from fees generated from increased mortgage loan originations and from
mortgage loan servicing income. HomeCorp's mortgage loan servicing portfolio
increased to $125.5 million at December 31, 1995 from $83.7 million at
December 31, 1994. The majority of residential mortgage originations were
being sold with servicing rights retained as of December 31, 1995.
Service charges increased $80,000 or 13.5%, between calendar 1995 and
1994, primarily the result of the expansion of the core deposit base.
HomeCorp began marketing an expanded selection of checking accounts during
1995. The increased number of accounts have generated increased fee income in
connection with the various services and charges related to the accounts.
Also, the continued growth of the commercial business relationship base
contributed to an increase in related deposit account service fee income.
Fees generated by HomeCorp's brokerage service declined $98,000 in 1995
compared to 1994 due to a decrease in personnel.
A total of $297,000 in net sales gains were generated during the year
ended December 31, 1995 compared to a net loss of $18,000 during the year
ended December 31, 1994. As noted earlier, there was an increase in mortgage
loan sales during 1995 compared to 1994. A loss of $278,000 was recognized
during the first quarter of 1994 due to a sudden rise in interest rates. A
sales management system was implemented thereafter in order to reduce risk.
HomeCorp sold $10.2 million of adjustable rate single family mortgages during
1995 at a gain of $12,000. The proceeds were reinvested in higher yielding
multi-family participations. A gain of approximately $4,000 was realized on
the sale of available for sale securities during 1995.
HomeCorp experienced a loss of $54,000 from real estate developments
during 1995 as compared to income of $445,000 during 1994. During 1995,
HomeCorp sold a golf course from one of its developments at a loss of
$180,000. Additionally, all the carrying costs of real estate operations were
expensed during 1995. A portion of such costs had been capitalized in prior
periods. The 1994 gains were generated largely by commercial lot sales, which
have historically generated higher profit margins than the sale of
single-family lots. There was less commercial property sold during 1995 than
in 1994.
NON-INTEREST OPERATING EXPENSE AND INCOME TAXES. Non-interest
operating expenses increased $508,000, or 6.0% during 1995. Other operating
expenses increased $268,000, or 17.7% between the years ended December 31,
1995 and 1994. The largest component of this increase was loan related
expenses, which increased $137,000 in 1995 to a total of $320,000. The
increase was primarily due to promotional costs associated with consumer loan
programs as well as other loan promotions. Advertising, also a component of
other operating expense, increased $52,000 to $334,000 during the year ended
December 31, 1995. Increased promotional efforts were noted in the checking
area, both through direct mailings and media advertising.
Data processing expense increased $60,000, or 9.1% in 1995 as compared
to 1994. HomeBanc opened its supermarket office in April of 1995, which added
to processing costs for the year. Costs were incurred to expand the information
processing and reporting capabilities in the mortgage loan area in order to
facilitate increased origination and sales volumes. Also, the number of loan and
deposit customers serviced increased in 1995 resulting in increased monthly
transaction costs.
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Income tax expense decreased $189,000 to $743,000 for the year ended
December 31, 1995. Tax expense as a percentage of pre-tax income was 38.1%
for 1995. The comparable 1994 rate was 39.4%, after considering the fact that
goodwill amortization of $808,000 was not deductible for tax purposes.
LIQUIDITY. Liquidity is generally regarded as the ability to generate
sufficient cash flow to meet all present and future funding commitments.
HomeBanc's primary sources of funds, or liquidity, are deposits, amortization
and repayment of loan principal (including mortgage-backed and certain
investment securities), operations and to a lesser extent, maturities of
investment securities and the sale of available-for-sale-securities.
Operating activities provided $3.3 million in cash during 1996 as
compared to the use of $2.9 million in cash during the year ended December
31, 1995. The largest difference between the years was the change in the
balance of mortgage loans held-for-sale. Mortgages held-for-sale declined
$2.9 million during 1996 while increasing $4.6 million during 1995. The
volume of held for sale loans generally declines near year end from the
seasonal nature of home mortgage lending.
Investing activities provided $3.7 million in cash during 1996. The same
activities used $11.3 million in cash during 1995. Principal payments and
repayments on loans exceeded originations by $310,000 during 1996.
Originations exceeded repayments and prepayments by $10.9 million during
1995. HomeBanc's residential mortgage and consumer loan portfolios continued
to season and correspondingly generated increased principal cash flows from
normal amortization and prepayments. Management anticipates continued
increases in loan cash flows, particularly from the shorter term consumer
loan portfolio. HomeBanc's mortgage-backed securities portfolio also
experienced increased repayments during 1996 as compared to 1995. The 1996
repayments totaled $5.5 million while the 1995 repayments totaled $3.8
million. There were no purchases of mortgage-backed securities during 1996 or
1995. Also, $6.7 million of adjustable rate mortgage loans were sold during
1996. The loans had interest rates that adjusted every three years. Based
upon the interest rates on the loans, the rates to which the loans would be
adjusting and the current interest rates available for mortgage loans, it was
determined the funds committed to these specific loans could best be utilized
by HomeBanc by selling the loans, retaining the servicing and providing
funding for additional lending.
A total of $7.2 million in participations were purchased during 1996, a
decrease of $3.4 million from 1995. The 1996 purchases, consistent with prior
years, were for multi-family and commercial real estate loans secured
primarily by properties located in southern Wisconsin and northern Illinois.
Financing activities used $3.3 million in cash during 1996 as compared
to $6.6 million of cash provided during 1995. HomeBanc experienced a decrease
of $2.5 million in deposits during 1996 compared to an increase of $6.7
million during 1995. The focus for 1996 was the increase of core deposits
more so than the increase of the deposit base in the aggregate. HomeBanc used
Federal Home Loan Bank advances throughout 1996 as a funding alternative to
deposits. Management intends to continue to use advances as needed as an
alternative to long term certificate of deposit funding. The focus will
remain upon continuing to build HomeBanc's core deposit base, which increased
$3.8 million during 1996.
HomeBanc had commitments to originate $5.6 million in mortgage loans as
of December 31, 1996. Additionally, HomeBanc had outstanding letters of
credit totaling $626,000. Management believes HomeBanc has adequate resources
to fund its commitments to the extent required.
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<PAGE> 101
Federal regulations require HomeBanc to maintain liquid assets at a
level of 5.0% of deposits and certain borrowings due within one year. Liquid
assets for purposes of this requirement include cash, certain time deposits,
U.S. Government and other securities generally having remaining maturities to
less than five years. HomeBanc's liquidity ratios were 8.2% and 7.7% at
December 31, 1996 and 1995, respectively.
Management is unaware of any current recommendations of the Office of
Thrift Supervision ("OTS") that, if implemented, would have a material impact
upon liquidity, capital resources or operations of HomeBanc.
ASSET/LIABILITY MANAGEMENT. The objective of management's
asset/liability program is to maximize HomeCorp's interest margin over a
range of interest rate environments without exposing HomeCorp to undue
interest rate risk. Interest rate risk is represented by the sensitivity of
an institution's earnings and net asset values to interest rate changes.
Management manages this risk not only through its pricing of assets and
liabilities, but also through the mix of asset and liability maturities and
cash flow characteristics and regularly monitors and evaluates the trade-off
between increased interest rate risk and enhanced earnings. The OTS currently
measures interest rate sensitivity of an institution based upon a discounted
cash flow approach under various interest rate scenarios. The interest rate
scenarios are generally determined as instantaneous and permanent changes in
the Treasury curve of plus and minus 100, 200, 300 and 400 basis points, or a
total of eight scenarios.
Based upon the estimated prepayment characteristics and decay rates of
an institution's loans, securities and deposits, a series of discounted cash
flows calculations are performed to estimate the volatility of an
institution's capital base ("net portfolio value") and net interest earnings.
Off-balance sheet cash flows from assets, liabilities and other contracts are
included in the computations.
The table below was prepared utilizing assumptions regarding loan and
mortgage-backed security repayment and deposit decay ratios which were
estimated by management based upon past experience and are believed by
management to reasonably represent the expected future repricing, maturity or
amortization of interest-bearing assets and liabilities. Prepayment
assumptions are applied to both mortgage and consumer loans.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NET INTEREST INCOME
---------------------------------------------------------------- -----------------------------------------
CHANGE ESTIMATED
INTEREST RATES NET PORTFOLIO AMOUNT OF NET INTEREST AMOUNT OF
(BASIS POINTS) VALUE CHANGE PERCENT INCOME CHANGE PERCENT
-------------- ------------- --------- ------- ------------ --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 $25,106 $ (7,235) (22.4)% $ 9,117 $ (823) (8.3)%
+300 27,291 (5,050) (15.6) 9,659 (281) (2.8)
+200 29,323 (3,018) (9.3) 10,142 202 2.0
+100 31,323 (1,018) (3.2) 10,141 201 2.0
0 32,341 -- -- 9,940 -- --
-100 37,297 4,956 15.3 9,644 (296) (3.0)
-200 37,204 4,863 15.0 9,151 (789) (7.9)
-300 37,358 5,017 15.5 8,931 (1,009) (10.2)
-400 34,469 2,128 6.6 7,907 (2,033) (20.5)
</TABLE>
The annual prepayment assumptions used in this table range from 4% to
38% for fixed rate mortgages, mortgage-backed securities and consumer loans
and 4% to 26% for adjustable rate mortgages and mortgage-backed securities
based upon the interest rates of the assets. No prepayments are
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<PAGE> 102
assumed for adjustable consumer loans and all commercial business loans. For
deposit accounts, it has been assumed that fixed maturity deposits are not
withdrawn prior to maturity. Other deposits display attrition at the following
rates:
<TABLE>
<CAPTION>
AFTER ONE AFTER THREE
IN ONE THROUGH THROUGH OVER
YEAR OR LESS THREE YEARS FIVE YEARS FIVE YEARS
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Passbook savings 51% 15% 10% 24%
Money market 68 15 9 16
NOW and Checking 64 14 4 18
</TABLE>
The prepayment and attrition rates are selected after considering the
current interest rate environment, industry asset, liability price tables
developed by the OTS, and HomeCorp's historical experience. All other
interest-earning assets and interest-bearing liabilities are shown based on
their contractual maturity or repricing date. In the event the rate changes
designated above were accompanied by a change in the shape of the yield
curve, the changes to the net portfolio value and net interest income could
differ significantly from those noted here.
Based upon the analysis noted, HomeBanc would not be considered to have
more than "normal" interest rate risk under OTS regulations. The most recent
evaluation performed by the OTS was as of December 31, 1996. The analysis
indicated a lower level of interest rate risk than the computations performed
by management.
Management believes that the fundamental business strategy of selling
longer term fixed rate mortgage loans investing in shorter term consumer and
commercial loans and adjustable rate mortgage, consumer, construction and
commercial loans has reduced HomeBanc's level of interest rate risk over the
past several years.
NON-PERFORMING ASSETS. On a monthly basis, management reviews
HomeBanc's loan portfolio and the most recent data available for any loans of
concern. Additionally, management ascertains whether circumstances warrant
closer monitoring of any performing loans. Management reviews and discusses
the status of all borrowers with $500,000 or more of indebtedness to HomeBanc
as a means of ascertaining a downturn in performance prior to the onset of
delinquency problems.
Loans are placed on non-accrual status when they become 90 days
delinquent and when, in the judgment of management, the probability for
collection of the remaining balances are deemed to be insufficient to warrant
further accrual. A loan remains on non-accrual status until the factors that
indicated uncertain or doubtful collectibility no longer exist or foreclosure
or repossession occurs, at which time the lesser of the loan balance or the
fair value of the collateral is reflected in the applicable asset account of
HomeBanc.
Effective January 1, 1995, HomeBanc adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of
a Loan" ("Statement No. 114") and Statement No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," ("Statement No.
118") which is an amendment to Statement No. 114. Under the new standard, a
loan is classified as "impaired" at such time as it is likely that the loan
will not perform in accordance with its original terms. The designation is
to be made independent of whether a loan is placed onto non-accrual status.
The new standard requires the allowance for loan losses related to impaired
loans
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<PAGE> 103
to be based upon discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for collateral dependent
loans.
The classification of a loan as non-performing or impaired does not
necessarily indicate that loan principal and interest ultimately will be
uncollectible. Following is a summary of non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Non-performing loans $ 2,146,331 $ 36,626
Real estate acquired in
settlement of loans 10,197,661 10,240,004
Total $12,343,992 $10,276,630
Non-performing loans as
percentage of total loans .81% .01%
Non-performing assets as a
percentage of total assets 3.68% 3.04%
Allowances for loan and
foreclosed real estate
losses as a percentage of
non-performing assets 17.27% 15.81%
</TABLE>
In addition to the non-performing loans noted above, there were two
loans totaling $1.4 million representing participating interests in
multi-family mortgage loans that were 90 days delinquent at December 31,
1996, but which continued on an accrual basis. The participating interests
represent interests in loans to a single borrower. The properties, located in
southern Wisconsin, had been sold on contract by the borrower and the
contract buyer filed for bankruptcy protection under Chapter 11. Cash flow from
the properties is currently diverted to a bankruptcy trustee for distribution.
It is anticipated that funds will be released to the participating banks as
senior secured creditors and that such funds will return the loans to a current
status and maintain scheduled payments. Based upon the current and historical
lease performance of the buildings, their current physical condition and the
economic condition of the area in which the buildings are located, accrual
status was considered appropriate.
The December 31, 1996 non-performing loan total consisted primarily of
two loans. The loans had balances of $1,050,000 and $774,000. The $1,050,000
loan represented a participating interest in a mortgage loan for a senior
housing facility. The borrower experienced cash flow problems; however, an
entity unrelated to the borrower that had purchased federal tax credits
generated by the facility returned the loan to current status after year end.
The $774,000 loan is secured by a commercial building that had been renovated
and leased to retail businesses. The lease-up progressed more slowly than
anticipated. This borrower had a $197,000 loan with HomeBanc in addition to
the delinquent loan. The $197,000 loan was current at December 31, 1996 and
was considered an impaired loan. The properties securing the two loans were
subsequently foreclosed on and sold, resulting in a loss to HomeBanc (net of
reserves) of $39,000.
The remaining balance of non-performing loans at December 31, 1996
consisted primarily of single family mortgages secured by properties within
HomeBanc's primary lending area.
Foreclosed real estate was comprised primarily of two properties at
December 31, 1996. A $5.4 million shopping center loan was transferred to
real estate owned during 1995. The center is located in
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<PAGE> 104
HomeBanc's primary market area and was approximately 97% leased at December 31,
1996. The center was being operated by HomeBanc and generated $471,000 in net
operating income during 1996. Management is actively marketing the center for
resale and will continue to operate the center until its sale.
The other significant asset in real estate owned, totaling $4.3 million,
represents a 50% interest in a land acquisition loan to a Michigan limited
partnership. The parcel, formally a quarry, consists of 364 acres of
undeveloped land located near Northville, Michigan. Regulations governing
the operation of a mining property require appropriate restoration before
residential development is allowed. A dispute arose with the prior owners
regarding the proper restoration of the land. Consequently, HomeBanc and its
partner determined to undertake mass earthwork sufficient to remedy the
condition. HomeBanc made an additional investment of $1.2 million in the
property during 1995. The property was subsequently sold in September 1997.
A settlement is being negotiated with the prior owners and no loss is
anticipated with respect to the property.
Regulatory Capital Requirements. HomeBanc currently meets all
regulatory requirements. Current OTS regulations measure a savings
institution's regulatory capital against three standards, a tangible
requirement, a leverage or core requirement, and a risk based requirement.
Unrealized gains and losses reflected as a component of stockholders' equity
in compliance with SFAS No. 115 are not considered by the OTS in calculating
regulatory capital.
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<PAGE> 105
The following table presents HomeBanc's compliance with the capital
requirements as of December 31, 1996:
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF ASSETS
------ ---------
(dollars in thousands)
<S> <C> <C>
Tangible Capital:
Bank $15,870 4.81%
Requirement 4,950 1.50
Excess 10,920 3.31
Core Capital:
Bank 15,870 4.81
Requirement 9,901 3.00
Excess 5,969 1.81
Current Risk-Based Capital:
Bank 17,452 8.29
Requirement 16,833 8.00
Excess $ 619 .29%
</TABLE>
IMPENDING CHANGE IN ACCOUNTING PRINCIPLE. In June 1996, the
Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("Statement No. 125"), which provides new accounting and
reporting standards for sales, securitization and servicing of receivables
and other financial assets and extinguishments of liabilities. The provisions
of Statement No. 125 are to be applied to transactions occurring after
December 31, 1996. Management does not believe HomeCorp will be
significantly impacted by the adoption of Statement No. 125.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
FINANCIAL CONDITION. HomeCorp's September 30, 1997 balance sheet
reflects the continuing focus upon community banking. The consumer loan
portfolio increased $5.3 million, or 7%, during the first nine months of 1997
while the commercial business loan portfolio increased $2.3 million, or 36%.
Consumer growth was largely due to increased equity lines of credit.
HomeBanc has specifically promoted line usage to current customers as well as
the origination of new lines. HomeBanc's indirect automobile loan portfolio
increased approximately 1% during 1997. The reduced growth rate as compared
to prior years is the result of increased principal repayments as the
portfolio has seasoned as well as lower origination volumes which, it is
believed, are the result of generally lower automobile sales in HomeBanc's
market area. Growth was also generated in home equity and improvement loans,
a result of targeted loan promotions during the first half of 1997.
HomeBanc's involvement with the business community continues to provide
steady growth in the commercial loan portfolio. Relationships established
through business lending generally result in HomeBanc providing additional
services as well, such as checking and related services.
The mortgage loan portfolio decreased $4.8 million, or 3%, during the
first nine months of 1997. Two participations totaling $3.6 million were
repaid during 1997. Included with mortgage loans is HomeBanc's construction
portfolio, which increased $952,000 in net outstanding balance during the
nine months ended September 30, 1997. HomeBanc continues to sell all fixed
interest rate one-to-four family mortgage loans originated as well as certain
adjustable rate loans.
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<PAGE> 106
Investment in real estate developments decreased $1.4 million during
the first nine months of 1997 due to one real estate partnership distributing
$2.5 million in undistributed earnings to HomeBanc's subsidiary during the
third quarter. This partnership, containing developed residential and
commercial land, represented the entire investment in real estate at
September 30, 1997. HomeCorp sold its interest in two real estate
development partnerships during 1997 at a small gain. The partnerships each
contained a single developed commercial lot.
Investment in foreclosed real estate decreased $4.4 million to $5.3
million due to the third quarter sale of a parcel of land located in
Michigan. A provision for loss had been recognized for this parcel prior to
the third quarter.
Deposits of HomeBanc declined between December 31, 1996 and September
30, 1997. Declines were noted in most deposit areas and maturities, except
for short term certificates of deposit which increased $1.7 million. HomeBanc
continues to focus upon the generation of core banking relationships.
HomeBanc's suit in the United States Court of Federal Claims against the
United States for breach of contract with regard to the utilization as
capital of the supervisory goodwill, which was created when HomeBanc acquired
failing institutions in the 1980's, has been stayed pending the outcome of an
appeal in another case that was heard by the U.S. Supreme Court. While the
Supreme Court ruled favorably on the issue in the other case, HomeCorp's suit
has yet to be heard.
RESULTS OF OPERATIONS. The following table presents, for the
periods indicated, the yields on average interest-earning assets as well as
the cost of average interest-bearing liabilities. The table does not reflect
the impact of income taxes. All averages are monthly average balances.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Mortgage loans 8.26% 7.95%
Consumer loans 8.16 8.28
Commercial loans 9.40 9.33
Other earning assets 6.04 5.79
Total interest-earning assets 7.95 7.72
Deposits 4.86 4.83
Borrowings 5.48 5.64
Total interest bearing liabilities 4.86 4.83
Interest rate spread 3.09 2.89
Net interest rate margin 3.18% 3.00%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. 1996. HomeCorp generated $1.3
million in net income during the nine months ended September 30, 1997,
representing an approximate 6% increase from the 1996 nine month income,
excluding the net impact of the SAIF assessment. The more significant
improvements between periods were noted in income from real estate development
and net interest income. These improvements were partially offset by a
provision for losses on real estate owned of $505,000 and a
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<PAGE> 107
reduction in gains from the sale of mortgage loans, investments and
mortgage-backed securities of $145,000.
Net Interest Income. Net interest income totaled $7.3 million for the
-------------------
first nine months of 1997, an increase of 3% from $7.1 million in the prior
year. HomeCorp's net interest margin increased to 3.18% from 3.00%. The
asset yield increased to 7.95% from 7.72% while HomeCorp's cost of funds
remained virtually unchanged, increasing to 4.86% from 4.83%. The increased
asset yield resulted from consumer loan portfolio growth and increased yields
in the mortgage and mortgage-backed securities portfolios. The increased
yield from the mortgage-backed securities portfolio was the result of
repricing adjustable rate securities and a general slowing of repayment
activity earlier in the year. Repayments increased during the third quarter
of 1997 and management anticipates these repayments will negatively impact
mortgage-backed securities yields during the fourth quarter of 1997. No
mortgage-backed securities were purchased during 1997 or 1996.
The increase in cost of funds is primarily the result of repricing of
savings deposits.
Non-Interest Income. Income from real estate development increased to
-------------------
$1.0 million for the nine months ended September 30, 1997 from $375,000
during 1996. The 1997 income is due primarily to the sale of two commercial
lots from one of HomeCorp's development partnerships and the sale of
HomeCorp's interest in two development partnerships, each of which contained
a single commercial lot. Loan fees and service charges increased $164,000,
or 13%, during 1997 as compared to 1996. The improvement was primarily due to
increased service charges related primarily to HomeBanc's core deposit accounts.
Net gains from the sale of mortgage loans and mortgage-backed and
investment securities declined to $294,000 in the first nine months of 1997
as compared to $729,000 during the first nine months of 1996. The reduction
in gains was the result of lower sales volume of residential mortgage loans.
Provisions for Loan and Real Estate Operating Losses. A provision of
----------------------------------------------------
$505,000 was recorded during the first nine months of 1997 for possible
future losses related to foreclosed real estate. The provision relates to
the two largest properties in foreclosed property, one of which was sold
during the third quarter of 1997.
A loan loss provision of $220,000 was recorded during the first nine
months of 1997. This compares to a provision of $395,000 recorded during the
same period of 1996. The reduction is the result of management's ongoing
analysis of the adequacy of HomeBanc's loan loss allowance.
Non-Interest Expenses. The 1996 expenses contained a one-time charge of
---------------------
$2.0 million to recapitalize the SAIF.
Operating expenses remained relatively stable, increasing by $152,000,
or 2%, in the first nine months of 1997 compared to the first nine months of
1996. Deposit premiums paid to the FDIC declined $295,000, or 47%, during
the first nine months of 1997 from the first nine months of 1996 as a result
of the recapitalization of the SAIF in late 1996. This reduction was offset
by increases in compensation and benefits, which increased $339,000 between
the first nine months of 1997 and 1996 due to general compensation increases
and additional personnel in the lending area. Other expense increased
$102,000 primarily due to legal costs incurred in HomeBanc's lawsuit
involving the parcel of foreclosed real estate in Michigan.
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<PAGE> 108
LIQUIDITY AND CAPITAL RESOURCES. Liquidity is generally
regarded as the ability to generate sufficient cash flow to meet all present
and future funding commitments. HomeBanc's primary sources of funds, or
liquidity, are deposits, amortization and prepayment of loan principal
(including mortgage-backed and certain investment securities) operations and
to a lesser extent, maturities of investment securities and the sale of
available for sale securities.
HomeBanc's liquidity, represented by cash and cash equivalents, is a
product of its operating activities, investing activities and financing
activities. Operating activities, consisting of net income adjusted for non
cash activity, generated or provided $1.4 million in cash during the first
nine months of 1997. This compares to cash to $4.4 million provided during
first nine months of 1996. The primary difference between periods is the
change in the held for sale portfolio. The portfolio increased, requiring
$317,000 in cash during the first nine months of 1997, while it decreased or
provided cash of $3.1 million during the same period of 1996.
Investing activities provided $5.7 million in cash during the first nine
months of 1997 and used $8.3 million in the same period of 1996. Loan
originations for the portfolio net of principal repayments used $1.4 million
during the first nine months of 1997 and $4.2 million during the same period
of 1996. Loan originations decreased slightly in 1997 from the prior year
period while repayments increased. Given the general level of interest rates
at September 30, 1997, management anticipates the repayments may continue
above prior year levels through the remainder of 1997.
A total of $2.5 million in available-for-sale securities were sold
during 1997. There were no such sales during 1996. The 1997 sales consisted
primarily of a $2.0 million U. S. Treasury note that was within 30 days of
maturity.
A total of $4.4 million was received through the sale of real estate
owned. The total consists primarily of the sale of a parcel of land in
Michigan for $3.7 million.
A total of $2.5 million was received from a real estate partnership in
which HomeCorp is a general partner. The amount represents a distribution of
accumulated earnings of the partnership.
Financing activities used $9.4 million in cash during the first nine
months of 1997, primarily due to a $12.6 million decline in deposits.
Financing activities for the first nine months of 1996 provided $425,000 in
cash, largely due to $8.3 million in increased borrowings. Management
believes the certificate of deposit pricing of HomeBanc is reasonable and
competitive. HomeBanc did not attempt to match the higher rates offered on
intermediate and longer term certificates of deposits available in the
marketplace and did experience a decline in these certificate of deposit
classes. Deposit pricing is reviewed continually in light of market
movements and HomeBanc's demand for funding sources.
HomeBanc had $2.4 million in short term borrowings at September 30,
1997. Management utilizes short term borrowings, such as overnight federal
funds line and Federal Home Loan Bank open advance line, for short term
financing needs.
There have been no material changes in HomeCorp's interest rate position
since December 31, 1996. Other types of market risk, such as foreign
currency exchange risk and commodity price risk, do not arise in the normal
course of HomeCorp's business.
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<PAGE> 109
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 20, 1998 the number of
shares of HomeCorp Common Stock beneficially owned and the percentage of
ownership of outstanding shares of HomeCorp Common Stock by (a) each director
and executive officer of HomeCorp, (b) each person who is known by HomeCorp
to own beneficially 5% or more of such stock and (c) all directors and
executive officers of HomeCorp as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER<F1> OWNED CLASS
---------------------------- ----- -----
<S> <C> <C>
C. Steven Sjogren<F2> 138,332 7.82%
President, Chief Executive Officer and Director
Robert C. Hauser<F3> 123,987 7.22
Director
John R. Perkins<F4> 104,040 5.95
Executive Vice President, Chief Operating Officer
and Director
Karl H. Erickson<F5> 83,899 4.89
Chairman of the Board
Larry U. Larson<F6> 56,862 3.31
Director
Adam A. Jahns 58,812 3.43
Vice Chairman of Board
Wesley E. Lindberg<F7> 55,061 3.21
Secretary and Director
Richard W. Malmgren<F8> 21,311 1.24
Director
David R. Rydell<F9> 67,887 3.96
Director
Dirk J. Meminger<F10> 28,523 1.65
Treasurer
Directors and Executive 782,006 40.93
Officers as a group
(12 persons)<F11>
<FN>
- ---------------------------
<F1> The business address for each of the beneficial owners listed is 1107
East State Street, Rockford, Illinois 61104.
<F2> Mr. Sjogren has sole voting and dispositive power with respect to 21,989
shares held directly and shared voting and dispositive power with
respect to 48,104 shares held jointly with his wife and children.
Also included in shares beneficially owned by Mr. Sjogren are options
to acquire 60,000 shares of HomeCorp Common Stock, all of which are
currently exercisable, 6,120 shares allocated to his account under
the Employee Stock Option Plan ("ESOP"), and 2,119 shares held by
Mrs. Sjogren with respect to which she has sole voting and
dispositive power.
<F3> Mr. Hauser has beneficial ownership of Hausers, Inc. and sole voting and
dispositive power as to 115,875 shares held by it. Also includes
options to acquire 7,812 shares of the HomeCorp Common Stock granted
to Mr. Hauser, all of which are currently exercisable. Mrs. Hauser
has sole voting and dispositive power with respect to the 300 shares
she holds.
<F4> Mr. Perkins has sole voting and dispositive power with respect to 19,556
shares held directly and shared voting and dispositive power with
respect to 37,620 shares held jointly with his wife. Also included
in shares beneficially owned by Mr. Perkins are options to acquire
41,000 shares of HomeCorp Common Stock, all of which are currently
exercisable, 3,989 shares allocated to his account under the ESOP and
1,875 shares held by Mrs. Perkins, with respect to which she has sole
voting and dispositive power.
- 104 -
<PAGE> 110
<F5> Includes 76,087 shares owned by a trust of which Mr. Erickson is a
beneficiary.
<F6> Includes 24,300 shares held Mr. Larson's spouse.
<F7> Includes 2,200 shares held by Mr. Lindberg's spouse and 3,960 shares
held in Mr. Lindberg's account under his firm's profit sharing plan.
<F8> Includes 292 shares held by Mr. Malmgren's spouse.
<F9> Includes 25,425 shares held by Mr. Rydell's spouse, 6,975 shares held by
his children and 2,250 shares held by a benefit plan of Bergstrom
Inc. of which Mr. Rydell is the President.
<F10> Includes 525 shares held by Mr. Meminger's children and 1,901 shares
allocated to his account under the ESOP.
<F11> Includes shares held directly, as well as shares held jointly with
family members, shares held in retirement accounts, held in a
fiduciary capacity, held by certain of the group members' families,
or held by trust of which the group member is a trustee or
substantial beneficiary, with respect to which shares the group may
be deemed to have sole or shared voting and/or investment powers.
This amount also includes 202,184 shares of HomeCorp Common Stock
granted to directors and executive officers, and 13,877 shares
allocated to executive officers pursuant to the ESOP.
</TABLE>
For purposes of the above table, a person is deemed to be a beneficial
owner of shares of HomeCorp Common Stock if the person has or shares the
power to vote or to dispose of such shares. Unless otherwise indicated in
the footnotes, each person has sole voting and investment power with respect
to shares shown in the table as beneficially owned by such person.
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INFORMATION REGARDING MBI STOCK
-------------------------------
DESCRIPTION OF MBI COMMON STOCK AND ATTACHED PREFERRED SHARE
PURCHASE RIGHTS
GENERAL. MBI has authorized 5,000,000 shares of MBI Preferred Stock,
no par value, and 200,000,000 shares of MBI Common Stock, $0.01 par value.
At September 30, 1997, MBI had no shares of MBI Preferred Stock issued and
outstanding and 130,289,361 shares of MBI Common Stock outstanding. Under
Missouri law, MBI's Board of Directors may generally approve the issuance of
authorized shares of Preferred Stock and Common Stock without shareholder
approval.
MBI's Board of Directors is also authorized to fix the number of shares
and determine the designation of any series of Preferred Stock and to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any series of MBI Preferred Stock. Except for the
designation and reservation of Series A Junior Participating Preferred Stock
pursuant to MBI's Preferred Share Purchase Rights Plan described below, MBI's
Board of Directors has not acted to designate or issue any shares of MBI
Preferred Stock. The existence of a substantial number of unissued and
unreserved shares of MBI Common Stock and undesignated shares of MBI
Preferred Stock may enable the Board of Directors to issue shares to such
persons and in such manner as may be deemed to have an anti-takeover effect.
The following summary of the terms of MBI's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
applicable provisions of MBI's Restated Articles of Incorporation, as
amended, and by-laws and Missouri law.
DIVIDENDS. The holders of MBI Common Stock are entitled to share
ratably in dividends when, as and if declared by the Board of Directors from
funds legally available therefor, after full cumulative dividends have been
paid or declared, and funds sufficient for the payment thereof set apart, on
all series of MBI Preferred Stock ranking superior as to dividends to MBI
Common Stock.
The Board of Directors of MBI intends to maintain its present policy of
paying quarterly cash dividends on MBI Common Stock, when justified by the
financial condition of MBI and its subsidiaries. The declaration and amount
of future dividends will depend on circumstances existing at the time,
including MBI's earnings, financial condition and capital requirements as
well as regulatory limitations, note and indenture provisions and such other
factors as the Board of Directors may deem relevant. The payment of
dividends to MBI by subsidiary banks is subject to extensive regulation by
various state and federal regulatory agencies. See "SUPERVISION AND
REGULATION."
VOTING RIGHTS. Each holder of MBI Common Stock has one vote for each
share held on matters presented for consideration by the shareholders, except
that, in the election of directors, each shareholder has cumulative voting
rights that entitle each such shareholder to the number of votes that equals
the number of shares held by the shareholder multiplied by the number of
directors to be elected. All such votes may be cast for one candidate for
election as a director or may be distributed among two or more candidates.
PREEMPTIVE RIGHTS. The holders of MBI Common Stock have no
preemptive right to acquire any additional unissued shares or treasury shares
of MBI.
LIQUIDATION RIGHTS. In the event of liquidation, dissolution or
winding up of MBI, whether voluntary or involuntary, the holders of MBI
Common Stock will be entitled to share ratably in
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any of its assets or funds that are available for distribution to its
shareholders after the satisfaction of its liabilities (or after adequate
provision is made therefor) and after preferences on any outstanding MBI
Preferred Stock.
ASSESSMENT AND REDEMPTION. Shares of MBI Common Stock are and will
be, when issued, fully paid and nonassessable. Such shares do not have any
redemption provisions.
PREFERRED SHARE PURCHASE RIGHTS PLAN. One preferred share
purchase right is attached to each share of MBI Common Stock. The MBI Rights
trade automatically with shares of MBI Common Stock, and become exercisable
and will trade separately from the MBI Common Stock on the tenth day after
public announcement that a person or group has acquired, or has the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of MBI
Common Stock, or upon commencement or announcement of intent to make a tender
offer for 20% or more of the outstanding shares of MBI Common Stock, in
either case without prior written consent of the Board. When exercisable,
each MBI Right will entitle the holder to buy 1/100 of a share of MBI Series
A Junior Participating Preferred Stock at an exercise price of $100 per MBI
Right. In the event a person or group acquires beneficial ownership of 20%
or more of MBI Common Stock, holders of MBI Rights (other than the acquiring
person or group) may purchase MBI Common Stock having a market value of twice
the then current exercise price of each MBI Right. If MBI is acquired by any
person or group after the Rights become exercisable, each MBI Right will
entitle its holder to purchase stock of the acquiring company having a market
value of twice the current exercise price of each MBI Right. The MBI Rights
are designed to protect the interests of MBI and its shareholders against
coercive takeover tactics. The purpose of the MBI Rights is to encourage
potential acquirors to negotiate with MBI's Board of Directors prior to
attempting a takeover and to give the Board leverage in negotiating on behalf
of all shareholders the terms of any proposed takeover. The MBI Rights may
deter certain takeover proposals. The MBI Rights, which can be redeemed by
MBI's Board of Directors in certain circumstances, expire by their terms on
June 3, 1998.
CLASSIFICATION OF BOARD OF DIRECTORS. The Board of Directors of
MBI is divided into three classes, and the directors are elected by classes
to three-year terms, so that one of the three classes of the directors of MBI
will be elected at each annual meeting of the shareholders. While this
provision promotes stability and continuity of the Board of Directors,
classification of the Board of Directors also may have the effect of
decreasing the number of directors that could otherwise be elected at each
annual meeting of shareholders by a person who obtains a controlling interest
in the MBI Common Stock and thereby could impede a change in control of MBI.
Because fewer directors will be elected at each annual meeting, such
classification also will reduce the effectiveness of cumulative voting as a
means of establishing or increasing minority representation on the Board of
Directors.
OTHER MATTERS. MBI's Restated Articles of Incorporation, as amended,
and by-laws also contain provisions that: (i) require the affirmative vote
of holders of at least 75% of the voting power of all of the shares of
outstanding capital stock of MBI entitled to vote in the election of
directors to remove a director or directors without cause; (ii) require the
affirmative vote of the holders of at least 75% of the voting power of all
shares of the outstanding capital stock of MBI to approve certain "business
combinations" with "interested parties" unless at least two-thirds of the
Board of Directors first approves such business combinations; and (iii)
require an affirmative vote of at least 75% of the voting power of all shares
of the outstanding capital stock of MBI for the amendment, alteration, change
or repeal of any of the above provisions unless at least two-thirds of the
Board of Directors first approves such an amendment, alteration, change or
repeal. Such provisions may be deemed to have an anti-takeover effect.
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RESTRICTIONS ON RESALE OF MBI STOCK BY AFFILIATES
Under Rule 145 of the Securities Act of 1933, as amended (the
"Securities Act"), certain persons who receive MBI Common Stock pursuant to
the Merger and who are deemed to be "affiliates" of HomeCorp will be limited
in their right to resell the stock so received. The term "affiliate" is
defined to include any person who, directly or indirectly, controls, or is
controlled by, or is under common control with HomeCorp at the time the
Merger is submitted to a vote of the shareholders of HomeCorp. Each
affiliate of HomeCorp (generally any director or executive officer or
shareholder of HomeCorp who beneficially owns a substantial number of
outstanding shares of HomeCorp Common Stock) who desires to resell the MBI
Common Stock received in the Merger must sell such stock either pursuant to
an effective registration statement or in accordance with an applicable
exemption, such as the applicable provisions of Rule 145(d) under the
Securities Act.
Rule 145(d) provides that persons deemed to be affiliates may resell
their stock received in the Merger pursuant to certain of the requirements of
Rule 144 under the Securities Act if such stock is sold within the first year
after the receipt thereof. After one year if such person is not an affiliate
of MBI and if MBI is current with respect to its required public filings, a
former affiliate of HomeCorp may resell the stock received in the Merger
without limitation. After two years from the issuance of the stock, if such
person is not an affiliate of MBI at the time of sale and for at least three
months prior to such sale, such person may resell such stock, without
limitation, regardless of the status of MBI's required public filings. The
shares of MBI Common Stock to be received by affiliates of HomeCorp in the
Merger will be legended as to the restrictions imposed upon resale of such
stock.
HomeCorp has agreed to provide MBI with a list of those persons who may
be deemed to be affiliates at the time of the Special Meeting. HomeCorp has
agreed to use all reasonable efforts to cause each such person to deliver to
MBI prior to the Effective Time a written agreement to the effect that no
sale will be made of any shares of MBI Common Stock received in the Merger by
an affiliate of MBI except in accordance with the Securities Act and until
such time as MBI shall first publish the financial results of at least 30
days of post-merger combined operations of HomeCorp and MBI. The
certificates of MBI Common Stock issued to affiliates of HomeCorp in the
Merger may contain an appropriate restrictive legend, and appropriate stop
transfer orders may be given to the transfer agent for such certificates.
COMPARISON OF THE RIGHTS OF SHAREHOLDERS AND STOCKHOLDERS OF MBI
AND HOMECORP
MBI is incorporated under the laws of the State of Missouri, while
HomeCorp is incorporated under the laws of the State of Delaware. The rights
of the shareholders of MBI are governed by MBI's Restated Articles of
Incorporation, as amended, and by-laws and Chapter 351 of the Missouri
Revised Statutes (the "Missouri Act"). The rights of HomeCorp stockholders
are governed by HomeCorp's Certificate of Incorporation and by-laws and by
the DGCL. The rights of HomeCorp stockholders who receive shares of MBI
Common Stock in the Merger will thereafter be governed by MBI's Restated
Articles of Incorporation, as amended, and by-laws and by the Missouri Act.
The material rights of such stockholders, and, where applicable, the
differences between the rights of MBI shareholders and HomeCorp stockholders,
are summarized below.
PREFERRED SHARE PURCHASE RIGHTS PLAN. As described above under
"- Preferred Share Purchase Rights Plan," MBI Common Stock has attached
Rights, which may deter certain takeover proposals. HomeCorp does not have a
rights plan.
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<PAGE> 114
SUPERMAJORITY PROVISIONS. MBI's Restated Articles of
Incorporation, as amended, and MBI's by-laws contain provisions requiring a
supermajority vote of the shareholders of MBI to approve certain proposals.
Under both MBI's Restated Articles of Incorporation, as amended, and by-laws,
removal by the shareholders of the entire Board of Directors or any
individual director from office without cause requires the affirmative vote
of not less than 75% of the total votes entitled to be voted at a meeting of
shareholders called for the election of directors. Amendment by the
shareholders of MBI's Restated Articles of Incorporation, as amended, or
by-laws relating to (i) the number or qualification of directors; (ii) the
classification of the Board of Directors; (iii) the filling of vacancies on
the Board of Directors; or (iv) the removal of directors, requires the
affirmative vote of not less than 75% of the total votes of MBI's then
outstanding shares of capital stock entitled to vote, voting together as a
single class, unless such amendment has previously been expressly approved by
at least two-thirds of the Board of Directors. The Restated Articles of
Incorporation, as amended, of MBI additionally provide that, in addition to
any shareholder vote required under the Missouri Act, the affirmative vote of
the holders of not less than 75% of the total votes to which all of the then
outstanding shares of capital stock of MBI are entitled, voting together as a
single class (the "Voting Stock"), shall be required for the approval of any
Business Combination. A "Business Combination" is defined generally to
include sales, exchanges, leases, transfers or other dispositions of assets,
mergers or consolidations, issuances of securities, liquidations or
dissolutions of MBI, reclassifications of securities or recapitalizations of
MBI, involving MBI on the one hand, and an Interested Shareholder or an
affiliate of an Interested Shareholder on the other hand. An "Interested
Shareholder" is defined generally to include any person, firm, corporation or
other entity which is the beneficial owner of 5% or more of the voting power
of the outstanding Voting Stock. If, however, at least two-thirds of the
Board of Directors of MBI approve the Business Combination, such Business
Combination shall require only the vote of shareholders as provided by
Missouri law or otherwise. The amendment of the provisions of MBI's Restated
Articles relating to the approval of Business Combinations requires the
affirmative vote of the holders of at least 75% of the Voting Stock unless
such amendment has previously been approved by at least two-thirds of the
Board of Directors. To the extent that a potential acquiror's strategy
depends on the passage of proposals which require a supermajority vote of
MBI's shareholders, such provisions requiring a supermajority vote may have
the effect of discouraging takeover attempts that do not have Board approval
by making passage of such proposals more difficult.
The Certificate of Incorporation and by-laws of HomeCorp also contain
provisions requiring a supermajority vote of the stockholders to approve
certain proposals. Under the Certificate of Incorporation of HomeCorp, any
amendments to the by-laws by stockholders require the affirmative vote of at
least 80% of the total shares entitled to vote in elections of directors.
Certain amendments to the Certificate of Incorporation also require an
affirmative vote of at least 80% of then outstanding shares of stock of
HomeCorp. In addition, approval of a merger or consolidation with an
interested stockholder, the sale of substantially all of the assets of
HomeCorp to an interested stockholder or the adoption of a proposal of
dissolution of HomeCorp by an interested stockholder requires an affirmative
vote of at least 80% of then outstanding shares of stock of HomeCorp.
VOTING FOR DIRECTORS. MBI's by-laws provide for cumulative voting
in the election of directors. Cumulative voting entitles each shareholder to
cast an aggregate number of votes equal to the number of voting shares held,
multiplied by the number of directors to be elected. Each shareholder may
cast all such votes for one nominee or distribute them among two or more
nominees, thus permitting holders of less than a majority of the outstanding
shares of voting stock to achieve board representation. Neither HomeCorp's
Certificate of Incorporation nor its by-laws provide for cumulative voting.
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<PAGE> 115
CLASSIFIED BOARD. As described under "-- Classification of Board of
Directors," the Board of Directors of MBI is divided into three classes of
directors, with each class being elected to a staggered three-year term. By
reducing the number of directors to be elected in any given year, the
existence of a classified Board diminishes the benefits of the cumulative
voting rights to minority shareholders. HomeCorp also has a classified Board
of Directors with three classes of directors.
ANTI-TAKEOVER STATUTES. The Missouri Act contains certain
provisions applicable to Missouri corporations such as MBI which may be
deemed to have an anti-takeover effect. Such provisions include Missouri's
business combination statute and the control share acquisition statute.
The Missouri business combination statute protects domestic corporations
after hostile takeovers by prohibiting certain transactions once an acquiror
has gained control. The statute restricts certain "Business Combinations"
between a corporation and an "Interested Shareholder" or affiliates of the
Interested Shareholder for a period of five years unless certain conditions
are met. A "Business Combination" includes a merger or consolidation,
certain sales, leases, exchanges, pledges and similar dispositions of
corporate assets or stock and certain reclassifications and
recapitalizations. An "Interested Shareholder" includes any person or entity
which beneficially owns or controls 20% or more of the outstanding voting
shares of the corporation.
During the initial five-year restricted period, no Business Combination
may occur unless such Business Combination or the transaction in which an
Interested Shareholder becomes "interested" (the "Acquisition Transaction")
was approved by the board of directors of the corporation on or before the
date of the Acquisition Transaction. Business Combinations may occur after
the five-year period following the Acquisition Transaction only if: (i) prior
to the stock acquisition by the Interested Shareholder, the board of
directors approves the transaction in which the Interested Shareholder became
an Interested Shareholder or approves the Business Combination in question;
(ii) the holders of a majority of the outstanding voting stock, other than
stock owned by the Interested Shareholder, approve the Business Combination;
or (iii) the Business Combination satisfies certain detailed fairness and
procedural requirements.
The Missouri Act exempts from its provisions: (i) corporations not
having a class of voting stock registered under Section 12 of the Exchange
Act; (ii) corporations which adopt provisions in their articles of
incorporation or by-laws expressly electing not to be covered by the statute;
and (iii) certain circumstances in which a shareholder inadvertently becomes
an Interested Shareholder. MBI's Restated Articles of Incorporation and
by-laws do not contain an election to "opt out" of the Missouri business
combination statute.
The Missouri Act also contains a "Control Share Acquisition Statute"
which provides that an "Acquiring Person" who after any acquisition of shares
of a publicly traded corporation has the voting power, when added to all
shares of the same corporation previously owned or controlled by the
Acquiring Person, to exercise or direct the exercise of: (i) 20% but less
than 33 1/3%, (ii) 33 1/3% or more but less than a majority or (iii) a
majority, of the voting power of outstanding stock of such corporation, must
obtain shareholder approval for the purchase of the "Control Shares." If
approval is not given, the Acquiring Person's shares lose the right to vote.
The statute prohibits an Acquiring Person from voting its shares unless certain
disclosure requirements are met and the retention or restoration of voting
rights is approved by both: (i) a majority of the outstanding voting stock, and
(ii) a majority of the outstanding voting stock after exclusion of "Interested
Shares." Interested Shares are defined as shares owned by the Acquiring Person,
by directors who are also employees, and by officers of the corporation.
Shareholders
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<PAGE> 116
are given dissenters' rights with respect to the vote on Control Share
Acquisitions and may demand payment of the fair value of their shares.
A number of acquisitions of shares are deemed not to constitute Control
Share Acquisitions, including good faith gifts, transfers pursuant to wills,
purchases pursuant to an issuance by the corporation, mergers involving the
corporation which satisfy the other requirements of the Missouri Act,
transactions with a person who owned a majority of the voting power of the
corporation within the prior year, or purchases from a person who has
previously satisfied the provisions of the Control Share Acquisition Statute
so long as the transaction does not result in the purchasing party having
voting power after the purchase in a percentage range (such ranges are as set
forth in the immediately preceding paragraph) beyond the range for which the
selling party previously satisfied the provisions of the statute.
Additionally, a corporation may exempt itself from application of the statute
by inserting a provision in its articles of incorporation or by-laws
expressly electing not to be covered by the statute. MBI's Restated Articles
of Incorporation and by-laws do not contain an election to "opt out" of the
Control Share Acquisition Statute.
The DGCL applicable to HomeCorp contains a business combination statute
similar to that contained in the Missouri Act. Like the Missouri business
combination statute, the Delaware business combination statute generally
prohibits a domestic corporation from engaging in mergers or other business
combinations with Interested Persons (as defined in the DGCL) for a statutory
time period. The prohibition can be avoided if the business combination is
approved by the board of directors prior to the date on which the Interested
Person acquires the requisite percentage of stock. The Missouri Act imposes
a longer prohibition period on transactions with Interested Persons (five
years) than the DGCL (three years), thereby potentially increasing the period
during which a hostile takeover may be frustrated. In addition, the DGCL,
unlike its Missouri counterpart, does not apply if the Interested Person
obtains at least 85% of the corporation's voting stock upon consummation of
the transactions which resulted in the stockholder becoming an Interested
Person. Thus, a person acquiring at least 85% of the corporation's voting
stock could circumvent the defensive provisions of the DGCL while being
unable to do so under the Missouri Act. The DGCL does not contain a control
share acquisition statute similar to that contained in the Missouri Act.
DISSENTERS' RIGHTS. Under Section 351.455 of the Missouri Act, a
shareholder of any corporation which is a party to a merger or consolidation,
or which sells all or substantially all of its assets, has the right to
dissent from such corporate action and to demand payment of the value of such
shares. Under the DGCL, stockholders of HomeCorp are not entitled to
appraisal rights in connection with the Merger. The DGCL has an exception
from the appraisal rights provisions in circumstances in which the
stockholder seeking to exercise such rights owns shares in a widely-held,
publicly-traded corporation and is to receive, or continue to hold after the
transaction under which such stockholder is seeking to exercise appraisal
rights, shares of a widely-held, publicly-traded corporation.
SHAREHOLDERS' AND STOCKHOLDERS' RIGHT TO INSPECT. Under the
DGCL, any stockholder may inspect the corporation's stock ledger, stockholder
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
stockholder. The DGCL specifically provides that a stockholder may appoint
an agent for the purpose of examining the stock ledger, list of stockholders or
other books and records of the corporation. A stockholder may apply to the
Delaware Court of Chancery to compel inspection in the event the stockholder's
request to examine the books and records is refused. In general, the
stockholder has the burden of proving an improper purpose where a stockholder
requests to examine the stockholder ledger or
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stockholder list. The right of stockholders to inspect under the Missouri Act
is generally similar to that of stockholders under the DGCL. Neither the
Missouri Act nor Missouri case law, however, provides any 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 DGCL, in a given situation a Missouri
shareholder may be provided with less guidance as to the scope of his or her
ability to inspect the books and records of the corporation.
SIZE OF BOARD OF DIRECTORS. As permitted under the Missouri Act,
the number of directors on the Board of Directors of MBI is set forth in
MBI's by-laws, which provide that the number of directors may be fixed from
time to time at not less than 12 nor more than 24 by an amendment of the
by-laws or by a resolution of the Board of Directors, in either case, adopted by
the vote or consent of at least two-thirds of the number of directors then
authorized under the by-laws. MBI's Board of Directors currently has twelve
(12) members. Similarly to the Missouri Act, the DGCL provides that a
corporation may fix the number of directors in its Certificate of
Incorporation or by-laws. The number of directors on the Board of Directors
of HomeCorp is set forth in the Certificate of Incorporation of HomeCorp,
which provides that the number of directors may be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by
majority of the whole Board.
The supermajority vote required for the amendment of MBI's by-laws
regarding a change in the number of directors may have the effect of making
it more difficult to force an immediate change in the composition of a
majority of the Board of Directors and may be deemed to have an anti-takeover
effect.
SUPERVISION AND REGULATION
--------------------------
GENERAL
As a bank holding company, MBI is subject to regulation under the BHCA
and its examination and reporting requirements. Under the BHCA, a bank
holding company may not directly or indirectly acquire the ownership or
control of more than 5% of the voting shares or substantially all of the
assets of any company, including a bank or savings and loan association,
without the prior approval of the Federal Reserve Board. In addition, bank
holding companies are generally prohibited under the BHCA from engaging in
nonbanking activities, subject to certain exceptions.
MBI and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of MBI's
subsidiaries, and therefore the earnings of MBI, are affected by general
economic conditions, management policies and the legislative and governmental
actions of various regulatory authorities, including the Federal Reserve
Board, the OTS, the FDIC, the Office of the Comptroller of the Currency (the
"Comptroller") and various state financial institution regulatory agencies.
In addition, there are numerous governmental requirements and regulations
that affect the activities of MBI and its subsidiaries.
CERTAIN TRANSACTIONS WITH AFFILIATES
There are various legal restrictions on the extent to which a bank
holding company and certain of its nonbank subsidiaries can borrow or
otherwise obtain credit from its bank subsidiaries. In general, these
restrictions require that any such extensions of credit must be on
non-preferential terms and secured by designated amounts of specified
collateral and be limited, as to any one of the holding company
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or such nonbank subsidiaries, to 10% of the lending bank's capital stock and
surplus, and as to the holding company and all such nonbank subsidiaries in the
aggregate, to 20% of such capital stock and surplus.
PAYMENT OF DIVIDENDS
MBI is a legal entity separate and distinct from its wholly owned
financial institutions and other subsidiaries. The principal source of MBI's
revenues is dividends from its financial institution subsidiaries. Various
federal and state statutory provisions limit the amount of dividends the
affiliate financial institutions can pay to MBI without regulatory approval.
The approval of the appropriate federal or state bank regulatory agencies is
required for any dividend if the total of all dividends declared by the bank
in any calendar year would exceed the total of the institutions net profits,
as defined by regulatory agencies, for such year combined with its retained
net profits for the preceding two years. In addition, a national bank or a
state member bank may not pay a dividend in an amount greater than its net
profits then on hand. The payment of dividends by any financial institution
subsidiary may also be affected by other factors, such as the maintenance of
adequate capital.
CAPITAL ADEQUACY
The Federal Reserve Board has issued standards for measuring capital
adequacy for bank holding companies. These standards are designed to provide
risk-responsive capital guidelines and to incorporate a consistent framework
for use by financial institutions operating in major international financial
markets. The banking regulators have issued standards for banks that are
similar to, but not identical with, the standards for bank holding companies.
In general, the risk-related standards require financial institutions
and financial institution holding companies to maintain capital levels based
on "risk-adjusted" assets, so that categories of assets with potentially
higher credit risk will require more capital backing than categories with
lower credit risk. In addition, financial institutions and financial
institution holding companies are required to maintain capital to support
off-balance sheet activities such as loan commitments.
FDIC INSURANCE ASSESSMENTS
The subsidiary depository institutions of MBI are subject to FDIC
deposit insurance assessments. The FDIC has adopted a risk-based premium
schedule. Each financial institution is assigned to one of three capital
groups -- well capitalized, adequately capitalized or undercapitalized -- and
further assigned to one of three subgroups within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors, and on the basis of other information relevant
to the institution's financial condition and the risk posed to the applicable
insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. See "- FIRREA and
FDICIA."
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent
savings associations, required the FDIC to establish separate deposit
insurance funds -- the BIF for banks and the Savings Association Insurance
Fund ("SAIF") for savings associations. FIRREA also required the FDIC to set
deposit insurance assessments at such levels as would cause BIF and SAIF to
reach their "designated reserve ratios" of 1.25 percent of the deposits
insured by them within a reasonable period of time. Due to low costs of
resolving bank insolvencies in the last few years, BIF reached its designated
reserve ratio in May 1995. As a result,
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effective January 1, 1996, the FDIC eliminated deposit insurance assessments
(except for the minimum $2,000 payment required by law) for banks that are well
capitalized and well managed and reduced the deposit insurance assessments for
all other banks. As of January 1, 1996, the SAIF had not reached the designated
reserve ratio. MBI, which has acquired substantial amounts of SAIF-insured
deposits during the years from 1989 to the present, is required to pay SAIF
deposit insurance premiums on these SAIF-insured deposits.
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted on
September 30, 1996, required the FDIC to take immediate steps to recapitalize
the SAIF and to change the basis on which funds are raised to make the
scheduled payments on the FICO bonds issued in 1987 to replenish the Federal
Savings and Loan Insurance Corporation. The new legislation, combined with
regulations issued by the FDIC immediately after enactment of the Funds Act,
provides for the following:
(i) A special assessment in the amount of 65.7 basis points
on SAIF-insured deposits held by depository institutions on March
31, 1995 (the special assessment was required by the Funds Act
to recapitalize the SAIF to the designated reserve ratio of
1.25 percent of the deposits insured by SAIF). Payments of
this assessment were made in November 1996, but were accrued by
financial institutions in the third calendar quarter of 1996.
Institutions such as MBI that have deposits insured by both the
BIF and the SAIF ("Oakar Banks") were required to pay the
special assessment on 80% of their "adjusted attributable
deposit amounts" ("AADA"). In addition, for purposes of future
regular deposit insurance assessments, the AADA on which Oakar
Banks pay assessments to SAIF was also reduced by 20%.
(ii) Commencing January 1, 1997, BIF insured institutions
will be responsible for a portion of the annual carrying costs of
the FICO bonds. Such institutions will be assessed at 80% of the
rate applicable to SAIF-insured institutions until December 31,
1999. Additionally, pursuant to the Funds Act, if the reserves
in BIF at the end of any semiannual assessment period exceed
1.25% of insured deposits, the FDIC is required to refund the
excess to the BIF-insured institutions.
(iii) The merger of the BIF and the SAIF on January 1, 1999 to
create the Deposit Insurance Fund, but only if no more savings
associations are in existence at that time. The Deposit Act
also directs the Secretary of the Treasury to conduct a study
and submit recommendations to Congress regarding the
establishment of a common charter for depository institutions.
PROPOSALS TO OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY
Proposals have been introduced in the U.S. Congress that, if adopted,
would overhaul the savings association industry. The most significant of
these proposals would merge the Comptroller and the OTS, abolish the federal
savings association charter and require federal thrifts to convert to
commercial banks. MBI cannot predict whether these or any other legislative
proposals will be enacted, or, if enacted, the final form of the law.
- 114 -
<PAGE> 120
SUPPORT OF SUBSIDIARY BANKS
Under Federal Reserve Board policy, MBI is expected to act as a source
of financial strength to each subsidiary bank and to commit resources to
support each of the subsidiaries in circumstances where it might not choose
to do so absent such a policy. This support may be required at times when
MBI may not find itself able to provide it. In addition, any capital loans
by MBI to any of its subsidiaries would also be subordinate in right of
payment to deposits and certain other indebtedness of such subsidiary.
Consistent with this policy regarding bank holding companies serving as
a source of financial strength for their subsidiary banks, the Federal
Reserve Board has stated that, as a matter of prudent banking, a bank holding
company generally should not maintain a rate of cash dividends unless its net
income available to common shareholders has been sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent
with the bank holding company's capital needs, asset quality and overall
financial condition.
FIRREA AND FDICIA
FIRREA contains a cross-guarantee provision which could result in
insured depository institutions owned by MBI being assessed for losses
incurred by the FDIC in connection with assistance provided to, or the
failure of, any other insured depository institution owned by MBI. Under
FIRREA, failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal
regulatory authorities, including the termination of deposit insurance by the
FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made extensive changes to the federal banking laws. FDICIA
instituted certain changes to the supervisory process, including provisions
that mandate certain regulatory agency actions against undercapitalized
institutions within specified time limits. FDICIA contains various other
provisions that may affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories ("well capitalized," "adequately capitalized" or one of three
"undercapitalized" categories) and to take progressively more restrictive
actions based on the capital categorization, as specified below. Under
FDICIA, capital requirements would include a leverage limit, a risk-based
capital requirement and any other measure of capital deemed appropriate by
the federal banking regulators for measuring the capital adequacy of an
insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees that would cause the institution to fail to satisfy the
minimum levels for any relevant capital measure.
The FDIC and the Federal Reserve Board adopted capital-related
regulations under FDICIA. Under those regulations, a bank will be well
capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii)
had a ratio of Tier 1 capital to risk-adjusted assets of 6% or greater; (iii)
had a ratio of Tier 1 capital to adjusted total assets of 5% or greater; and
(iv) was not subject to an order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital
level for any capital measure. An association will be adequately capitalized
if it was not "well capitalized" and: (i) had a risk-based capital ratio of
8% or greater; (ii) had a ratio of Tier 1 capital to risk-adjusted
- 115 -
<PAGE> 121
assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to adjusted
total assets of 4% or greater (except that certain associations rated "Composite
1" under the federal banking agencies' CAMEL rating system may be adequately
capitalized if their ratios of core capital to adjusted total assets were 3% or
greater).
FDICIA also makes extensive changes in existing rules regarding audits,
examinations and accounting. It generally requires annual on-site, full
scope examinations by each bank's primary federal regulator. It also imposes
new responsibilities on management, the independent audit committee and
outside accountants to develop or approve reports regarding the effectiveness
of internal controls, legal compliance and off-balance sheet liabilities and
assets.
DEPOSITOR PREFERENCE STATUTE
Legislation enacted in August 1993 provides a preference for deposits
and certain claims for administrative expenses and employee compensation
against an insured depository institution, in the liquidation or other
resolution of such an institution by any receiver. Such obligations would be
afforded priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, as well as any
obligation to shareholders of such an institution in their capacity as such.
THE INTERSTATE BANKING AND COMMUNITY DEVELOPMENT LEGISLATION
In September 1994, legislation was enacted that is expected to have a
significant effect in restructuring the banking industry in the United
States. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal") facilitates the interstate expansion and consolidation
of banking organizations by permitting (i) bank holding companies that are
adequately capitalized and managed to acquire banks located in states outside
their home states regardless of whether such acquisitions are authorized
under the law of the host state, (ii) the interstate merger of banks after
June 1, 1997, subject to the right of individual states to "opt in" or to
"opt out" of this authority before that date, (iii) banks to establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state, (iv) foreign banks to establish,
with approval of the regulators in the United States, branches outside their
home states to the same extent that national or state banks located in the
home state would be authorized to do so, and (v) banks to receive deposits,
renew time deposits, close loans, service loans and receive payments on loans
and other obligations as agent for any bank or thrift affiliate, whether the
affiliate is located in the same state or a different state. One effect of
Riegle-Neal is to permit MBI to acquire banks located in any state and to
permit bank holding companies located in any state to acquire banks and bank
holding companies in Missouri. Overall, Riegle-Neal is likely to have the
effects of increasing competition and promoting geographic diversification in
the banking industry.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
-----------------------------------------
KPMG Peat Marwick LLP served as MBI's independent accountants for the
year ended December 31, 1996 and continues to serve in such capacity.
Services provided in connection with the audit function included examination
of the annual consolidated financial statements, review and consultation
regarding filings with the Commission and other regulatory authorities and
consultation on financial accounting and reporting matters.
Ernst & Young LLP served as HomeCorp's independent accountants for the
year ended December 31, 1996 and continues to serve in such capacity.
Services provided in connection with the audit
- 116 -
<PAGE> 122
function included examination of the annual consolidated financial statements
and consultation on financial accounting and reporting matters.
LEGAL MATTERS
-------------
Certain legal matters will be passed upon for MBI by Thompson Coburn,
St. Louis, Missouri and for HomeCorp by Silver, Freedman & Taff L.L.P.,
Washington, D.C.
EXPERTS
-------
The consolidated financial statements of MBI as of December 31, 1996,
1995 and 1994, and for each of the years in the three-year period ended
December 31, 1996, incorporated by reference in MBI's Annual Report on Form
10-K, and the supplemental consolidated financial statements of MBI as of
December 31, 1996, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1996, contained in MBI's Current Report on Form 8-K
dated May 13, 1997 (as amended by Form 8-K/A dated May 22, 1997), have been
incorporated by reference herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, whose reports are
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of HomeCorp, Inc. and subsidiary
at December 31, 1996 and 1995, and for each of the two years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of HomeCorp as of December 31,
1994 and for the year then ended have been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public
accountants, whose report is included herein and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of Roosevelt as of December 31,
1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, incorporated by reference in MBI's Current Report on Form
8-K, dated July 1, 1997, have been incorporated herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
whose report has been incorporated by reference herein and upon the
authority of said firm as experts in accounting and auditing.
OTHER MATTERS
-------------
The Board of Directors of HomeCorp, at the date hereof, is not aware of
any business to be presented at the Special Meeting other than that referred
to in the Notice of Special Meeting and discussed herein. If any other
matter should properly come before the Special Meeting, the persons named as
proxies will have discretionary authority to vote the shares represented by
proxies in accordance with their discretion and judgment as to the best
interests of HomeCorp.
- 117 -
<PAGE> 123
SHAREHOLDER PROPOSALS
---------------------
If the Merger is approved, the other conditions to the Merger are
satisfied and the Merger is consummated, stockholders of HomeCorp will become
shareholders of MBI at the Effective Time. MBI shareholders may submit to
MBI proposals for formal consideration at the annual meeting of MBI's
shareholders and inclusion in MBI's proxy statement for such meeting. All
such proposals for the 1998 annual meeting of MBI's shareholders were
required to have been received in writing by the Corporate Secretary at
Mercantile Bancorporation Inc., P.O. Box 524, St. Louis, Missouri 63166-0524
by November 22, 1997.
- 118 -
<PAGE> 124
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
-----
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS -- ERNST &
YOUNG LLP F-1
REPORT OF INDEPENDENT AUDITORS -- KPMG PEAT
MARWICK LLP F-2
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1997 (UNAUDITED) AND
DECEMBER 31, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31 1996, 1995 AND 1994 F-4
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 F-6 to F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 to F-38
</TABLE>
- 119 -
<PAGE> 125
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
HomeCorp, Inc.
We have audited the accompanying consolidated balance sheets of HomeCorp,
Inc. and subsidiary (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The
consolidated statements of operations, stockholders' equity and cash flows of
HomeCorp, Inc. and subsidiary for the year ended December 31, 1994 were
audited by other auditors whose report dated February 24, 1995 expressed an
unqualified opinion on those statements and included an explanatory paragraph
that disclosed the change in the Company's method of accounting for goodwill
discussed in Note 1 to these financial statements.
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 1996 and 1995 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of HomeCorp, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
As disclosed in Note 1 to the consolidated financial statements, in 1996 the
Company changed its method of accounting for mortgage servicing rights.
/s/ Ernst & Young LLP
Chicago, Illinois
January 22, 1997
F-1
<PAGE> 126
[Letterhead of KPMG Peat Marwick LLP]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
HomeCorp, Inc:
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of HomeCorp, Inc. and subsidiary for the
year ended December 31, 1994. These consolidated financial statements are
the responsibility of HomeCorp's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of HomeCorp, Inc. and subsidiary for the year ended December 31, 1994,
in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, HomeCorp
changed its method of accounting for goodwill to adopt the provisions of the
Financial Accounting Standards Board's SFAS No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions," on January 1, 1994.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 24, 1995
F-2
<PAGE> 127
<TABLE>
HOMECORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
------------ --------------------------------
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents:
Cash on hand and noninterest-bearing deposits $ 11,648,446 $ 13,959,409 $ 7,633,563
Interest-bearing deposits 177,652 181,083 388,208
Federal funds sold -- -- 2,389,798
Total cash and cash equivalents 11,826,098 14,140,492 10,411,569
Investment securities held to maturity
(approximate fair value of $5,385,000,
$5,471,000 and $6,412,000 in 1997, 1996 and
1995 respectively) 5,500,794 5,502,353 6,504,355
Investment securities available for sale, at fair value 11,729,058 12,496,885 8,311,118
Mortgage-backed securities held to maturity
(approximate fair value of $16,183,000,
$18,577,000 and $24,146,000 in 1997, 1996
and 1995 respectively) 16,342,000 18,858,630 24,487,509
Federal Home Loan Bank Stock, at cost 1,637,000 2,079,000 2,279,400
Loans receivable, net 261,917,162 259,139,564 261,021,836
Mortgage loans held for sale 2,189,873 1,872,513 4,741,405
Foreclosed real estate, net 5,288,037 9,647,661 9,790,004
Investments in real estate developments 3,738,205 5,094,960 4,059,899
Premises and equipment 3,603,778 3,869,381 3,629,608
Accrued interest receivable 1,836,624 1,823,540 1,850,490
Other assets 1,268,665 1,299,495 939,404
Total Assets $326,877,294 $335,824,474 $338,026,597
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $299,147,543 $311,754,446 $314,293,883
Short term borrowing 2,400,000 -- --
Advance payments by borrowers for taxes
and insurance 526,078 1,329,965 2,075,471
Other liabilities 2,481,214 1,881,807 1,233,743
Total Liabilities 304,554,835 314,966,218 317,603,097
Stockholders' equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares
outstanding -- -- --
Common stock, $.01 par value; authorized
5,000,000 shares; 1,707,527, 1,128,779 and
1,126,371 shares issued and
outstanding in 1997, 1996 and 1995,
respectively 17,075 11,287 11,264
Additional paid-in capital 6,609,982 6,492,542 6,465,178
Retained earnings 15,674,654 14,332,532 13,973,701
Unrealized gain (loss) on securities available
for sale, net of taxes 20,748 21,895 (26,643)
Total Stockholders' Equity 22,322,459 20,858,256 20,423,500
Total Liabilities and Stockholders'
Equity $326,877,294 $335,824,474 $338,026,597
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 128
<TABLE>
HOMECORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ---------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $16,220,368 $16,172,102 $21,788,251 $21,316,412 $18,198,107
Investment securities and other 1,125,618 1,054,777 1,352,273 1,585,403 1,702,218
Mortgage-backed securities 798,596 946,088 1,240,782 1,534,009 1,620,717
Total interest income 18,144,582 18,172,967 24,381,306 24,435,824 21,521,042
Interest expense:
Deposits 10,877,494 11,031,663 14,748,617 14,967,400 12,470,895
Borrowed funds 15,469 74,023 136,610 97,198 25,304
Total interest expense 10,892,963 11,105,686 14,885,227 15,064,598 12,496,199
Net interest income 7,251,619 7,067,281 9,496,079 9,371,226 9,024,843
Provision for loan losses 220,000 395,000 565,000 360,000 240,000
Net interest income after provision for
loan losses 7,031,619 6,672,281 8,931,079 9,011,226 8,784,843
Noninterest income:
Loan fees and service charges 1,416,237 1,252,084 1,699,220 1,455,525 1,486,466
Gain (loss) on sale of:
Loans receivable 302,877 729,465 943,573 292,588 (145,208)
Securities available for sale (8,651) -- (10,259) 4,458 126,720
Income (loss) from real estate developments 1,020,890 374,546 861,175 (53,673) 445,079
Operations of real estate owned 360,614 350,947 471,109 115,573 --
Other 142,378 105,914 165,512 129,370 166,721
Total noninterest income 3,234,345 2,812,956 4,130,330 1,943,841 2,079,778
Noninterest expense:
Compensation and benefits 4,111,390 3,772,677 5,122,278 4,542,135 4,380,316
Office occupancy and equipment 958,833 923,441 1,223,133 1,171,536 1,090,900
Data processing 643,877 673,133 902,811 727,200 666,717
Federal deposit insurance premium 339,050 634,122 860,153 843,495 896,704
Savings Association Insurance Fund
special assessment -- 2,042,942 2,042,942 -- --
Other 1,536,117 1,433,793 2,002,153 1,719,914 1,461,734
Amortization of goodwill -- -- -- -- 807,603
Total Noninterest expense 7,589,267 9,480,108 12,153,470 9,004,280 9,303,974
Provision for loss on foreclosed real estate 505,000 -- 100,000 -- --
Provision for credit enhancement costs -- -- 246,000 -- --
Total noninterest expense 8,094,267 9,480,108 12,499,470 9,004,280 9,303,974
Income before income taxes and cumulative
effect of change in accounting principle 2,171,697 5,129 561,939 1,950,787 1,560,647
Income taxes 829,575 (5,093) 203,108 743,305 932,600
Income before cumulative effect of change in
accounting principle 1,342,122 10,222 358,831 1,207,482 628,047
Cumulative effect of change in accounting
for goodwill -- -- -- -- (4,340,424)
Net income (loss) $ 1,342,122 $ 10,222 $ 358,831 $ 1,207,482 $(3,712,377)
Earnings per common and common equivalent share:
Income before cumulative effect of change in
accounting principle 0.74 0.01 0.30 1.03 0.54
Cumulative effect of change in accounting
for goodwill -- -- -- -- (3.75)
Net income (loss) $ 0.74 $ 0.01 $ 0.30 $ 1.03 $ (3.21)
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 129
<TABLE>
HOMECORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN RETAINED GAIN (LOSS) STOCKHOLDERS'
STOCK CAPITAL EARNINGS ON SECURITIES EQUITY
----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $11,220 $6,435,874 $16,478,596 $ -- $22,925,690
Implementation of change in
accounting for investment
securities, net of tax effect
of $74,151 -- -- -- 115,981 115,981
Change in unrealized gain for
investment securities available
for sale, net of tax effect
of $(192,109) -- -- -- (300,479) (300,479)
Net loss -- -- (3,712,377) -- (3,712,377)
Balance at December 31, 1994 11,220 6,435,874 12,766,219 (184,498) 19,028,815
Stock options exercised 44 29,304 -- -- 29,348
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $97,026 -- -- -- 157,855 157,855
Net income -- -- 1,207,482 -- 1,207,482
Balance at December 31, 1995 11,264 6,465,178 13,973,701 (26,643) 20,423,500
Stock options exercised 23 27,364 -- -- 27,387
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $34,629 -- -- -- 48,538 48,538
Net income -- -- 358,831 -- 358,831
Balance at December 31, 1996 $11,287 $6,492,542 $14,332,532 $ 21,895 $20,858,256
Effect 3-for-2 stock split (unaudited) 5,643 (5,643) -- -- --
Stock options exercised (unaudited) 145 123,083 -- -- 123,228
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $734 (unaudited) -- -- -- (1,147) (1,147)
Net income (unaudited) -- -- 1,342,122 -- 1,342,122
Balance at September 30, 1997 (unaudited) $17,075 $6,609,982 $15,674,654 $20,748 $22,322,459
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE> 130
<TABLE>
HOMECORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,342,122 $ 10,221 $ 358,831 $ 1,207,482 $ (3,712,377)
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Amortization of:
Goodwill -- -- -- -- 807,603
Premiums and discounts on loans,
mortgage-backed securities
and investment securities 47,953 108,713 141,605 160,149 134,825
(Income) loss from real estate
developments (1,020,890) (374,546) (861,175) 53,673 (445,079)
Provision for loan losses 220,000 395,000 565,000 360,000 240,000
Provision for loss on foreclosed
real estate 505,000 -- 100,000 -- --
Provision for credit enhancement costs -- -- 246,000 -- --
Net (gain) loss on sale of:
Loans receivable (302,877) (729,465) (943,573) (292,588) 145,208
Mortgage-backed and investment
securities 8,651 -- 10,259 (4,458) (126,720)
Depreciation and amortization of premises
and equipment 330,997 347,003 461,730 457,276 420,516
Decrease (increase) in loans held for sale (317,360) 3,147,970 2,868,892 (4,629,485) 1,714,697
Cumulative effect of change in
accounting principle -- -- -- -- 4,340,424
Increase (decrease) in cash flows due to
changes in:
Accrual for SAIF -- 2,042,942 -- -- --
Accrued interest and other assets 17,746 (453,685) (333,141) 160,906 1,907,572
Other liabilities 599,407 (45,869) 648,064 (361,304) 453,447
Total adjustments 88,627 4,438,063 2,903,661 (4,095,831) 9,592,493
Net cash provided (used) by operating activities $ 1,430,749 $ 4,448,284 $ 3,262,492 $ (2,888,349) $ 5,880,116
Cash flows from investing activities:
Loan organizations, net of principal payments
on loans (1,395,601) (4,196,418) 309,786 (10,939,715) (11,755,120)
Purchase of:
Loans receivable (3,304,393) (5,201,609) (7,201,609) (10,613,318) (8,591,011)
Mortgage-backed and investment
securities (2,000,000) (1,500,000) (1,500,000) (7,000,000) (7,458,988)
Securities available for sale (6,526,230) (6,997,032) (6,997,032) (1,986,456) (68,154)
Certificates of deposit -- (7,000,000) (7,000,000) (11,000,000) (10,000,000)
Premises and equipment (65,394) (147,417) (701,503) (416,736) (177,429)
Investment in foreclosed real estate 24,852 (23,932) (24,271) (1,199,982) --
Investment in real estate developments (312,230) (977,360) (1,245,828) (1,214,254) (2,254,538)
Principal payments on mortgage-backed
securities 2,445,721 4,688,243 5,484,928 3,821,207 6,449,575
Principal repayments of securities available
for sale 771,189 1,086,005 1,415,939 1,536,713 2,766,946
Proceeds from sales of:
Mortgage loans -- -- 6,679,881 -- 3,936,160
Securities available for sale 2,506,379 -- 1,481,140 2,554,366 6,130,108
Real estate developments -- 67,500 67,500 267,000 362,854
Foreclosed real estate 4,381,705 61,172 291,145 717,794 414,391
Proceeds from maturities of:
Certificates of deposit -- 7,000,000 7,000,000 13,000,000 9,000,000
Investment securities 2,000,000 2,500,000 2,500,000 10,000,000 4,000,000
Securities available for sale 4,000,000 1,986,456 1,986,456 -- --
Redemption of FHLB stock 442,000 171,900 200,400 -- 91,400
Distributions of income on real estate
partnerships 2,689,875 146,677 1,004,442 1,208,682 1,139,149
Net cash provided (used) by investing
activities $ 5,657,873 $(8,335,815) $ 3,751,374 $(11,264,699) $ (6,014,657)
F-6
<PAGE> 131
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits (12,606,903) (647,433,636) (2,539,437) 6,688,797 18,586
Repayment of borrowings -- -- -- -- (237,175)
Net increase (decrease) in borrowings 2,400,000 8,300,000 -- -- --
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 803,887 (1,401,950) (745,506) (107,492) 237,405
Net cash provided (used) by financing
activities (9,403,016) 424,414 (3,284,943) 6,581,305 18,816
Net increase (decrease) in cash and cash
equivalents (2,314,394) (3,463,117) 3,728,923 (7,571,743) (115,725)
Cash and cash equivalents at beginning of year 14,140,492 10,411,569 10,411,569 17,983,312 18,099,037
Cash and cash equivalents at end of year $ 11,826,098 $ 6,948,452 $14,140,492 $10,411,569 $17,983,312
Supplemental Information
Cash payment during the period for:
Interest 10,794,742 10,873,350 14,877,972 15,061,696 12,470,018
Taxes 256,000 240,000 195,000 640,400 629,000
Non-cash investing activity:
Transfer of loans to real estate owned 551,933 -- 294,531 5,841,292 782,691
Loans held for sale:
Origination 18,247,425 42,972,403 51,706,526 60,411,504 14,399,386
Sales $ 22,367,646 $ 44,232,233 $54,575,418 $55,782,019 $16,114,083
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE> 132
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following comprise the significant accounting policies which
Homecorp, Inc. and Subsidiary ("HomeCorp") follows in preparing and presenting
its consolidated financial statements:
a. BUSINESS. HomeCorp, Inc. is a savings bank holding
company and owns all the outstanding capital stock of HomeBanc, a
federal savings bank (HomeBanc). HomeCorp has no business operations
independent of HomeBanc.
As a community oriented savings bank, HomeBanc offers a range of
retail banking services through its ten offices located in Winnebago,
Stephenson, and Lee Counties, Illinois. HomeBanc is principally
engaged in the business of attracting deposits from the general
public and using such deposits, together with borrowings and other
funds, to originate residential and commercial mortgage loans,
consumer loans, construction loans, and commercial business loans.
Through a subsidiary, HomeBanc also offers a full line of securities
brokerage services.
b. USE OF ESTIMATES. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
c. PRINCIPLES OF CONSOLIDATION. The accompanying
consolidated financial statements include the accounts of HomeCorp,
Inc., its wholly owned subsidiary, HomeBanc, fsb, and HomeBanc's
wholly owned subsidiary, Home Federal Service Corporation. All
significant intercompany transactions and balances have been
eliminated in consolidation.
d. CASH AND CASH EQUIVALENTS. HomeCorp's interest-bearing
deposits are available upon demand. Federal funds are sold for one
day periods.
e. INVESTMENT SECURITIES HELD TO MATURITY. Investment
securities are carried at cost, adjusted for amortization of premium
and accretion of discount using the interest method. It is
management's intention and their opinion that they have the ability
to hold these securities to maturity. Amortization of premiums and
accretion of discounts is recognized in interest income over the
estimated lives of the respective securities using the interest
method. Gains and losses on the sale of investment securities are
determined using the specific identification method.
f. INVESTMENT SECURITIES AVAILABLE FOR SALE. Investment
securities available for sale are carried at estimated fair value
with fluctuations from amortized cost reflected, net of tax, as a
component of stockholders' equity.
g. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities
represent participating interests in pools of first mortgage loans
originated and serviced by the issuers of the securities and
F-8
<PAGE> 133
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
are generally backed by agencies of the federal government. These
securities are carried at current unpaid principal balances, adjusted
for premiums and discounts as it is management's intention and their
opinion that they have the ability to hold them to maturity.
Amortization of premiums and accretion of discounts is recognized in
interest income over the estimated lives of the respective securities
using the interest method.
Gains and losses on the sale of mortgage-backed securities are
determined using the specific identification method.
Amortization of premiums and accretion of discounts are
recognized as interest income using the interest method over the
estimated lives of the securities.
Gains and losses on the sales of securities are determined using
the specific identification method.
h. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES.
Loans are stated at their outstanding unpaid principal balances net
of any deferred fees or costs, or unamortized premiums or discounts
on purchased loans. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to income
using the interest method. Loan origination fees net of certain
direct origination costs are deferred and recognized as an adjustment
of the yield of the related loans.
Generally, a loan is classified as nonaccrual when the contractual
payment of principal or interest has become 90 days past due or
management has serious doubts about collectibility of principal or
interest. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed. Interest received
on nonaccrual loans generally is either applied against principal or
reported as interest income, according to management's judgment as to
the collectibility of principal.
Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no
longer in doubt.
The allowance for loan losses is established through provisions
for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and
subsequent recoveries, if any are credited to the allowance.
A loan is impaired when, based upon current information and
events, it is probable that HomeBanc will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Management regularly reviews delinquent loans, significant loans and
potential problem loans (based upon information available to management)
to determine if the impairment criterion has been met.
F-9
<PAGE> 134
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
A loan is automatically classified as impaired when it reaches 90
days delinquent. Applicable loans less than 90 days delinquent are
evaluated and classified as impaired on a case by case basis. Once
classified as impaired, the necessity for an impairment reserve is
based upon one of three methodologies: the present value of expected
future cash flows discounted using the loan's initial effective
interest rate, a loan's observable market price, or the fair value of
the collateral.
Management determines the appropriate method on a case by case
basis. HomeBanc charges-off principal of impaired loans when a total
loss of principal has been deemed to have occurred or when collection
efforts have ceased.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses.
Management's periodic evaluation of the adequacy of the allowance is
based on HomeCorp's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently
subjective as it requires estimates of the amounts and timing of
future cash flows expected to be received on impaired loans.
i. MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for
sale are stated at the lower of aggregate cost or market value.
Deferred loan origination fees and expenses on these loans are not
amortized and are recorded as income or expense when the loans are
sold.
j. MORTGAGE SERVICE RIGHTS. On January 1, 1996, HomeCorp
adopted Financial Accounting Standards Board Statement No. 122,
"Accounting for Mortgage Servicing Rights," which requires that an
allocation of costs be made between loans and their related servicing
rights for loans originated with a definitive plan to sell with
servicing rights retained. The recognition of a separate asset for
servicing rights increases the gain on sale of loans. The cost of
mortgage servicing rights is allocated based on the relative fair
value of the mortgage servicing rights and the sold loans. The asset
is then amortized to expense over the life of the loan using the
level yield amortization method.
Amortization of servicing rights is calculated based upon the
level yield method over the estimated life of the estimated net
servicing income. Impairment of mortgage servicing rights is
determined periodically based on fair value estimates of the rights
utilizing current estimates of prepayments and other variables.
The adoption of this statement resulted in increased after tax
income of $326,000 for the year ended December 31, 1996. Servicing
rights capitalized in accordance with this accounting pronouncement
totaled $534,000 at December 31, 1996. Total amortization for the period
amounted to $71,400.
F-10
<PAGE> 135
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
k. FORECLOSED REAL ESTATE. Foreclosed real estate is
comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure and loans classified as
in-substance foreclosure. A loan is classified as in-substance
foreclosure when HomeCorp has taken possession of the collateral
regardless of whether formal foreclosure proceedings have taken
place.
Foreclosed real estate initially is recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real
estate is carried at the lower of cost or fair value minus estimated
costs to sell. Revenue and expenses from operations are included in
real estate owned (REO) operations.
l. INVESTMENTS IN REAL ESTATE DEVELOPMENTS. Investments
in real estate developments are carried at the lower of cost,
adjusted for HomeBanc's share of undistributed earnings, or net
realizable value. Development and holding costs, including interest
incurred during the development phase are capitalized. No interest
was capitalized to real estate projects for the three years in the
period ended December 31, 1996.
There were no loans outstanding from HomeBanc to any of the
unconsolidated joint ventures during 1996 or 1995. Interest income
recognized on loans receivable from the unconsolidated joint ventures
amounted to approximately $711,000 for the year ended December 31,
1994.
m. PREMISES AND EQUIPMENT. Land is carried at cost. Office
properties and equipment are recorded at cost less depreciation,
which is accumulated on a straight-line basis over the estimated
useful lives of the related assets. Estimated lives are 25 to 50
years for the office buildings and 3 to 25 years for equipment and
other properties. Leasehold improvements are recorded at cost less
accumulated amortization computed on a straight-line basis over the
term of the lease or the life of the asset, whichever is shorter.
n. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED.
HomeCorp's excess of cost over fair value of net assets acquired was the
result of the acquisition of two separate financial institutions.
HomeCorp adopted Statement of Financial Accounting Standards No. 72,
"Accounting for Certain Acquisitions of Banking and Thrift Institutions"
effective January 1, 1994 for the portion of goodwill not previously
accounted for under the statement. The cumulative effect of adoption was
$4.3 million.
o. PENSION PLAN. Pension expense for HomeBanc's defined
benefit plan is determined by the projected unit credit method for
measuring net periodic pension cost over the employee's service life.
HomeBanc's funding policy is to contribute annually an amount calculated
under the entry-age-normal method.
F-11
<PAGE> 136
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
p. STOCK COMPENSATION PLANS. HomeCorp has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in
accounting for its employee stock options because, as discussed in
footnote No. 14, the alternative fair value accounting provided for
under Financial Accounting Standard Board Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of HomeCorp's
employee stock options equals or is less than the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
q. INCOME TAXES. Deferred income tax assets and liabilities
are adjusted regularly to amounts estimated to be receivable or
payable based on current tax law and HomeCorp's tax status.
Consequently, tax expense in future years may be impacted by changes
in tax rates and tax return limitations.
r. EARNINGS PER SHARE. Earnings per share for the year
ended December 31, 1996 was computed by dividing net income by
1,175,379, the average number of common and common equivalent shares
(using the treasury share method) outstanding at the end of the year.
HomeCorp's equivalent shares consist entirely of stock options.
Earnings per share for the year ended December 31, 1995 was
computed by dividing net income by 1,168,613, the average number of
common and common equivalent shares (using the treasury share method)
outstanding at the end of the year. HomeCorp's equivalent shares
consist entirely of stock options.
Earnings per share before the change in accounting principle and
the per share impact of the change in accounting principle for the
year ended December 31, 1994 were computed by dividing these amounts
by 1,153,512, the weighted average number of shares outstanding
during the year as adjusted for the dilutive effect of common stock
options.
s. RECLASSIFICATIONS. Certain prior-year balances have been
reclassified to conform to the current year's presentation.
F-12
<PAGE> 137
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. INVESTMENT SECURITIES HELD TO MATURITY
A summary of investment securities held to maturity at December 31
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Debt securities:
U.S. Government and agency obligations $5,502,353 $ 3,277 $ (34,630) $5,471,000
Total investment securities 5,502,353 3,277 (34,630) 5,471,000
1995
Debt securities:
U.S. Government and agency obligations 6,504,355 15,315 (107,670) 6,412,000
Total investment securities $6,504,355 $15,315 $(107,670) $6,412,000
</TABLE>
There were no sales of investment securities during 1996, 1995, or
1994. Debt securities held at December 31, 1996 are due after one year
through five years. 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.
F-13
<PAGE> 138
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
A summary of securities available for sale at December 31
follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt securities $ 8,613,202 $ 33,579 $(36,362) $ 8,610,419
Other 5,904 9,146 -- 15,050
Mutual Fund Shares 1,252,819 -- (25,095) 1,227,724
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,043,965 60,828 -- 2,104,793
Federal National Mortgage Association 545,102 -- (6,203) 538,899
Total Mortgage-Backed 2,589,067 60,828 (6,203) 2,643,692
Total investment securities available for sale $12,460,992 $103,553 $(67,660) $12,496,885
<CAPTION>
1995
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt securities $ 4,370,387 $ 2,319 $(29,674) $ 4,363,032
Other 5,904 6,096 -- 12,000
Mutual Fund Shares 1,252,818 -- (30,142) 1,222,676
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,060,442 7,075 (16,663) 2,050,854
Federal National Mortgage Association 669,142 -- (6,586) 662,556
Total Mortgage-Backed 2,729,584 7,075 (23,249) 2,713,410
Total investment securities available for sale $ 8,358,693 $ 35,490 $(83,065) $ 8,311,118
</TABLE>
F-14
<PAGE> 139
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The amortized cost and estimated fair value of available for sale
investment securities at December 31, 1996 by contractual maturity are shown
by the following. 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>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 1,322,389 $ 1,305,923
Due after one year through five years 7,948,981 7,928,372
Due after five years through ten years 89,689 90,249
Due after ten years 3,099,933 3,172,341
Total available for sale investment securities $12,460,992 $12,496,885
</TABLE>
Proceeds from sales of investment securities available for sale
during 1996, 1995, and 1994 were $1,481,140, $2,554,366, and $6,130,108
respectively. The 1996 and 1995 sales generated gross gains/(losses) of
$(10,259) and $4,458, respectively.
The 1994 sales generated gross gains of $144,490 and gross losses
of $17,770.
A total of $2,383,931 of debt securities and $5,904 of equity
securities were transferred from held to maturity to available for sale
during December 1995 pursuant to the transition provisions of the Financial
Accounting Standards Board Special Report on Statement No. 115. The
investment securities had a net unrealized gain of $6,741 at the time of
transfer.
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
A summary of mortgage-backed securities held to maturity at
December 31 follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 3,570,178 $ 3,659,000 $ 4,301,911 $ 4,381,000
Small Business Administration 1,368,562 1,350,000 1,442,448 1,446,000
Federal Home Loan Mortgage Corporation 6,055,755 6,083,000 8,706,976 8,769,000
Federal National Mortgage Association 6,376,573 6,419,000 7,739,609 7,811,000
Agency for International Development 22,983 23,000 44,216 44,000
Collateralized Mortgage Obligations 1,051,572 1,043,000 1,695,391 1,695,000
Total mortgage-backed securities, gross $18,445,623 $18,577,000 $23,930,551 $24,146,000
Add:
Unamortized premium 413,007 556,958
Total mortgage-backed securities
held to maturity, net $18,858,630 $24,487,509
</TABLE>
F-15
<PAGE> 140
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The collateralized mortgage obligations represent pools of
securities issued by agencies of the federal government. The amortized cost
and approximate value of mortgage-backed securities at December 31 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996 $18,858,630 $ 7,946 $(289,576) $18,577,000
1995 24,487,509 15,263 (356,772) 24,146,000
</TABLE>
5. LOANS RECEIVABLE
A summary of loans receivable at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Conventional first
mortgage loans $168,847,672 $195,422,934
Short-term construction
and land loans 15,242,660 9,102,103
Commercial business loans 6,242,571 4,007,156
Auto loans 53,325,499 38,686,836
Home equity and
improvement loans 21,167,683 16,268,139
Other consumer loans 1,298,502 1,293,286
Total loans
receivable, gross 266,124,587 264,780,454
Less:
Loans in process 5,638,590 2,753,743
Deferred loan origination
costs (445,917) (440,064)
Unearned discount,
principally on loans
purchased 210,248 269,761
Allowance for
loan losses 1,582,102 1,175,178
Total loans receivable,
net $259,139,564 $261,021,836
</TABLE>
Adjustable-rate loans totaled $100,888,000 and $109,548,000 at
December 31, 1996 and 1995, respectively. HomeBanc serviced first mortgage
loans for other institutions approximating $162,856,000 and $125,796,000 at
December 31, 1996 and 1995, respectively.
F-16
<PAGE> 141
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The following summarizes activity in the allowance for loan losses
at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning
of year $1,175,178 $1,048,105 $ 956,105
Charge-offs (162,991) (241,203) (158,940)
Recoveries 4,915 8,276 10,940
Provision for
loan losses 565,000 360,000 240,000
Balance at end of year $1,582,102 $1,175,178 $1,048,105
</TABLE>
Impaired loans totaled $3,789,000 and $1,020,000 at December 31,
1996 and 1995, respectively. The impaired totals included $2,146,000 and
$37,000 of non-performing loans at the respective year end dates.
Included in impaired loans at December 31, 1996 were two
participating interests totaling $1,445,000 that were 90 days delinquent but
which continued on an accrual basis. Based upon their current physical
condition and the economic condition of the area in which the buildings are
located, accrual status was considered appropriate.
The average recorded investment in impaired loans during the years
ended December 31, 1996 and 1995 was approximately $1,891,000 and $4,252,000,
respectively. HomeBanc recognized interest income on impaired loans of
$226,000 and $424,000 for the years ended December 31, 1996 and 1995,
respectively.
6. FORECLOSED REAL ESTATE
Foreclosed real estate is presented net of a valuation allowance
for possible losses. Activity in the allowance for losses on foreclosed real
estate is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1995 $450,000
Provision charged to expense --
Charge-offs, net of recoveries --
Balance at December 31, 1995 450,000
Provision charged to expense 100,000
Charge-offs, net of recoveries --
--------
Balance at December 31, 1996 $550,000
</TABLE>
7. INVESTMENTS IN REAL ESTATE DEVELOPMENTS
HomeBanc and its wholly owned subsidiary have direct investments
in real estate projects and participate in unconsolidated joint ventures with
third parties engaged in the purchase of undeveloped
F-17
<PAGE> 142
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
land for improvement, subdivision, and subsequent sale. The
investments in unconsolidated real estate joint ventures represent 50 percent
interest in the projects involved and are accounted for on the equity method.
These developments are summarized at December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investment in real estate project $ -- $ 33,600
Investment in unconsolidated
real estate joint ventures 5,094,960 4,026,299
Total investment in
real estate developments $5,094,960 $4,059,899
</TABLE>
Income from real estate developments is summarized as follows for
the year ended December 31;
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loss of real estate projects $(73,117) $ (76,967) $(213,991)
Equity in earnings (loss) of unconsolidated
real estate joint ventures 530,278 (214,399) 502,766
Fees received less expenses incurred
related to unconsolidated real estate
joint ventures 404,014 237,693 156,304
Total income (loss) from real estate
developments $861,175 $ (53,673) $ 445,079
</TABLE>
Combined statements of financial condition, operations, and
partners' capital of the unconsolidated real estate joint ventures follow.
<TABLE>
COMBINED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Assets
Cash $ 47,475 $ 26,480
Land and development costs 15,459,094 21,006,807
Other assets 887,376 1,016,613
Total assets $16,393,945 $22,049,900
Liabilities:
Borrowings 3,662,623 10,177,867
Other liabilities 2,541,402 3,919,630
Total liabilities $ 6,204,025 $14,097,497
Partners' capital:
Wholly owned subsidiary of
HomeBanc 5,094,960 3,976,202
Co-venturer 5,094,960 3,976,201
Total partners' capital 10,189,920 7,952,403
Total liabilities and partners' capital $16,393,945 $22,049,900
</TABLE>
F-18
<PAGE> 143
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
COMBINED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales of real estate $10,042,533 $ 9,293,475 $ 7,366,404
Cost of sales (5,966,373) (7,243,804) (4,317,866)
Gross profit 4,076,160 2,049,671 3,048,538
Management fees (927,127) 319,625 (677,185)
Other expense (2,088,477) (2,798,095) (1,365,821)
Net income (loss) $ 1,060,556 $ (428,799) $ 1,005,532
</TABLE>
<TABLE>
COMBINED STATEMENTS OF PARTNERS' CAPITAL
<CAPTION>
WHOLLY OWNED
SUBSIDIARY OF CO-
HOMEBANC VENTURER TOTAL
-------- -------- -----
<S> <C> <C> <C>
Balance at December 31, 1993 $ 4,681,712 $ 4,681,712 $ 9,363,424
Capital contributions 154,000 154,000 308,000
Capital withdrawals (1,139,149) (1,139,150) (2,278,299)
Net income 502,766 502,766 1,005,532
Balance at December 31, 1994 4,199,329 4,199,328 8,398,657
Capital contributions 1,314,236 1,314,237 2,628,473
Capital withdrawals (1,322,964) (1,322,964) (2,645,928)
Net loss (214,399) (214,400) (428,799)
Balance at December 31, 1995 3,976,202 3,976,201 7,952,403
Capital contributions 1,592,922 1,592,922 3,185,844
Capital withdrawals (1,004,442) (1,004,441) (2,008,883)
Net income 530,278 530,278 1,060,556
Balance At December 31, 1996 $ 5,094,960 $ 5,094,960 $10,189,920
</TABLE>
F-19
<PAGE> 144
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation of partners' capital per the joint venture
financial statements to HomeBanc records at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Partners' capital per joint
venture financial statements $5,094,960 $3,976,202
Deferred income and partner-
ship cash held by HomeBanc -- 50,097
Investment in unconsolidated
real estate joint ventures $5,094,960 $4,026,299
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $1,311,124 $ 723,509
Office buildings 3,201,006 3,189,077
Furniture, fixtures and equipment 2,928,401 2,914,806
Parking lots and drive-through facility 921,421 921,421
Leasehold improvements 360,878 360,878
8,722,830 8,109,691
Less accumulated depreciation and
amortization 4,853,449 4,480,083
Premises & equipment $3,869,381 $3,629,608
</TABLE>
F-20
<PAGE> 145
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
9. DEPOSITS
A summary of deposit accounts at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Account
Non-interest-bearing demand
deposit accounts $ 8,870,879 $ 6,822,512
Negotiable order of withdrawal (NOW) 25,972,892 25,072,580
Passbook 22,167,353 23,442,492
Money market 30,805,437 28,566,474
Certificates of deposit:
Original balances of less than or
equal to $100,000 195,633,979 201,808,483
Original balances of greater than
$100,000 28,303,989 28,581,342
Total certificates of deposit 223,937,968 230,389,825
Total deposit accounts $311,754,446 $314,293,883
</TABLE>
The following sets forth the scheduled maturities of certificates
of deposit at December 31, 1996:
<TABLE>
<S> <C>
Maturing:
Within 12 months $106,758,921
Between 12 months and 2 years 57,984,665
Between 2 years and 3 years 27,366,599
Between 3 years and 4 years 25,920,539
Between 4 years and 5 years 5,633,240
Beyond 5 years 274,004
Total certificates of deposit $223,937,968
</TABLE>
HomeBanc had approximately $6,325,000 and $6,716,000 of U.S.
Government and agency obligations pledged to secure certain deposits at
December 31, 1996 and 1995, respectively.
F-21
<PAGE> 146
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
A summary of interest on deposits as shown in the consolidated
statements of operations at December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NOW $ 215,701 $ 187,337 $ 179,109
Passbook 416,637 418,297 458,862
Money market 846,776 779,050 726,128
Certificates of deposit 13,269,503 13,582,716 11,106,796
Total interest on deposits $14,748,617 $14,967,400 $12,470,895
</TABLE>
10. BORROWED FUNDS
Federal Home Loan Bank advances were utilized throughout 1996 and
1995 as a short term funding source for HomeBanc. HomeBanc had approximately
$1.2 million in mortgage-backed securities pledged to the Federal Home Loan
Bank of Chicago as collateral for outstanding letters of credit at December
31, 1996.
HomeCorp had no borrowings at December 31, 1996 or 1995.
11. INCOME TAXES
Components of applicable income taxes are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $(437,840) $622,866 $640,409
State (127,989) 135,494 121,689
Total current (563,829) 758,360 762,098
Deferred:
Federal 624,803 4,334 104,443
State 142,134 (19,389) 66,059
Total deferred 766,937 (15,055) 170,502
Total income taxes $ 203,108 $743,305 $932,600
</TABLE>
F-22
<PAGE> 147
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation of income taxes computed at the statutory federal
income tax rate of 34% in 1996, 1995, and 1994 to the actual income taxes are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate $191,059 $663,268 $ (945,124)
Effect of purchase accounting
adjustments -- -- 1,750,329
State taxes, net of federal effect 10,656 76,629 93,713
Other, net 1,393 3,408 33,682
Total income taxes $203,108 $743,305 $ 932,600
</TABLE>
Retained earnings at December 31, 1996 and 1995 includes
approximately $3,426,000 for which no federal income tax liability has been
provided. This amount represents allocations of income to bad debt deductions
for tax purposes only. Reductions of amounts so allocated for purposes other
than tax bad debt losses will create taxable income, which will be subject to
the then current corporate income tax rate.
Following is a breakdown of the significant individual temporary
differences that give rise to HomeCorp's deferred tax assets and liabilities
as of December 31:
F-23
<PAGE> 148
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Financial statement allowance
for loan losses $ 612,888 $ 629,574
Book vs tax basis in real
estate partnerships -- 169,036
Securities available for sale
market value adjustment -- 20,724
Book vs tax basis in fixed assets 42,596 --
Other 69,094 41,192
Sub-Total $ 724,578 $ 860,526
Less: Valuation allowance -- (29,472)
Total Deferred Tax Assets $ 724,578 $ 831,054
Deferred Tax Liabilities:
Excess of tax loan loss allowance
over base year amount (88,601) (143,365)
Book vs tax basis in
servicing rights (206,773) --
Book vs tax basis in
real estate partnerships (419,313) --
Securities available for sale market
value adjustment (13,905) --
Book vs tax basis in fixed assets -- (28,312)
Book vs tax basis in FHLB stock (133,468) (133,468)
Deferred fee income (191,418) (89,755)
Other (36,512) --
Total Deferred Tax
Liabilities $(1,089,990) $(394,900)
Net Deferred Tax
(Liabilities) Assets $ (365,412) $ 436,154
</TABLE>
The valuation allowance for deferred tax assets as of December 31,
1995 was $29,472 and was related to the state benefit recognized on the
difference in HomeCorp's real estate partnerships and capital loss
carryforward. Based upon the reduction in the book-tax difference in real
estate partnerships and the utilization of capital loss carryforwards, the
reserve was eliminated.
12. PENSION PLAN
HomeBanc has a qualified, noncontributory defined benefit plan
covering substantially all employees who are at least 20-1/2 years of age and
have at least six months of service. Benefits are based on years of service
and the average of the five highest consecutive years of compensation.
F-24
<PAGE> 149
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The following table sets forth the status of the plan as of
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested $1,730,802 $1,599,730
Nonvested 88,546 76,345
Total accumulated benefit
obligation 1,819,348 1,676,075
Projected benefit obligation 2,622,865 2,366,786
Plan assets at fair value, primarily
certificates of deposit at
HomeBanc 2,298,660 1,976,521
Funded status-plan assets less than
projected benefits obligation (324,205) (390,265)
Items to be recognized in earnings
in future periods:
Unrecognized prior
service cost 150,395 163,566
Unrecognized net loss 7,983 76,343
Unrecognized net asset at
January 1, 1987 being
amortized over 15 years (7,769) (9,323)
Accrued pension cost $ (173,596) $ (159,679)
</TABLE>
Total pension expense for the plan was $214,917, $113,066, and
$97,569, for 1996, 1995 and 1994, respectively. Pension expense included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned
during the period $ 193,245 $ 112,496 $109,002
Interest cost on projected benefit
obligation 173,384 135,294 131,825
Actual return on plan assets (257,200) (206,534) (77,835)
Net amortization and deferrals 105,488 71,810 (65,423)
Total pension expense $ 214,917 $ 113,066 $ 97,569
</TABLE>
The weighted assumed discount rate used to determine the projected
benefit obligation was 7.50% for 1996 and 1995 and 8.00% for 1994. The expected
long-term rate of return on plan assets was 8.50% for 1996 and 1995 and 8.00%
for 1994. The plan assumed a 4.75% salary progression in 1996 and 1995 and
5.00% in 1994.
F-25
<PAGE> 150
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
13. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
HomeBanc has a non-qualified, noncontributory supplemental
executive retirement plan covering employees earning in excess of the maximum
compensation amount that can be considered under the Pension Plan. Benefits
are based on years of service and the average.
The following table sets forth the status of the plan as of
December 31, 1996:
<TABLE>
<S> <C>
Actuarial present value of
benefit obligation:
Vested $ 92,571
Nonvested --
Total accumulated benefit obligation 92,571
Projected benefit obligation 224,175
Plan assets at fair value --
Funded status-plan assets in excess of (less
than) projected benefits obligation (224,175)
Item to be recognized in earnings in
future periods:
Unrecognized prior service cost 184,645
Adjustment to recognize minimum liability (53,041)
Accrued pension cost $ (92,571)
</TABLE>
Total pension expense for the plan was $39,530 for 1996. Pension
expense included the following components:
<TABLE>
<S> <C>
Service cost benefits earned during
the period $ 9,161
Interest cost on projected benefit
obligation 15,001
Net amortization and deferrals 15,368
Total pension $39,530
</TABLE>
The weighted assumed discount rate used to determine the projected
benefit obligation was 7.50% for 1996. The expected long-term rate of return
on plan assets was 8.50% for 1996. The plan assumed a 4.75% salary progression
in 1996.
14. OFFICER, DIRECTOR, AND EMPLOYEE PLANS
Effective January 1, 1994, HomeCorp implemented a profit sharing
and savings plan under Section 401(k) of the Internal Revenue Code covering
substantially all full-time employees. Under the 401(k) plan, employee
contributions were partially matched by HomeCorp during 1996, 1995, and 1994.
F-26
<PAGE> 151
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
HomeCorp will make an annual determination whether to continue the
employer match. It is HomeCorp's intent to continue the match during 1997.
Additionally, HomeCorp may allocate a portion of net profits to the
employees' accounts in the 401(k) plan.
HomeCorp incurred expense of $73,356, $68,279, and $67,500 to fund
the ESOP and 401(k) plans for the years ended December 31, 1996, 1995, and
1994, respectively.
Pursuant to HomeCorp's 1990 Incentive Stock Option and Incentive
Plan ("1990 Plan"), 110,436 shares of HomeCorp's Common Stock were reserved
for issuance by HomeCorp. The exercise price for the purchase of shares
subject to a stock option at the date of grant may not be less than 100
percent of the market value of the shares covered by the option at that date.
Pursuant to HomeCorp's 1996 Premium Price Stock Option and
Incentive Plan ("1996 Plan"), 70,000 shares of HomeCorp's Common Stock were
reserved for issuance by HomeCorp. The exercise price for the purchase of
shares subject to a stock option at the date of grant cannot be less than 120
percent of the market value of the shares covered by the option at that date.
The Plans provide awards in the form of stock options, stock
appreciation rights ("SARs"), incentive stock options and restricted stock.
Each award will be on such terms and conditions, consistent with the Plans,
as the Stock Option Committee (the "Committee") administering the Plans may
determine. The term of stock options in both plans will not exceed ten years
from the date of grant.
Pro forma information regarding net income and earnings per share
is required by Statement No. 123, and has been determined as if HomeCorp had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995; risk-free interest rates of
6.48% and 6.67%; no dividends for either year; volatility factors of the
expected market price of HomeCorp's common stock of .095 and .290; and a
weighted-average expected life of the options of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because HomeCorp's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
F-27
<PAGE> 152
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
HomeCorp's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pro forma net income $152,320 $1,053,645
Pro forma earnings per share $ 0.12 $ 0.89
</TABLE>
Because Statement No. 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1997.
A summary of HomeCorp's stock option activity, and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
----------------------------- ----------------------------- -----------------------------
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-Beginning of year 93,656 $ 9.50 70,251 $ 7.00 66,251 $ 6.67
Granted 45,500 21.00 30,029 14.75 4,000 12.38
Exercised (200) 14.75 (6,608) 6.67 -- --
Forfeited (200) 14.75 (16) 6.67 -- --
Outstanding-end of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Exercisable at end of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Weighted-average fair value of
options granted during year $ 7.38 $ 8.33 $ 6.53
</TABLE>
HomeCorp's stock price was $17.875 at the time the 1996 options
were granted. The options have an exercise price of $21.00. All prior
options were granted with exercise prices equal to HomeCorp's stock price on
the date of grant. The following table summarizes information about fixed
stock options at December 31, 1996:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE
--------------- ----------- -------------- --------------
<C> <C> <C> <C>
$ 6.67 59,627 3.5 years $ 6.67
12.375 to 14.75 33,629 8.3 14.47
21.00 45,500 9.3 21.00
------ --- -----
138,756 6.6 13.26
</TABLE>
HomeCorp has an Employee Stock Ownership Plan ("ESOP"). The ESOP
covers substantially all employees with more than one year of employment who
have attained the age of 21. Contributions to the ESOP are determined
annually by the Board of Directors. The ESOP owned 27,398 shares of
HomeCorp's common stock as of December 31, 1996, all of which were allocated.
F-28
<PAGE> 153
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
15. REGULATORY CAPITAL
HomeBanc is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on HomeBanc's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
HomeBanc must meet specific capital guidelines that involve quantitative
measures of HomeBanc's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. HomeBanc's 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 HomeBanc 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 adjusted total assets (as defined). Management believes as of
December 31, 1996, that HomeBanc meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the
Office of Thrift Supervision (the "OTS") categorized HomeBanc as adequately
capitalized under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized, HomeBanc must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table below. There are no conditions or events since that notification
that management believes have changed the institution's category.
F-29
<PAGE> 154
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
HomeBanc's actual capital amounts and ratios are presented in the
table below:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER 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 December 31, 1996:
Total Capital to risk-weighted assets
Consolidated $17,479 8.29% $16,865 8.00% $ NA NA %
Subsidiary Bank 17,452 8.29 16,833 8.00 21,042 10.00
Tier 1 capital to risk-weighted assets
Consolidated 15,897 7.54 8,433 4.00 NA NA
Subsidiary Bank 15,870 7.54 8,417 4.00 12,625 6.00
Tier 1 capital to adjusted total assets
Consolidated 15,897 4.81 13,217 4.00 NA NA
Subsidiary Bank 15,870 4.81 13,201 4.00 16,502 5.00
As of December 31, 1995:
Total Capital to risk-weighted assets
Consolidated $19,294 9.47% $16,302 8.00% $ NA NA %
Subsidiary Bank 19,202 9.42 16,301 8.00 20,377 10.00
Tier 1 capital to risk-weighted assets
Consolidated 17,669 8.67 8,151 4.00 NA NA
Subsidiary Bank 17,577 8.63 8,151 4.00 12,226 6.00
Tier 1 capital to adjusted total assets
Consolidated 17,669 5.27 13,413 4.00 NA NA
Subsidiary Bank 17,577 5.24 13,412 4.00 16,765 5.00
</TABLE>
Applicable rules and regulations of the OTS impose limitations on
dividends by HomeBanc. Within those limitations, certain "safe harbor"
dividends are permitted, subject to providing the OTS at least 30 days
advance notice. The safe harbor amounts are based upon an institution's
regulatory capital level. Thrift institutions which have capital in excess
of all capital requirements before and after the proposed dividend are
permitted to make capital distributions during any calendar year up to the
greater of (1) 100% of net income to date during the calendar year, plus
one-half of the surplus over such institution's capital requirements at the
beginning of the calendar year, or (2) 75% of net income over the most recent
four-quarter period. Additional restrictions would apply to an institution
which does not meet its capital requirement before or after a proposed
dividend. Under the frame work, HomeBanc's capital levels do not allow
HomeBanc to accept brokered deposits. HomeBanc relies upon its community
deposit base and Federal Home Loan Bank borrowings as primary funding
sources.
Unlike HomeBanc, HomeCorp is not subject to regulatory
restrictions on the payment of dividends to its shareholders. However, the
source of its future dividends may depend upon dividends from HomeBanc.
F-30
<PAGE> 155
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
As part of the Conversion process to a public company, HomeBanc
established a liquidation account for the benefit of eligible depositors as
of March 31, 1989, the eligibility record date, who continue to maintain
deposits in HomeBanc following the Conversion. The initial balance of the
liquidation account was $9,011,252, the retained earnings of HomeBanc as of
April 30, 1990. The balance in this account decreases each year in which
deposit balances of eligible depositors decline. The account balance
approximated $2,667,000 at December 31, 1996. In the unlikely event of a
complete liquidation, each eligible depositor who has continued to maintain
deposits in HomeBanc following the Conversion, will be entitled to receive a
liquidation distribution from the liquidation account prior to any
distributions to stockholders. Dividends cannot be paid from retained
earnings allocated to the liquidation account.
16. CONCENTRATIONS OF CREDIT RISK, FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK, COMMITMENTS AND CONTINGENCIES
Substantially all of HomeBanc's conventional first mortgage loans
are secured by single-family homes in the Northern Illinois area. HomeBanc
evaluates each customer's creditworthiness on a case-by-case basis. The
borrower's ability to repay the loans is generally dependent upon the
economic environment of the Northern Illinois area.
HomeBanc is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract amounts of those instruments
reflect the extent of involvement HomeBanc has in particular classes of
financial instruments.
Letters of credit are issued by HomeCorp and HomeBanc to guarantee
the completion of certain real estate developments.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established of any
condition established in the contract. Commitments are made at adjustable and
fixed rates. Fixed rate commitments generally expire within sixty days with
adjustable rate commitments made for up to 60 days. At December 31, 1996
fixed rate commitments for the origination of fixed and variable rate
mortgage loans were $2,379,000 and ranged from 6.125% to 8.50%.
All of HomeBanc's loan sales have been without recourse. Virtually
all of HomeBanc's servicing responsibilities are to the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association under
standard servicing agreements.
As of December 31, 1996 and 1995, HomeBanc has contingent
liabilities under surety agreements (credit enhancements) with third parties
aggregating $2,000,000 and $5,800,688, respectively. Fees are received for
HomeBanc's guarantee, with other financial institutions, of certain multifamily
housing revenue bonds.
F-31
<PAGE> 156
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Mortgage-backed and U.S. Government and agency obligations with
carrying values of approximately $1,185,000 and $8,979,000 at December 31,
1996 and 1995 respectively, have been pledged to secure these agreements.
HomeCorp and its subsidiary use the same credit policies in
making commitments and conditional obligations as on-balance-sheet instruments.
At December 31, 1996 and 1995 such commitments and conditional obligations are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Standby letters of credit $ 626,000 $ 262,000
Conventional first mortgage
loan commitments 5,630,000 9,110,000
Total commitments
to extend credit $6,256,000 $9,372,000
</TABLE>
Because of the nature of its activities, HomeCorp and HomeBanc are
subject to pending and threatened legal actions which arise in the normal
course of business.
In the opinion of management, based on advise of legal counsel,
the disposition of any known pending current legal actions will not have a
material adverse effect on the financial position of HomeCorp.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" ("Statement No. 107") requires
disclosures of estimated values of financial instruments. Fair value
estimates, methods, and assumptions are set forth:
Cash and Cash Equivalents. The carrying amounts of
-------------------------
$14,140,492 and $10,411,569 for 1996 and 1995, respectively of cash
and cash equivalents approximate fair value because they mature in
three months or less and do not present unanticipated credit
concerns.
F-32
<PAGE> 157
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Investment and Mortgage-Backed Securities. Comparisons of
-----------------------------------------
the recorded book values and estimated fair values to investment
securities held to maturity, securities available for sale and
mortgage-backed securities are summarized in notes (2), (3), and (4),
respectively. All fair values are based upon market quotes. The
following table summarizes the balances:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Investment securities held to maturity $ 5,502,353 $ 5,471,000 $ 6,504,355 $ 6,412,000
Securities available for sale 12,496,885 12,496,885 8,311,118 8,311,118
Mortgage-backed securities held to
maturity 18,858,630 18,577,000 24,487,509 24,146,000
</TABLE>
Loans. Fair values are estimated on portfolios of loans with
-----
similar financial characteristics. Loans are segregated by type,
such as residential real estate, commercial or consumer and are then
further segregated by adjustable and fixed interest rate.
The fair value for the loan portfolio was calculated by
discounting estimated future cash flows of loans using estimated
discount rates that consider the credit and interest rate risk
inherent in the loans. The assumptions involved in estimating the
future cash flows and appropriate discount rate are judgmentally
determined using market information and specific borrower
information, as appropriate.
The following table presents information for loans:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE<F*> AMOUNT FAIR VALUE<F*>
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Residential real estate
Fixed $79,189,188 $79,221,000 $99,675,842 $102,015,000
Adjustable 48,429,170 47,774,000 61,271,355 60,917,000
Other real estate:
Fixed 16,070,904 16,456,000 10,738,298 11,036,000
Adjustable 24,014,859 24,870,000 27,891,711 28,471,000
Construction and land:
Fixed 2,010,952 2,013,000 -- --
Adjustable 10,562,950 10,577,000 6,841,363 6,838,000
Consumer:
Fixed 61,398,873 62,319,000 44,913,412 45,022,000
Adjustable 14,674,712 14,657,000 11,599,302 11,525,000
Commercial:
Fixed 3,036,300 3,018,000 2,062,421 2,067,000
Adjustable 3,206,271 3,186,000 1,944,735 1,949,000
<FN>
<F*> Management has made estimates of fair value discount rates that it believes
are reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
values presented above would be indicative of the values negotiated in actual
sales.
</TABLE>
F-33
<PAGE> 158
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Deposit Liabilities. Under SFAS No. 107, the fair value of
-------------------
deposits with no stated maturity, such as non-interest bearing
checking, NOW accounts, savings and money market accounts, is equal
to the amount payable on demand as of December 31, 1996 and 1995.
The discount rate is determined by the rates offered as of
December 31, 1996 and 1995 for comparable remaining maturities.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 8,870,796 $ 8,870,796 $ 6,822,512 $ 6,822,512
Savings and NOW 48,140,245 48,140,245 48,515,072 48,515,072
Money market 30,805,437 30,805,437 28,566,474 28,566,474
Certificates of deposit 223,937,968 225,645,000 230,389,825 234,155,000
</TABLE>
The fair values estimated above do not include the benefit
that results from the low cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Commitments to Extend Credit, Standby Letters of Credit, and
------------------------------------------------------------
Financial Guarantees Written. The fair value of commitments to
----------------------------
extend credit is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of financial guarantees written
and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise
settle obligations with the counterparties.
HomeBanc and HomeCorp issue letters of credit, primarily on
behalf of HomeBanc's subsidiary in connection with its ongoing real
estate development operations.
Limitations. The fair value estimates are made at a
-----------
discrete point in time based on relevant market information and
information about the financial instrument. Because no market exists
for a significant portion of HomeBanc's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
In addition, the fair value estimates are based on existing
on-and-off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Significant assets
F-34
<PAGE> 159
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
and liabilities that are not considered financial assets and liabilities
include the mortgage origination operation, brokerage, deferred taxes and
property plant and equipment. In addition, the tax ramifications related
to the realization of unrealized gains and losses can have a significant
effect on fair value estimated and have not been considered in any
estimated.
F-35
<PAGE> 160
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
18. INTERIM PERIOD CONSOLIDATED OPERATING HIGHLIGHTS (UNAUDITED)
Consolidated operating highlights (unaudited) for the respective
interim quarterly reporting periods for the years ended December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Total interest income $5,973,291 $6,065,503 $ 6,134,173 $6,208,339
Total interest expense 3,707,025 3,646,845 3,751,816 3,779,541
Net interest income 2,266,266 2,418,658 2,382,357 2,428,798
Provision for loan losses 115,000 105,000 175,000 170,000
Net interest income after provision for
loan losses 2,151,266 2,313,658 2,207,357 2,258,798
Gain on sale of: 396,974 418,812 436,298 447,136
Loans receivable, investment securities and
mortgage-backed securities 337,498 211,270 180,697 203,849
Income (Loss) from real estate developments (219) (13,644) 388,409 486,629
REO Operations 114,951 115,934 120,062 120,162
Other noninterest operating income 33,264 51,085 21,565 59,598
Noninterest operating expense 2,443,793 2,425,062 2,568,311 2,673,362
SAIF special assessment -- -- 2,042,942 --
Provision for loss on foreclosed real estate -- -- -- 100,000
Provision for credit enhancement costs -- -- -- 246,000
Income before income taxes 589,941 672,053 (1,256,865) 556,810
Income taxes 234,405 261,000 (500,498) 208,201
Net income (loss) 355,536 411,053 (756,376) 348,609
Earnings per share (loss) $ 0.30 $ 0.35 $ (0.64) $ 0.29
1995:
Total interest income $5,867,331 $6,100,713 $6,350,927 $6,116,853
Total interest expense 3,460,246 3,803,614 3,954,695 3,846,043
Net interest income 2,407,085 2,297,099 2,396,232 2,270,810
Provision for loan losses 90,000 90,000 90,000 90,000
Net interest income after provision for
loan losses 2,317,085 2,207,099 2,306,232 2,180,810
Loan fees and service charges 336,468 341,691 371,245 406,121
Gain on sale of:
Loans receivable, investment securities and
mortgage backed securities 23,173 59,468 101,184 113,221
Income (Loss) from real estate developments (52,605) 147,578 (68,374) (80,272)
REO Operations -- -- -- 115,573
Other noninterest operating income 33,002 38,411 39,840 18,117
Noninterest operating expense 2,174,191 2,289,044 2,304,124 2,236,921
Income before income taxes 482,932 505,203 446,003 516,649
Income taxes 180,550 193,535 168,050 201,170
Net income 302,382 311,668 277,953 315,479
Earnings per share $ 0.26 $ 0.26 $ 0.23 $ 0.27
</TABLE>
F-36
<PAGE> 161
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
As computations for each quarter are independent, the sum of
earnings per share data for the quarters in each year may not equal earnings
per share for the year.
19. PARENT COMPANY FINANCIAL INFORMATION
The parent company only financial information as of and for the
years ended December 31, 1996, 1995, and 1994 is presented below and should
be read in conjunction with the other notes to the consolidated financial
statements.
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $ 28,504 $ 88,534 $ 118,085
Investments 11,544 11,159 10,804
Equity in net assets of HomeBanc 20,830,674 20,337,651 18,905,641
Total assets $20,870,722 $20,437,344 $19,034,530
Liabilities:
Other liabilities $ 12,466 $ 13,844 $ 5,175
Stockholders' equity:
Common stock 11,287 11,264 11,220
Additional paid-in capital 6,492,542 6,465,178 6,435,874
Retained earnings 14,332,532 13,973,701 12,766,219
Unrealized gain (loss) on securities
available for sale 21,895 (26,643) (184,498)
Total liabilities and stockholders' equity $20,870,722 $20,437,344 $19,034,530
STATEMENTS OF OPERATIONS
Equity in earnings of HomeBanc:
Income before cumulative effect of
change in accounting principle $ 444,484 $ 1,274,155 $ 684,600
Cumulative effect of change in
accounting principle -- -- (4,340,424)
Interest income 385 355 513
Other income (expense), net (140,893) (109,673) (122,466)
Income before income taxes 303,976 1,164,837 (3,777,777)
Income tax expense (benefit) (54,855) (42,645) 65,400
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
F-37
<PAGE> 162
<CAPTION>
HOMECORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Deduct (add) equity in earnings of HomeBanc
not providing (using) funds (444,484) (1,274,155) 3,655,825
Net increase (decrease) in other liabilities (1,379) 8,129 13,280
Net decrease in other assets -- -- 45,448
Net cash provided (used) by operations (87,032) (58,544) 2,176
Purchase of investment security (385) (355) (216)
Net cash used by investing activities (385) (355) (216)
Exercise of stock options 27,387 29,348 --
Net cash provided by financing activities 27,387 29,348 --
Net increase (decrease) in cash (60,030) (29,551) 1,960
Cash and cash equivalents, beginning of year 88,534 118,085 116,125
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
HomeCorp entered into a merger agreement with MBI on October 29,
1997. The merger is structured as a tax-free exchange with HomeCorp
stockholders receiving 0.4968 shares of MBI Common Stock for each share of
HomeCorp Common Stock. The merger is subject to certain conditions including
the approval of HomeCorp stockholders and all appropriate regulatory
authorities.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of HomeCorp and
its subsidiary at September 30, 1997 and the results of operations and cash
flows for the nine month periods ended September 30, 1997 and 1996.
F-38
<PAGE> 163
Annex A
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
MERCANTILE BANCORPORATION INC.,
a Missouri corporation
and
AMERIBANC, INC.,
a Missouri corporation
and
HOMECORP, INC.,
a Delaware corporation
-------------------------------------------------
October 29, 1997
- -------------------------------------------------------------------------------
A-1
<PAGE> 164
AGREEMENT AND PLAN OF MERGER
----------------------------
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), made and entered
into as of October 29, 1997 by and among Mercantile Bancorporation Inc., a
Missouri corporation ("Mercantile"), Ameribanc, Inc., a Missouri corporation
("Merger Sub" and, collectively, with Mercantile, the "Buyers"), and
Homecorp, Inc., a Delaware corporation ("Seller").
WHEREAS, Merger Sub is a wholly owned subsidiary of Mercantile, and
each of Mercantile and Merger Sub is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the "BHCA"); and
WHEREAS, Seller is registered as a savings and loan holding company
under the Home Owners' Loan Act of 1933, as amended (the "HOLA"); and
WHEREAS, the respective Boards of Directors of Seller and Merger Sub
have approved the merger (the "Merger") of Seller with and into Merger Sub
pursuant to the terms and subject to the conditions contained in this
Agreement; and
WHEREAS, the parties desire to provide certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated by this Agreement.
NOW THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties
agree as follows:
ARTICLE I
THE MERGER
1.01 The Merger. Subject to the terms and conditions of this
----------
Agreement, Seller shall be merged with and into Merger Sub in accordance with
Chapter 351 of the Missouri Revised Statutes (the "Missouri Statute") and the
provisions of the Delaware General Corporation Law (the "DGCL"), and the
separate corporate existence of Seller shall cease. Merger Sub shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Missouri.
1.02 Closing. The closing (the "Closing") of the Merger, unless the
-------
parties hereto shall otherwise mutually agree, shall take place at the
offices of Mercantile in St. Louis, Missouri, at 10:00 am, local time, on the
date that the Effective Time (as defined in Section 1.03) occurs (the
"Closing Date").
1.03 Effective Time. The Merger shall become effective (the
--------------
"Effective Time") upon the later of (i) the issuance of a Certificate of
Merger by the Office of the Secretary of State of the State of Missouri and
(ii) the filing of a Certificate of Merger with the Office of the Secretary
of State of the State of Delaware. Unless otherwise mutually agreed in
writing by Buyers and Seller, subject to the terms and conditions of this
Agreement, the Effective Time shall occur on such date as Buyers shall
A-2
<PAGE> 165
notify Seller in writing (such notice to be at least five business days in
advance of the Effective Time) but (i) not earlier than the satisfaction of all
conditions set forth in Section 6.01(a) and 6.01(b) (the "Approval Date") and
(ii) not later than the first business day of the first full calendar month
commencing at least five business days after the Approval Date. On the
Closing Date, the parties hereto will cause the Merger to be consummated by
delivering to the Secretary of State of the State of Missouri and the
Secretary of State of the State of Delaware, for filing, Articles of Merger
and a Certificate of Merger, respectively, in such form as required by, and
executed and acknowledged in accordance with, the relevant provisions of the
Missouri Statute and the DGCL.
1.04 Additional Actions. If, at any time after the Effective Time,
------------------
the Surviving Corporation shall consider or be advised that any further
deeds, assignments or assurances in law or any other acts are necessary or
desirable to (a) vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of Seller or Merger Sub, or (b) otherwise carry
out the purposes of this Agreement, Seller and its officers and directors
shall be deemed to have granted to the Surviving Corporation an irrevocable
power of attorney to execute and deliver all such deeds, assignments or
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Surviving Corporation and otherwise to carry out the purposes of this
Agreement, and the officers and directors of the Surviving Corporation are
authorized in the name of Seller or otherwise to take any and all such
action.
1.05 Articles of Incorporation and By-Laws. The Articles of
-------------------------------------
Incorporation and By-Laws of Merger Sub in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and By-Laws of the
Surviving Corporation following the Merger, unless otherwise repealed or
amended.
1.06 Board of Directors and Officers. At the Effective Time, the
-------------------------------
directors and officers of Merger Sub immediately prior to the Effective Time
shall be the directors and officers, respectively, of the Surviving
Corporation following the Merger, and such directors and officers shall hold
office in accordance with the Surviving Corporation's By-Laws and applicable
law.
1.07 Conversion of Securities. At the Effective Time, by virtue of
------------------------
the Merger and without any action on the part of the Buyers, Seller or the
holder of any of the following securities:
(a) Each share of the common stock, $1.00 par value, of Merger
Sub that is issued and outstanding immediately prior to the Effective
Time shall remain outstanding and shall be unchanged after the Merger
and shall thereafter constitute all of the issued and outstanding
capital stock of the Surviving Corporation; and
(b) Subject to Sections 1.10 and 1.11 hereof, each share of
common stock, $0.01 par value, of Seller ("Seller Common Stock") issued
and outstanding immediately prior to the Effective Time (other than any
shares held by Seller, Mercantile or any of their respective
Subsidiaries (as defined in Section 2.02 hereof) (in each case other
than in a fiduciary capacity or as a result of debts previously
contracted), which shall be canceled), shall cease to be outstanding
and shall be converted into and become the right to receive 0.4968 of a
share (the "Exchange Ratio") of common stock, $0.01 par value, and the
associated "Rights" under the "Rights Agreement," as those terms are
defined in Section 3.02 hereof, of Mercantile (collectively,
"Mercantile Common Stock"). The
A-3
<PAGE> 166
Exchange Ratio was computed by (i) aggregating (A) the total number of
shares of Seller Common Stock that were issued and outstanding on the date
of this Agreement (as set forth in Section 2.03 hereof) with (B) the total
number of shares of Seller Common Stock that are reserved for issuance
pursuant to options relating to Seller Common Stock and outstanding as of
October 3, 1997 (as set forth in Section 2.03 hereof) and dividing such
number of shares of Seller Common Stock (computed by aggregating (A) and
(B) hereof (the "Fully Diluted Shares")) into (ii) 951,380, the aggregate
number of shares of Mercantile Common Stock to be issued in the Merger.
For purposes of this Agreement, the Exchange Ratio reflects the payment
of the three-for-two Mercantile Common Stock dividend that was paid on
October 1, 1997 to shareholders of record of Mercantile as of September
10, 1997 (the "Stock Dividend").
1.08 Exchange Procedures.
-------------------
(a) As soon as practicable following the Effective Time,
Mercantile shall mail or cause to be mailed to holders of record of
certificates formerly representing shares of Seller Common Stock (the
"Certificates"), as identified on the Seller Stockholder List (as
provided pursuant to Section 1.10 hereof), letters advising them of the
effectiveness of the Merger and instructing them to tender such
Certificates to Mercantile or its duly appointed agent as exchange
agent (the "Exchange Agent"), or in lieu thereof, such evidence of
lost, stolen or mutilated Certificates and such surety bond or other
security as the Exchange Agent may reasonably require (the "Required
Documentation").
(b) Subject to Section 1.10 hereof, after the Effective Time,
each previous holder of a Certificate that surrenders such Certificate
or in lieu thereof, the Required Documentation, to the Exchange Agent,
with a properly completed and executed letter of transmittal with
respect to such Certificate, will be entitled to a certificate or
certificates representing the number of full shares of Mercantile
Common Stock into which the Certificate so surrendered shall have been
converted pursuant to this Agreement, and any distribution theretofore
declared and not yet paid with respect to such shares of Mercantile
Common Stock and any amount due with respect to fractional shares,
without interest (the "Merger Consideration"). Such shares of
Mercantile Common Stock, any amount due with respect to fractional
shares and any distribution shall be delivered by the Exchange Agent to
each such holder as promptly as practicable after such surrender.
(c) Each outstanding Certificate, until duly surrendered to the
Exchange Agent, shall be deemed to evidence ownership of the Merger
Consideration into which the stock previously represented by such
Certificate shall have been converted pursuant to this Agreement.
(d) After the Effective Time, holders of Certificates shall
cease to have rights with respect to the stock previously represented
by such Certificates, and their sole rights shall be to exchange such
Certificates for the Merger Consideration and any shares of Mercantile
Common Stock to which the stockholder may be entitled pursuant to the
provisions of Section 1.07 hereof. After the closing of the transfer
books as described in Section 1.10 hereof, there shall be no further
transfer on the records of Seller of Certificates, and if such
Certificates are presented to Seller for transfer, they shall be
canceled against delivery of the Merger Consideration. Neither Buyers
nor the
A-4
<PAGE> 167
Exchange Agent shall be obligated to deliver the Merger Consideration
until such holder surrenders the Certificates or furnishes the Required
Documentation as provided herein. No dividends or distributions declared
after the Effective Time (including any redemption by Mercantile of the
Rights associated therewith) on the Mercantile Common Stock will be
remitted to any person entitled to receive Mercantile Common Stock under
this Agreement until such person surrenders the Certificate representing
the right to receive such Mercantile Common Stock or furnishes the
Required Documentation, at which time such dividends or declarations shall
be remitted to such person, without interest and less any taxes that may
have been imposed thereon. Certificates surrendered for exchange by an
affiliate shall not be exchanged until Buyers have received a written
agreement from such affiliate as required pursuant to Section 5.07 hereof.
Neither the Exchange Agent nor any party to this Agreement nor any
affiliate thereof shall be liable to any holder of stock represented by
any Certificate for any Merger Consideration issuable or payable in the
Merger that is paid to a public official pursuant to applicable
abandoned property, escheat or similar laws.
1.09 No Fractional Shares. Notwithstanding any other provision of
--------------------
this Agreement, neither certificates nor scrip for fractional shares of
Mercantile Common Stock shall be issued in the Merger. Each holder of shares
of Seller Common Stock who otherwise would have been entitled to a fraction
of a share of Mercantile Common Stock shall receive (by check from the
Exchange Agent, mailed to the stockholder with the certificate(s) for
Mercantile Common Stock which such holder is to receive pursuant to the
Merger) in lieu thereof, and at the time such holder receives the shares of
Mercantile Common Stock to which the holder is entitled, cash (without
interest) in an amount determined by multiplying the fractional share
interest to which such holder would otherwise be entitled by the closing
stock price of Mercantile Common Stock on the New York Stock Exchange (the
"NYSE") Composite Tape as reported in The Wall Street Journal on the Closing
Date. No such holder shall be entitled to dividends, voting rights or any
other rights in respect of any fractional share.
1.10 Closing of Stock Transfer Books.
-------------------------------
(a) The stock transfer books of Seller shall be closed at the
end of business on the business day immediately preceding the Closing
Date. In the event of a transfer of ownership of Seller Common Stock
that is not registered in the transfer records prior to the closing of
such record books, the Merger Consideration issuable or payable with
respect to such stock may be delivered to the transferee, if the
Certificate or Certificates representing such stock is presented to the
Exchange Agent accompanied by all documents required to evidence and
effect such transfer and all applicable stock transfer taxes are paid.
(b) At the Effective Time, Seller shall provide Buyers with a
complete and verified list of registered holders of Seller Common Stock
based upon its stock transfer books as of the closing of said transfer
books, including the names, addresses, certificate numbers and taxpayer
identification numbers of such holders (the "Seller Stockholder List").
Buyers shall be entitled to rely upon the Seller Stockholder List to
establish the identity of those persons entitled to receive the Merger
Consideration, which list shall be conclusive with respect thereto. In
the event of a dispute with respect to ownership of stock represented
by any Certificate, Buyers shall be entitled to deposit any Merger
A-5
<PAGE> 168
Consideration represented thereby in escrow with an independent third
party and thereafter be relieved with respect to any claims thereto.
1.11 Anti-Dilution. If between the date of this Agreement and the
-------------
Effective Time a share of Mercantile Common Stock shall be changed into a
different number of shares of Mercantile Common Stock or a different class of
shares by reason of reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment, or if a stock dividend
thereon shall be declared with a record date within such period, then
appropriate and proportionate adjustment or adjustments will be made to the
Exchange Ratio such that each stockholder of Seller shall be entitled to
receive such number of shares of Mercantile Common Stock or other securities
as such stockholder would have received pursuant to such reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment
or as a result of such stock dividend had the record date therefor been
immediately following the Effective Time.
1.12 Reservation of Right to Revise Transaction. Buyers may at any
------------------------------------------
time change the method of effecting the acquisition of Seller by Buyers
(including, without limitation, the provisions of this Article I) if and to
the extent Buyers deem such change to be desirable, including, without
limitation, to provide for (i) a merger of Merger Sub with and into Seller,
in which Seller is the surviving corporation, or (ii) a merger of Seller
directly into Mercantile, in which Mercantile is the surviving corporation;
provided, however, that no such change shall (A) alter or change the amount
or kind of the consideration to be received by the stockholders of Seller in
the Merger, (B) adversely affect the tax treatment to Seller stockholders, as
generally described in Section 6.01(e) hereof, (C) materially impede or delay
receipt of any approvals, referred to in Section 6.01(b) or the consummation
of the transactions contemplated by this Agreement or (D) prevent or impede
the transactions contemplated hereby from qualifying for pooling-of-interests
accounting treatment unless Buyers first waive Seller's covenants set forth
in Sections 5.02(b) and 5.16 hereof and the condition to Buyers' obligation
to consummate the Merger set forth in Section 6.03(f) hereof.
1.13 Material Adverse Effect. As used in this Agreement, the term
-----------------------
"Material Adverse Effect" with respect to an entity means any condition,
event, change or occurrence that has or may reasonably be expected to have a
material adverse effect on the condition (financial or otherwise),
properties, business or results of operations, of such entity and its
Subsidiaries, taken as a whole as reflected in the Seller Financial
Statements (as defined in Section 2.05(b)) or the Mercantile Financial
Statements (as defined in Section 3.04), as the case may be; it being
understood that a Material Adverse Effect shall not include: (i) a change
with respect to, or effect on, such entity and its Subsidiaries resulting
from a change in law, rule, regulation, generally accepted accounting
principles or regulatory accounting principles; (ii) a change with respect
to, or effect on, such entity and its Subsidiaries resulting from any other
matter affecting depository institutions generally including, without
limitation, changes in general economic conditions and changes in prevailing
interest and deposit rates; (iii) in the case of Seller, any financial change
resulting from adjustments taken pursuant to Section 5.05 hereof; (iv) a
change disclosed in the Seller Financial Statements or the Mercantile
Financial Statements, as the case may be; or (v) any charges taken by
Mercantile in connection with pending or completed acquisitions or the
disposition of certain businesses or lines of business.
A-6
<PAGE> 169
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to the Buyers as follows:
2.01 Organization and Authority. Seller is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the State
of Delaware, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of
its business requires it to be so qualified, except where the failure of
Seller to so qualify would not have a Material Adverse Effect on Seller and
the Seller Subsidiaries, taken as a whole, and has the corporate power and
authority to own its properties and assets and to carry on its business as it
is now being conducted. Seller is registered as a savings and loan holding
company with the Office of Thrift Supervision (the "OTS") under the HOLA.
True and complete copies of the Certificate of Incorporation and By-Laws of
Seller and the Charter and By-Laws of HomeBanc, a federal savings bank, a
wholly owned subsidiary of Seller ("HomeBanc"), each as in effect on the date
of this Agreement, are attached hereto as Schedule 2.01. Also attached
-------------
hereto as Schedule 2.01 are true and complete lists of the stockholders of
-------------
record of each of the Seller and HomeBanc (including directors' qualifying
shares), as of a record date for the most recent annual meeting of Seller.
2.02 Subsidiaries.
------------
(a) Schedule 2.02 sets forth, a complete and correct list of
-------------
all of Seller's "Subsidiaries" (as defined in Rule 1-02 of Regulation
S-X promulgated by the Securities and Exchange Commission (the "SEC");
each a "Seller Subsidiary" and, collectively, the "Seller
Subsidiaries"), and all outstanding Equity Securities (as defined in
Section 2.03) of each, all of which are owned directly or indirectly by
Seller. Except as disclosed in Schedule 2.02, all of the outstanding
-------------
shares of capital stock of the Seller Subsidiaries owned directly or
indirectly by Seller are validly issued, fully paid and nonassessable
and are owned free and clear of any lien, claim, charge, option,
encumbrance, agreement, mortgage, pledge, security interest or
restriction (a "Lien") with respect thereto. Each of the Seller
Subsidiaries is a corporation or savings bank duly incorporated or
organized and validly existing under the laws of its jurisdiction of
incorporation or organization, and has corporate power and authority to
own or lease its properties and assets and to carry on its business as
it is now being conducted. Each of the Seller Subsidiaries is duly
qualified to do business in each jurisdiction where its ownership or
leasing of property or the conduct of its business requires it so to be
qualified, except where the failure to so qualify would not have a
Material Adverse Effect on Seller and the Seller Subsidiaries, taken as
a whole. Except as set forth in Schedule 2.02, neither Seller nor any
-------------
Seller Subsidiary owns beneficially, directly or indirectly, any shares
of any class of Equity Securities or similar interests of any
corporation, bank, business trust, association or organization, or any
interest in a partnership or joint venture of any kind, other than
those identified as Seller Subsidiaries in Schedule 2.02 hereof.
-------------
(b) HomeBanc is a federal savings association duly organized
and validly existing under the laws of the United States of America.
The deposits of HomeBanc are insured by the Federal Deposit Insurance
Corporation (the "FDIC") under the Federal Deposit Insurance Act of
1950, as amended (the "FDI Act").
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2.03 Capitalization. The authorized capital stock of Seller consists
--------------
of (i) 5,000,000 shares of Seller Common Stock, of which, as of October 3,
1997, 1,708,552 shares were issued and outstanding and (ii) 1,000,000 shares
of preferred stock, $0.01 par value, of which, as of September 30, 1997, no
shares were outstanding. As of September 30, 1997, Seller had reserved
270,654 shares of Seller Common Stock for issuance under Seller's stock
option and incentive plans (including grants reflected in the Board minutes),
a list of which is set forth on Schedule 2.03 (the "Seller Stock Plans"),
-------------
pursuant to which options ("Seller Employee Stock Options") covering 206,384
shares of Seller Common Stock were outstanding as of October 3, 1997. Since
October 3, 1997, no equity securities of Seller have been issued, other than
shares of Seller Common Stock which may have been issued upon the exercise of
Seller Stock Options. "Equity Securities" of an issuer means capital stock
or other equity securities of such issuer, options, warrants, scrip, rights
to subscribe to, calls or commitments of any character whatsoever relating
to, or securities or rights convertible into, shares of any capital stock or
other equity securities of such issuer, or contracts, commitments,
understandings or arrangements by which such issuer is or may become bound
to issue additional shares of its capital stock or other equity securities of
such issuer, or options, warrants, scrip or rights to purchase, acquire,
subscribe to, calls on or commitments for any shares of its capital stock or
other equity securities. Except as set forth above, there are no other
Equity Securities of Seller outstanding. All of the issued and outstanding
shares of Seller Common Stock are validly issued, fully paid and
nonassessable, and have not been issued in violation of any preemptive right
of any stockholder of Seller. Neither Seller nor any Seller Subsidiary has
taken or agreed to take any action or has any knowledge of any fact or
circumstance and neither Seller nor any Seller Subsidiary will take any
action that would prevent the Merger from qualifying for pooling-of-interests
accounting treatment.
2.04 Authorization.
-------------
(a) Seller has the corporate power and authority to enter into
this Agreement and, subject to the approval of this Agreement by the
stockholders of Seller and Regulatory Authorities (as defined in
Section 2.06), to carry out its obligations hereunder. The only
stockholder vote required for Seller to approve this Agreement is the
affirmative vote of the holders of a majority of the outstanding shares
of Seller Common Stock entitled to vote at a meeting called for such
purpose. The execution, delivery and performance of this Agreement by
Seller and the consummation by Seller of the transactions contemplated
hereby in accordance with and subject to the terms of this Agreement
have been duly authorized by the Board of Directors of Seller. Subject
to the approval of Seller's stockholders and subject to the receipt of
such approvals of the Regulatory Authorities as may be required by
statute or regulation, this Agreement is a valid and binding obligation
of Seller enforceable against Seller in accordance with its terms.
(b) Except as disclosed on Schedule 2.04(b), neither the
----------------
execution nor delivery nor performance by Seller of this Agreement, nor
the consummation by Seller of the transactions contemplated hereby, nor
compliance by Seller with any of the provisions hereof, will (i)
violate, conflict with, or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in
a right of termination or acceleration of, or result in the creation
of, any Lien upon any of the properties or assets of Seller or any of
the Seller
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Subsidiaries under any of the terms, conditions or provisions of (x) its
Certificate of Incorporation, charter or By-Laws or (y) any material note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Seller or any of the Seller
Subsidiaries is a party or by which it may be bound, or to which Seller or
any of the Seller Subsidiaries or any of the properties or assets of
Seller or any of the Seller Subsidiaries may be subject, or (ii) subject
to compliance with the statutes and regulations referred to in subsection
(c) of this Section 2.04 violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Seller or
any of the Seller Subsidiaries or any of their respective properties or
assets.
(c) Other than in connection or in compliance with the
provisions of the Missouri Statute, the DGCL, the Securities Act of
1933, as amended, and the rules and regulations thereunder (the
"Securities Act"), the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (the "Exchange Act"), the
securities or blue sky laws of the various states or filings, consents,
reviews, authorizations, approvals or exemptions required under the
BHCA, or any required approvals of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the OTS or other
governmental agencies or governing boards having regulatory authority
over Seller or any Seller Subsidiary, no notice to, filing with,
exemption or review by, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by Seller of
the transactions contemplated by this Agreement.
2.05 Seller Financial Statements.
---------------------------
(a) Attached hereto as Schedule 2.05(a) are copies of the
----------------
following documents: (i) Seller's Annual Report to Stockholders for
the year ended December 31, 1996; and (ii) Seller's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
(b) The financial statements contained in the documents
referenced in Schedule 2.05(a) are referred to collectively as the
----------------
"Seller Financial Statements." The Seller Financial Statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP") during the periods involved, and present fairly the
consolidated financial position of Seller and the Seller Subsidiaries
at the dates thereof and the consolidated results of operations,
changes in stockholders' equity and cash flows of Seller and the Seller
Subsidiaries for the periods stated therein.
(c) Seller and the Seller Subsidiaries have each prepared, kept
and maintained through the date hereof true, correct and complete
financial books and records which fairly reflect their respective
financial conditions, results of operations, changes in stockholders'
equity and cash flows.
2.06 Seller Reports. Except as set forth in Schedule 2.06, since
-------------- -------------
January 1, 1995, each of Seller and the Seller Subsidiaries has timely filed
all material reports, registrations and statements, together with any required
amendments thereto, that it was required to file with (i) the SEC, including,
but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy statements,
(ii) the OTS, (iii) the FDIC and (iv) any federal, state, municipal or local
government, securities, banking, savings and loan, environmental, insurance and
other governmental or regulatory
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authority, and the agencies and staffs thereof (the entities in
the foregoing clauses (i) through (iv) being referred to herein collectively
as the "Regulatory Authorities" and individually as a "Regulatory
Authority"), having jurisdiction over the affairs of it. All such material
reports and statements filed with any such Regulatory Authority are
collectively referred to herein as the "Seller Reports." As of each of their
respective dates, the Seller Reports complied in all material respects with
all the rules and regulations promulgated by the applicable Regulatory
Authority. With respect to Seller Reports filed with the Regulatory
Authorities, to the best knowledge of Seller, there is no material unresolved
violation, criticism or exception by any Regulatory Authority with respect to
any report or statement filed by, or any examinations of, Seller or any of
the Seller Subsidiaries.
2.07 Title to and Condition of Assets.
--------------------------------
(a) Except as may be reflected in the Seller Financial
Statements and with the exception of all "Real Property" (which is the
subject of Section 2.08 hereof) Seller and the Seller Subsidiaries
have, and at the Closing Date will have, good and marketable title to
their real and personal property, including, without limitation, those
reflected in the Seller Financial Statements (except those disposed of
in the ordinary course of business since the date thereof), free and
clear of any Lien, except for Liens for (i) taxes, assessments or other
governmental charges not yet delinquent and (ii) as set forth or
described in the Seller Financial Statements or any subsequent Seller
Financial Statements delivered to Buyers prior to the Effective Time.
(b) No material real or personal property that is reflected as
owned by Seller or any of the Seller Subsidiaries in the Seller
Financial Statements as of June 30, 1997, has been sold, leased,
transferred, assigned or otherwise disposed of since such date, except
in the ordinary course of business.
(c) All furniture, fixtures, vehicles, machinery and equipment
and computer software owned or used by Seller or the Seller
Subsidiaries and in regular use, including any such items leased as a
lessee (taken as a whole as to each of the foregoing with no single
item deemed to be of material importance) are in good and serviceable
condition, subject only to normal wear and tear. The operation by
Seller or the Seller Subsidiaries of such properties and assets is in
compliance in all material respects with all applicable laws,
ordinances and rules and regulations of any governmental authority
having jurisdiction over such use.
2.08 Real Property.
-------------
(a) A list of each parcel of real property owned by Seller or
any of the Seller Subsidiaries (other than real property acquired in
foreclosure or in lieu of foreclosure in the course of the collection
of loans and being held by Seller or a Seller Subsidiary for
disposition as required by law (such real property being herein
referred to as the "Owned Real Property") and each parcel of real
property leased by Seller or any of the Seller Subsidiaries (such real
property being herein referred to as the "Leased Real Property") is
attached to Schedule 2.08(a). In addition, a copy of the lease for
----------------
each parcel of Leased Real Property is attached to Schedule 2.08(a).
----------------
Seller shall update Schedule 2.08(a) within ten days of acquiring any
----------------
Owned Real Property or leasing any real property after
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the date hereof. Collectively, the Owned Real Property and the Leased Real
Property is herein referred to as the "Real Property."
(b) There is no pending action involving Seller or any of the
Seller Subsidiaries as to the title of or the right to use any of the
Real Property.
(c) Except as disclosed on Schedule 2.08(c), neither Seller nor
----------------
any of the Seller Subsidiaries has any interest in any real property
other than as described above in Section 2.08(a) except interests as a
mortgagee, and except for any real property acquired in foreclosure or
in lieu of foreclosure and being held for disposition as required by
law.
(d) None of the buildings, structures or other improvements
located on the Real Property encroaches upon or over any adjoining
parcel of real estate or any easement or right-of-way or "setback" line
and, to the best knowledge of Seller, all such buildings, structures
and improvements are located and constructed in conformity with all
applicable zoning ordinances and building codes.
(e) None of the buildings, structures or improvements located
on the Owned Real Property are the subject of any official complaint or
notice by any governmental authority of violation of any applicable
zoning ordinance or building code, and there is no zoning ordinance,
building code, use or occupancy restriction or condemnation action or
proceeding pending, or, to the best knowledge of Seller, threatened,
with respect to any such building, structure or improvement. The Owned
Real Property is in generally good condition for its intended purpose,
ordinary wear and tear excepted, and has been maintained in accordance
with reasonable and prudent business practices applicable to like
facilities.
(f) Except as may be reflected in the Seller Financial
Statements or with respect to such easements, Liens, defects or
encumbrances as do not individually or in the aggregate materially
adversely affect the use or value of the parcel of Owned Real Property,
Seller and the Seller Subsidiaries have, and at the Closing Date will
have, good and marketable title to their respective Owned Real
Properties.
(g) There are no underground storage tanks located on, in or
under any Owned Real Property. Neither Seller nor any Seller
Subsidiaries own or operate any underground storage tank at any Leased
Real Property.
2.09 Taxes. Seller and each Seller Subsidiary have timely filed or
-----
will timely file (including extensions) all tax returns required to be filed
at or prior to the Closing Date ("Seller Returns"). Each of Seller and the
Seller Subsidiaries has paid, or set up adequate reserves on the Seller
Financial Statements for the payment of, all taxes required to be paid in
respect of the periods covered by such Seller Returns and has set up adequate
reserves on the most recent Seller Financial Statements for the payment of
all taxes anticipated to be payable in respect of all periods up to and
including the latest period covered by such Seller Financial Statements.
Neither Seller nor any Seller Subsidiary has any material liability for any
such taxes in excess of the amounts so paid or reserves so established, and
no material deficiencies for any tax, assessment or governmental charge have
been proposed, asserted or assessed (tentatively or definitely) against
Seller or any of the Seller Subsidiaries which would not be
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covered by existing reserves. Neither Seller nor any of the Seller Subsidiaries
is delinquent in the payment of any material tax, assessment or governmental
charge, nor has it requested any extension of time within which to file any
tax returns in respect of any fiscal year which have not since been filed and
no requests for waivers of the time to assess any tax are pending. No
federal or state income tax return of Seller or any Seller Subsidiaries has
been audited by the Internal Revenue Service (the "IRS") or any state tax
authority for the seven most recent full calendar years. There is no
deficiency or refund litigation or, to the best knowledge of Seller, matter
in controversy with respect to Seller Returns. Neither Seller nor any of the
Seller Subsidiaries has extended or waived any statute of limitations on the
assessment of any tax due that is currently in effect.
2.10 Material Adverse Effect. Since June 30, 1997, there has been no
-----------------------
Material Adverse Effect on Seller and the Seller Subsidiaries, taken as a
whole.
2.11 Loans, Commitments and Contracts.
--------------------------------
(a) Schedule 2.11(a) contains a complete and accurate listing
----------------
as of the date hereof of all contracts entered into with respect to
deposits of $250,000 or more, by account, and all loan agreements and
commitments, notes, security agreements, repurchase agreements,
bankers' acceptances, outstanding letters of credit and commitments to
issue letters of credit, participation agreements, and other documents
relating to or involving extensions of credit and other commitments to
extend credit by Seller or any of the Seller Subsidiaries with respect
to any one entity or related group of entities in excess of $500,000 to
which Seller or any of the Seller Subsidiaries is a party or by which
it is bound, by account, and, where applicable, such other information
as shall be necessary to identify any related group of entities.
(b) Except for the contracts and agreements required to be
listed on Schedule 2.11(a) and the loans required to be listed on
----------------
Schedule 2.11(f), and except as otherwise listed on Schedule 2.11(b),
---------------- ----------------
as of the date hereof neither Seller nor any of the Seller Subsidiaries
is a party to or is bound by any:
(i) agreement, contract, arrangement, understanding or
commitment with any labor union;
(ii) franchise or license agreement;
(iii) written employment, severance, termination pay,
agency, consulting or similar agreement or commitment in respect
of personal services;
(iv) material agreement, arrangement or commitment (A)
not made in the ordinary course of business, and (B) pursuant to
which Seller or any of the Seller Subsidiaries is or may become
obligated to invest in or contribute to any Seller Subsidiary
other than pursuant to Seller Employee Plans (as that term is
defined in Section 2.19 hereof) and agreements relating to joint
ventures or partnerships set forth in Schedule 2.02, true and
-------------
complete copies of which have been furnished to Buyers;
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<PAGE> 175
(v) agreement, indenture or other instrument not
disclosed in the Seller Financial Statements relating to the
borrowing of money by Seller or any of the Seller Subsidiaries or
the guarantee by Seller or any of the Seller Subsidiaries of any
such obligation (other than trade payables or instruments related
to transactions entered into in the ordinary course of business
by Seller or any of the Seller Subsidiaries, such as deposits,
Federal Home Loan Bank ("FHLB") and Federal Funds borrowings and
repurchase and reverse repurchase agreements), other than such
agreements, indentures or instruments providing for annual
payments of less than $50,000;
(vi) contract containing covenants which limit the
ability of Seller or any of the Seller Subsidiaries to compete in
any line of business or with any person or which involves any
restrictions on the geographical area in which, or method by
which, Seller or any of the Seller Subsidiaries may carry on
their respective businesses (other that as may be required by law
or any applicable Regulatory Authority);
(vii) contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K as
promulgated by the SEC to be performed after the date of this
Agreement that has not been filed or incorporated by reference in
the Seller Reports;
(viii) lease with annual rental payments aggregating
$25,000 or more;
(ix) loans or other obligations payable or owing to any
officer, director or employee except (A) salaries, wages and
directors' fees or other compensation incurred and accrued in the
ordinary course of business and (B) obligations due in respect of
any depository accounts maintained by any of the foregoing at
Seller or any of the Seller Subsidiaries in the ordinary course
of business; or
(x) other agreement, contract, arrangement,
understanding or commitment involving an obligation by Seller or
any of the Seller Subsidiaries of more than $100,000 and
extending beyond six months from the date hereof that cannot be
canceled without cost or penalty upon notice of 30 days or less,
other than contracts entered into in respect of deposits, loan
agreements and commitments, notes, security agreements,
repurchase and reverse repurchase agreements, bankers'
acceptances, outstanding letters of credit and commitments to
issue letters of credit, participation agreements and other
documents relating to transactions entered into by Seller or any
of the Seller Subsidiaries in the ordinary course of business and
not involving extensions of credit with respect to any one entity
or related group of entities in excess of $100,000.
(c) Seller and/or the Seller Subsidiaries carry property,
liability, director and officer errors and omissions, and other
insurance coverage as set forth in Schedule 2.11(c) under the heading
----------------
"Insurance."
(d) True, correct and complete copies of the agreements,
contracts, leases, insurance policies and other documents referred to
in Section 2.11(b) have been included
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<PAGE> 176
with Schedule 2.11(b) hereto. True, correct and complete copies of the
----------------
agreements, contracts, leases, insurance policies and other documents
referred to in Sections 2.11(a) and (c) have been or shall be furnished or
------------------------
made available to Buyers.
(e) To the best knowledge of Seller, each of the agreements,
contracts, leases, insurance policies and other documents referred to
in Schedules 2.11 (a), (b) and (c) is a valid, binding and enforceable
-------------------------------
obligation of the parties sought to be bound thereby, except as the
enforceability thereof against the parties thereto may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws now
or hereafter in effect relating to the enforcement of creditors' rights
generally, and except that equitable principles may limit the right to
obtain specific performance or other equitable remedies.
(f) Schedule 2.11(f) under the heading "Loans" contains a true,
----------------
correct and complete listing, as of the date of this Agreement, by
account, of (i) all loans in excess of $100,000 of Seller or any of the
Seller Subsidiaries that have been accelerated during the past twelve
months; (ii) all loan commitments or lines of credit of Seller or any
of the Seller Subsidiaries in excess of $100,000 which have been
terminated by Seller or any of the Seller Subsidiaries during the past
twelve months by reason of default or adverse developments in the
condition of the borrower or other events or circumstances affecting
the credit of the borrower; (iii) all loans, lines of credit and loan
commitments in excess of $100,000, as to which Seller or any of the
Seller Subsidiaries has given written notice of its intent to terminate
during the past twelve months; (iv) with respect to all commercial
loans (including commercial real estate) in excess of $100,000 all
notification letters and other written communications from Seller or
any of the Seller Subsidiaries to any of their respective borrowers,
customers or other parties during the past twelve months wherein Seller
or any of the Seller Subsidiaries has requested or demanded that
actions be taken to correct existing defaults or facts or circum-
stances which may become defaults; (v) each borrower, customer or other
party which has notified Seller or any of the Seller Subsidiaries
during the past twelve months of, or has asserted against Seller or any
of the Seller Subsidiaries, in each case in writing, any "lender
liability" or similar claim, and, to the best knowledge of Seller, each
borrower, customer or other party which has given Seller or any of the
Seller Subsidiaries any oral notification of, or orally asserted to or
against Seller or any of the Seller Subsidiaries, any such claim; or
(vi) all loans in excess of $50,000 (A) that are contractually past due
90 days or more in the payment of principal and/or interest, (B) that
are on non-accrual status, (C) that have been classified "doubtful,"
"loss" or the equivalent thereof by any Regulatory Authority, (D) where
a reasonable doubt exists as to the timely future collectibility of
principal and/or interest, whether or not interest is still accruing or
the loan is less than 90 days past due, (E) the interest rate terms
have been reduced and/or the maturity dates have been extended
subsequent to the agreement under which the loan was originally created
due to concerns regarding the borrower's ability to pay in accordance
with such initial terms, or (F) where a specific reserve allocation
exists in connection therewith.
2.12 Absence of Defaults. Neither Seller nor any of the Seller
-------------------
Subsidiaries is in violation of its charter documents or By-Laws or in
default under any material agreement, commitment, arrangement, lease,
insurance policy or other instrument, whether entered into in the ordinary
course of
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<PAGE> 177
business or otherwise and whether written or oral, and there has not occurred
any event that, with the lapse of time or giving of notice or both, would
constitute such a default.
2.13 Litigation and Other Proceedings. Except as set forth on
--------------------------------
Schedule 2.13 or otherwise disclosed in the Seller Financial Statements,
- -------------
neither Seller nor any of the Seller Subsidiaries is a party to any pending
or, to the best knowledge of Seller, threatened claim, action, suit,
investigation or proceeding, or is subject to any order, judgment or decree,
except for matters which, in the aggregate, will not have, or reasonably
could not be expected to have, a Material Adverse Effect on Seller and the
Seller Subsidiaries, taken as a whole. Without limiting the generality of
the foregoing, there are no actions, suits or proceedings pending or, to the
best knowledge of Seller, threatened against Seller or any of the Seller
Subsidiaries or any of their respective officers or directors by any
stockholder of Seller or any of the Seller Subsidiaries (or any former
stockholder of Seller or any of the Seller Subsidiaries) or involving claims
under the Community Reinvestment Act of 1977, as amended, the Bank Secrecy
Act, the fair lending laws or any other similar laws.
2.14 Directors' and Officers' Insurance. Each of Seller and the
----------------------------------
Seller Subsidiaries has taken or will take all requisite action (including,
without limitation, the making of claims and the giving of notices) pursuant
to its directors' and officers' liability insurance policy or policies in
order to preserve all rights thereunder with respect to all matters (other
than matters arising in connection with this Agreement and the transactions
contemplated hereby) occurring prior to the Effective Time that are known to
Seller.
2.15 Compliance with Laws.
--------------------
(a) To the best knowledge of Seller, Seller and each of the
Seller Subsidiaries have all permits, licenses, authorizations, orders
and approvals of, and have made all filings, applications and
registrations with, all Regulatory Authorities that are required in
order to permit them to own or lease their respective properties and
assets and to carry on their respective businesses as presently
conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and, to the best
knowledge of Seller, no suspension or cancellation of any of them is
threatened; and all such filings, applications and registrations are
current; in each case except for permits, licenses, authorizations,
orders, approvals, filings, applications and registrations the failure
to have (or have made) would not have a Material Adverse Effect on
Seller and the Seller Subsidiaries, taken as a whole.
(b) (i) Each of Seller and the Seller Subsidiaries has
complied with all laws, regulations and orders (including, without
limitation, zoning ordinances, building codes, the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and securities, tax,
environmental, civil rights, and occupational health and safety laws
and regulations including, without limitation, in the case of Seller or
any Seller Subsidiary that is a bank or savings association, banking
organization, banking corporation or trust company, all statutes,
rules, regulations and policy statements pertaining to the conduct of a
banking, deposit-taking, lending or related business, or to the
exercise of trust powers) and governing instruments applicable to it
and to the conduct of its business, and (ii) neither Seller nor any of
the Seller Subsidiaries is in default under, and no event has occurred
which, with the lapse of time or notice or both, could result in the
default under, the terms of any judgment, order, writ, decree, permit,
or license of any
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<PAGE> 178
Regulatory Authority or court, whether federal, state, municipal or local,
and whether at law or in equity, except in the case of subparts (i) and
(ii) where such failure to comply or default would not have a Material
Adverse Effect on Seller and the Seller Subsidiaries, taken as a whole.
(c) Except as set forth on Schedule 2.15, neither Seller nor
-------------
any of the Seller Subsidiaries is subject to or reasonably likely to
incur a liability as a result of its ownership, operation, or use of
any Property (as defined below) of Seller (whether directly or, to the
best knowledge of Seller, as a consequence of such Property being
acquired in foreclosure or in lieu of foreclosure or being part of the
investment portfolio of Seller or any of the Seller Subsidiaries) (A)
that is contaminated by or contains any hazardous, toxic or dangerous
substance, pollutant, waste, gas or material, including, without
limitation, petroleum and petroleum products, asbestos, PCBs,
pesticides, herbicides and any other metals, liquids, semi-solids or
solids that are regulated under any federal, state or local statute,
ordinance, rule, regulation or other law pertaining to environmental
protection, contamination, quality, waste management or clean-up (each,
a "Toxic Substance"), or (B) on which any Toxic Substance has been
stored, disposed of, placed or used at the Property or in the
construction of structures thereon; and which, in each case, reasonably
could be expected to have a Material Adverse Effect on Seller and the
Seller Subsidiaries, taken as a whole. "Property" shall include all
property (real or personal, tangible or intangible) owned or controlled
by Seller or any of the Seller Subsidiaries, including, without
limitation, property acquired under foreclosure or in lieu of
foreclosure, property in which any venture capital or similar unit of
Seller or any of the Seller Subsidiaries has an interest and, to the
best knowledge of Seller, property held by Seller or any of the Seller
Subsidiaries in its capacity as a trustee. No claim, action, suit or
proceeding is pending and no material claim has been asserted against
Seller or any of the Seller Subsidiaries relating to Property of
Seller or any of the Seller Subsidiaries and, to the best knowledge of
the Seller, no such claim, action, suit or proceeding has been
threatened before any court or other Regulatory Authority or
arbitration tribunal relating to Toxic Substances, pollution or the
environment, and there is no outstanding judgment, order, writ,
injunction, decree or award against or affecting Seller or any of the
Seller Subsidiaries with respect to the same. Except for statutory or
regulatory restrictions of general application, no Regulatory Authority
has placed any restriction on the business of Seller or any of the
Seller Subsidiaries which reasonably could be expected to have a
Material Adverse Effect on Seller and the Seller Subsidiaries, taken as
a whole.
(d) Neither Seller nor any of the Seller Subsidiaries has
received any notification or communication that has not been finally
resolved from any Regulatory Authority (i) asserting that the Seller or
any of the Seller Subsidiaries or any Property is not in substantial
compliance with any of the statutes, regulations or ordinances that
such Regulatory Authority enforces, except with respect to matters
which (A) are disclosed on Schedule 2.15 or (B) reasonably could not be
-------------
expected to have a Material Adverse Effect on the Seller and the Seller
Subsidiaries, taken as a whole, (ii) threatening to revoke any license,
franchise, permit or governmental authorization that reasonably could
be expected to have a Material Adverse Effect on the Seller and the
Seller Subsidiaries, taken as a whole, including, without limitation,
such company's status as an insured depository institution under the
Federal Deposit Insurance Act, as amended (the "FDI
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Act"), (iii) requiring or threatening to require Seller or any of the
Seller Subsidiaries, or indicating that Seller or any of the Seller
Subsidiaries may be required, to enter into a cease and desist order,
agreement or memorandum of understanding or any other agreement
restricting or limiting or purporting to direct, restrict or limit in
any manner the operations of Seller or any of the Seller Subsidiaries,
including, without limitation, any restriction on the payment of
dividends. No such cease and desist order, agreement or memorandum of
understanding or other agreement is currently in effect.
(e) Neither Seller nor any of the Seller Subsidiaries is
required by Section 32 of the FDI Act to give prior notice to any
federal banking agency of the proposed addition of an individual to its
board of directors or the employment of an individual as a senior
executive officer.
2.16 Labor. No work stoppage involving Seller or any of the Seller
-----
Subsidiaries is pending or, to the best knowledge of Seller, threatened.
Neither Seller nor any of the Seller Subsidiaries is involved in, or, to the
best knowledge of Seller, threatened with or affected by, any labor dispute,
arbitration, lawsuit or administrative proceeding that reasonably could be
expected to have a Material Adverse Effect on the Seller and the Seller
Subsidiaries, taken as a whole. None of the employees of Seller or the
Seller Subsidiaries are represented by any labor union or any collective
bargaining organization.
2.17 Material Interests of Certain Persons. Except as set forth in
-------------------------------------
the Seller's Proxy Statement for its 1997 Annual Meeting of Stockholders, to
the best knowledge of the Seller, no officer or director of Seller or any of
the Seller Subsidiaries, or any "associate" (as such term is defined in Rule
14a-1 under the Exchange Act) of any such officer or director, has any
interest in any contract or property (real or personal, tangible or
intangible), used in, or pertaining to the business of, Seller or any of the
Seller Subsidiaries, which in the case of Seller and each of the Seller
Subsidiaries would be required to be disclosed by Item 404 of Regulation S-K
promulgated by the SEC.
2.18 Allowance for Loan and Lease Losses; Non-Performing Assets;
-----------------------------------------------------------
Financial Assets.
- ----------------
(a) All of the accounts, notes and other receivables that are
reflected in the Seller Financial Statements as of June 30, 1997 were
acquired in the ordinary course of business and were collectible in
full in the ordinary course of business, except for possible loan and
lease losses that are adequately provided for in the allowance for loan
and lease losses reflected in such Seller Financial Statements, and the
collection experience of Seller and the Seller Subsidiaries since June
30, 1997 to the date hereof, has not deviated in any material and
adverse manner from the credit and collection experience of Seller and
the Seller Subsidiaries, taken as a whole, for the year ended December
31, 1996.
(b) The allowances for loan losses contained in the Seller
Financial Statements were established in accordance with the past
practices and experiences of Seller and the Seller Subsidiaries, and
the allowance for loan and lease losses shown on the consolidated
balance sheet of Seller and the Seller Subsidiaries as of June 30,
1997, were adequate in all material respects under the requirements of
GAAP, or regulatory accounting principles, as the case may be, to
provide for possible losses on loans and
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leases (including, without limitation, accrued interest receivable) and
credit commitments (including, without limitation, stand-by letters of
credit) as of the date of such balance sheet.
(c) Schedule 2.18(c) sets forth as of the date of this
----------------
Agreement all assets classified by Seller as real estate acquired
through foreclosure or repossession, including foreclosed assets.
(d) As of September 30, 1997, the aggregate amount of all Non-
Performing Assets (as defined below) on the books of Seller and the
Seller Subsidiaries did not exceed $7,200,000. "Non-Performing Assets"
shall mean (i) all loans (A) that are contractually past due 90 days or
more in the payment of principal and/or interest, (B) that are on
nonaccrual status, (C) that have been classified "doubtful," "loss" or
the equivalent thereof by any Regulatory Agency or (D) where the
interest rate terms have been reduced and/or the maturity dates have
been extended subsequent to the agreement under which the loan was
originally created due to concerns regarding the borrower's ability to
pay in accordance with such initial terms, and (ii) all assets
classified by Seller as real estate acquired through foreclosure or in
lieu of foreclosure, including in-substance foreclosures, and all other
assets acquired through foreclosure or in lieu of foreclosure.
(e) All loans receivable (including discounts) and accrued
interest entered on the books of Seller and the Seller Subsidiaries, to
the extent unpaid on the Closing Date, arose out of bona fide arm's-
length transactions, were made for good and valuable consideration in
the ordinary course of Seller's or the appropriate Seller Subsidiary's
respective business, and the notes or other evidences of indebtedness
with respect to such loans or discounts are true and genuine and are
what they purport to be. To the best knowledge of Seller, the loans,
discounts and the accrued interest reflected on the books of Seller and
the Seller Subsidiaries are subject to no defenses, set-offs or
counterclaims (including, without limitation, those afforded by usury
or truth-in-lending laws), except as may be provided by bankruptcy,
insolvency or similar laws affecting creditors' rights generally or by
general principles of equity. All such loans are owned by Seller or
the appropriate Seller Subsidiary free and clear of any liens,
restrictions or encumbrances.
(f) The notes and other evidences of indebtedness evidencing
the loans described in (e) above, and all pledges, mortgages, deeds of
trust and other collateral documents or security instruments relating
thereto are and will be, in all material respects, valid, true, genuine
and enforceable, and what they purport to be. Seller and each of the
Seller Subsidiaries has good and valid title to the investment
securities shown on their respective Seller Financial Statements and
all securities entered on the books of Seller or the appropriate Seller
Subsidiary subsequent to June 30, 1997, except for those sold or
redeemed in the ordinary course of business. A complete and accurate
list of such investment securities as of September 30, 1997 is attached
as Schedule 2.18(f). Such list shall be updated each month in writing
----------------
until the Closing.
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2.19 Employee Benefit Plans.
----------------------
(a) Schedule 2.19(a) lists all pension, retirement,
----------------
supplemental retirement, stock option, stock purchase, stock ownership,
savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, medical, disability, workers'
compensation, vacation, group insurance, severance and other employee
benefit, incentive and welfare policies, contracts, plans and
arrangements, and all trust agreements related thereto, currently
maintained by or contributed to by Seller or any of the Seller
Subsidiaries in respect of any of the present or former directors,
officers, or other employees of and/or consultants to Seller or any of
the Seller Subsidiaries (collectively, "Seller Employee Plans").
Seller has furnished, or will promptly furnish after the date hereof,
Buyers with the following documents with respect to each Seller
Employee Plan: (i) a true and complete copy of all written documents
comprising such Seller Employee Plan (including amendments and
individual agreements relating thereto) or, if there is no such written
document, an accurate and complete description of the Seller Employee
Plan; (ii) the most recently filed Form 5500 or Form 5500-C/R
(including all schedules thereto), if applicable; (iii) the most recent
financial statements and actuarial reports, if any; (iv) the summary
plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent IRS determination letter, if
any.
(b) All Seller Employee Plans have been maintained and operated
in all material respects in accordance with their terms and the
material requirements of all applicable statutes, orders, rules and
final regulations, including, without limitation, to the extent
applicable, ERISA and the Internal Revenue Code of 1986, as amended
(the "Code"). All contributions required to be made to Seller Employee
Plans have been made or reserved.
(c) With respect to each of the Seller Employee Plans which is
a pension plan (as defined in Section 3(2) of ERISA) (the "Pension
Plans"): (i) each Pension Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code has been determined to
be so qualified by the IRS and, to the best knowledge of the Seller,
such determination letter may still be relied upon, and each related
trust is exempt from taxation under Section 501(a) of the Code; (ii)
the actuarial present value of all benefits vested and all benefits
accrued under each Pension Plan which is subject to Title IV of ERISA,
valued using the assumptions in the most recent actuarial report, did
not, in each case, as of the last applicable annual valuation date (as
indicated on Schedule 2.19(a)), exceed the value of the assets of the
----------------
Pension Plan allocable to such vested or accrued benefits; (iii) to the
best knowledge of the Seller, there has been no "prohibited
transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA, which could subject any Pension Plan or
associated trust, or Seller or any of the Seller Subsidiaries, to any
material tax or penalty; (iv) no Pension Plan or any trust created
thereunder has been terminated, nor has there been any "reportable
events" with respect to any Pension Plan, as that term is defined in
Section 4043 of ERISA since January 1, 1989; and (v) no Pension Plan or
any trust created thereunder has incurred any "accumulated funding
deficiency", as such term is defined in Section 302 of ERISA (whether
or not waived). No Pension Plan is a "multiemployer plan" as that term
is defined in Section 3(37) of ERISA.
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<PAGE> 182
(d) Except as disclosed in Schedule 2.19(d), neither Seller nor
----------------
any of the Seller Subsidiaries has any liability for any post-
retirement health, medical or similar benefit of any kind whatsoever,
except as required by statute or regulation.
(e) Neither Seller nor any of the Seller Subsidiaries has any
material liability under ERISA or the Code as a result of its being a
member of a group described in Sections 414(b), (c), (m) or (o) of the
Code.
(f) Except as disclosed in Schedule 2.19(f), neither the
----------------
execution nor delivery of this Agreement, nor the consummation of any
of the transactions contemplated hereby, will (i) result in any payment
(including, without limitation, severance, unemployment compensation or
golden parachute payment) becoming due to any director or employee of
Seller or any of the Seller Subsidiaries from any of such entities,
(ii) increase any benefit otherwise payable under any of the Seller
Employee Plans or (iii) result in the acceleration of the time of
payment of any such benefit. Seller shall use its best efforts to
insure that no amounts paid or payable by Seller, the Seller
Subsidiaries or Buyers to or with respect to any employee or former
employee of Seller or any of the Seller Subsidiaries will fail to be
deductible for federal income tax purposes by reason of Section 280G of
the Code, provided that the Seller makes no representation or warranty
herein with respect to the Employment Agreements of even date herewith
by and between Mercantile and C. Steven Sjogren and Mercantile and John
R. Perkins.
2.20 Conduct of Seller to Date. From and after June 30, 1997 through
-------------------------
the date of this Agreement, except as set forth in the Seller Financial
Statements and the Seller Reports and except as disclosed in Schedule 2.20:
-------------
(i) Seller and the Seller Subsidiaries have conducted their respective
businesses in the ordinary and usual course consistent with past practices;
(ii) neither Seller nor any of the Seller Subsidiaries has issued, sold,
granted, conferred or awarded any of its Equity Securities, or any corporate
debt securities which would be classified under GAAP as long-term debt on the
balance sheets of Seller or the Seller Subsidiaries; (iii) Seller has not
effected any stock split or adjusted, combined, reclassified or otherwise
changed its capitalization; (iv) Seller has not declared, set aside or paid
any dividend (other than its regular quarterly dividends) or other
distribution in respect of its capital stock, or purchased, redeemed,
retired, repurchased or exchanged, or otherwise acquired or disposed of,
directly or indirectly, any of its Equity Securities, whether pursuant to the
terms of such Equity Securities or otherwise; (v) neither Seller nor any of
the Seller Subsidiaries has incurred any obligation or liability (absolute or
contingent), except liabilities incurred in the ordinary course of business,
or subjected to Lien any of its assets or properties other than in the
ordinary course of business consistent with past practice; (vi) neither
Seller nor any of the Seller Subsidiaries has discharged or satisfied any
Lien or paid any obligation or liability (absolute or contingent), other than
in the ordinary course of business; (vii) neither Seller nor any of the
Seller Subsidiaries has sold, assigned, transferred, leased, exchanged, or
otherwise disposed of any of its properties or assets other than for a fair
consideration in the ordinary course of business; (viii) except as required
by contract or law, neither Seller nor any of the Seller Subsidiaries has (A)
increased the rate of compensation of, or paid any bonus to, any of its
directors, officers, or other employees, except in accordance with existing
policy, (B) entered into any new, or amended or supplemented any existing,
employment, management, consulting, deferred compensation, severance, or
other similar contract, (C) entered into, terminated, or substantially
modified any of the Seller Employee Plans or (D) agreed to do any of the
foregoing; (ix) neither Seller nor any Seller
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<PAGE> 183
Subsidiary has suffered any material damage, destruction, or loss, whether as
the result of fire, explosion, earthquake, accident, casualty, labor trouble,
requisition, or taking of property by any Regulatory Authority, flood,
windstorm, embargo, riot, act of God or the enemy, or other casualty or event,
and whether or not covered by insurance; (x) neither Seller nor any of the
Seller Subsidiaries has canceled or compromised any debt, except for debts
charged off or compromised in accordance with the past practice of Seller and
the Seller Subsidiaries; and (xi) neither Seller nor any of the Seller
Subsidiaries has entered into any material transaction, contract or commitment
outside the ordinary course of its business.
2.21 Absence of Undisclosed Liabilities.
----------------------------------
(a) As of the date of this Agreement, neither Seller nor any of
the Seller Subsidiaries has any debts, liabilities or obligations
equal to or exceeding $50,000, individually or $100,000 in the
aggregate, whether accrued, absolute, contingent or otherwise and
whether due or to become due, which are required to be reflected in the
Seller Financial Statements or the notes thereto in accordance with
GAAP except:
(i) debts, liabilities, obligations and contingencies
reflected on the Seller Financial Statements and the notes
thereto;
(ii) operating leases reflected on Schedule 2.11(b); and
----------------
(iii) debts, liabilities or obligations incurred or arising
since June 30, 1997 in the ordinary and usual course of their
respective businesses, none of which are for breach of contract,
breach of warranty, torts, infringements or lawsuits and none of
which have a Material Adverse Effect on Seller and the Seller
Subsidiaries, taken as a whole.
(b) Neither Seller nor any of the Seller Subsidiaries was as of
June 30, 1997, and since such date to the date hereof, has become a
party to, any contract or agreement, excluding deposits, loan
agreements, and commitments, notes, security agreements, repurchase and
reverse repurchase agreements, bankers' acceptances, outstanding
letters of credit and commitments to issue letters of credit,
participation agreements and other documents relating to transactions
entered into by Seller or any of the Seller Subsidiaries in the
ordinary course of business, that had, has or may be reasonably
expected to have a Material Adverse Effect on Seller and the Seller
Subsidiaries, taken as a whole.
2.22 Proxy Statement, Etc. None of the information regarding Seller
--------------------
or any of the Seller Subsidiaries to be supplied by Seller for inclusion or
included in (i) the Registration Statement on Form S-4 to be filed with the
SEC by Mercantile for the purpose of registering the shares of Mercantile
Common Stock to be exchanged for shares of Seller Common Stock pursuant to
the provisions of this Agreement (the "Registration Statement"), (ii) the
Proxy Statement to be mailed to Seller's stockholders in connection with the
meeting to be called to consider this Agreement and the Merger (the "Proxy
Statement") or (iii) any other documents to be filed with any Regulatory
Authority in connection with the transactions contemplated hereby will, at
the respective times such documents are filed with any Regulatory Authority
and, in the case of the Registration Statement, when it becomes effective
and, with respect to the Proxy Statement, when mailed, be false or misleading
with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading or, in the
case of the Proxy Statement or any amendment thereof or supplement thereto,
at the time of the meeting
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<PAGE> 184
of Seller's stockholders referred to in Section 5.03, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for such meeting. All documents which Seller or any
of the Seller Subsidiaries is responsible for filing with any Regulatory
Authority in connection with the Merger will comply as to form in all material
respects with the provisions of applicable law.
2.23 Registration Obligations. Neither Seller nor any of the Seller
------------------------
Subsidiaries is under any obligation, contingent or otherwise, which will
survive the Effective Time by reason of any agreement to register any
transaction involving any of its securities under the Securities Act.
2.24 Tax and Regulatory Matters. Neither Seller nor any of the Seller
--------------------------
Subsidiaries has taken or agreed to take any action or has any knowledge of
any fact or circumstance that would (i) prevent the transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section 368
of the Code or (ii) materially impede or delay receipt of any approval
referred to in Section 6.01(b) or the consummation of the transactions
contemplated by this Agreement.
2.25 Brokers and Finders. Except for Keefe Bruyette & Woods, Inc.,
-------------------
neither Seller nor any of the Seller Subsidiaries nor any of their respective
officers, directors or employees has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder's fees, and no broker or finder has acted directly or
indirectly for Seller or any of the Seller Subsidiaries in connection with
this Agreement or the transactions contemplated hereby.
2.26 Interest Rate Risk Management Instruments.
-----------------------------------------
(a) Set forth on Schedule 2.26(a) is a list as of the date
----------------
hereof of all interest rate swaps, caps, floors and option agreements
and other interest rate risk management arrangements to which Seller or
any of the Seller Subsidiaries is a party or by which any of their
properties or assets may be bound.
(b) All such interest rate swaps, caps, floors and option
agreements and other interest rate risk management arrangements to
which Seller or any of the Seller Subsidiaries is a party or by which
any of their properties or assets may be bound were entered into in the
ordinary course of business and, to the best knowledge of Seller, in
accordance with prudent banking practice and applicable rules,
regulations and policies of Regulatory Authorities and with
counterparties believed to be financially responsible at the time and
are legal, valid and binding obligations of Seller or a Seller
Subsidiary and are in full force and effect. Seller and each of the
Seller Subsidiaries has duly performed in all material respects all of
its obligations thereunder to the extent that such obligations to
perform have accrued, and to the best knowledge of Seller, there are no
material breaches, violations or defaults or allegations or assertions
of such by any party thereunder.
2.27 Accuracy of Information. The statements contained in this
-----------------------
Agreement, the Schedules and any other written document executed and
delivered by or on behalf of Seller pursuant to the terms of this Agreement
are true and correct as of the date hereof or as of the date delivered in all
material respects, and such statements and documents do not omit any material
fact necessary to make the statements contained therein not misleading.
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<PAGE> 185
2.28 Year 2000 Compliant. To the best knowledge of Seller, all
-------------------
computer software and hardware utilized by Seller or any Seller Subsidiary
is, or Seller is taking steps to be, Year 2000 compliant, which, for purposes
of this Agreement, shall mean that the data outside the range 1990-1999 will
be correctly processed in any level of computer hardware or software
including, but not limited to, microcode, firmware, applications programs,
files and data bases. All computer software is, or Seller is taking steps to
ensure that all computer software will be, designed to be used prior to,
during and after the calendar year 2000 A.D., and such software will operate
during each such time period without error relating to date data,
specifically including any error relating to, or the product of, date data
that represents or references different centuries or more than one century.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYERS
The Buyers hereby represent and warrant to Seller as follows:
3.01 Organization and Authority. Mercantile and Merger Sub are each
--------------------------
corporations duly organized, validly existing and in good standing under the
laws of the State of Missouri, are each qualified to do business and are each
in good standing in all jurisdictions where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and
has corporate power and authority to own its properties and assets and to
carry on its business as it is now being conducted, except where the failure
to be so qualified would not have a Material Adverse Effect on Mercantile and
its Subsidiaries, taken as a whole. Each of Mercantile and Merger Sub is
registered as a bank holding company with the Federal Reserve Board under the
BHCA.
3.02 Capitalization of Mercantile. The authorized capital stock of
----------------------------
Mercantile consists of (i) 200,000,000 shares of Mercantile Common Stock, of
which, as of September 30, 1997, 86,981,445 shares were issued and 86,877,787
were outstanding and (ii) 5,000,000 shares of preferred stock, no par value
("Mercantile Preferred Stock"), issuable in series, of which as of the date
hereof, no shares were issued and outstanding. Mercantile has designated
2,000,000 shares of Mercantile Preferred Stock as "Series A Junior
Participating Preferred Stock" and has reserved such shares under a Rights
Agreement dated May 23, 1988 between Mercantile and Mercantile Bank National
Association, as Rights Agent (the "Rights Agreement" and, the rights to be
issued pursuant thereto, the "Rights"). As of September 30, 1997, Mercantile
had reserved: (i) 8,747,596 shares of Mercantile Common Stock for issuance
under various Mercantile employee and/or director stock option, incentive
and/or benefit plans ("Mercantile Employee/Director Stock Grants"); and (ii)
2,550,000 shares of Mercantile Common Stock for issuance upon the acquisition
of Horizon Bancorp, Inc. ("Horizon") pursuant to the Agreement and Plan of
Merger dated as of July 31, 1997 by and between Mercantile and Horizon. From
September 30, 1997 through the date of this Agreement, no shares of
Mercantile Common Stock have been issued, excluding any such shares which may
have been issued in connection with Mercantile Employee/Director Stock Grants
and shares issued in connection with the Stock Dividend.
Mercantile continually evaluates possible acquisitions and may prior to
the Effective Time enter into one or more agreements providing for, and may
consummate, the acquisition by it of another bank, association, bank holding
company, savings and loan holding company or other company (or the assets
thereof) for consideration that may include Equity Securities. In addition,
prior to the Effective Time, Mercantile may, depending on market conditions
and other factors, otherwise determine to issue equity, equity-linked or
other securities for financing purposes or repurchase its outstanding
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<PAGE> 186
Equity Securities. Notwithstanding the foregoing, neither Mercantile nor any
Mercantile Subsidiary has taken or agreed to take any action or has any
knowledge of any fact or circumstance and neither Mercantile nor Merger Sub
will take any action that would (i) prevent the transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section 368
of the Code, (ii) materially impede or delay receipt of any approval referred
to in Section 6.01(b) or the consummation of the trans-actions contemplated
by this Agreement or (iii) prevent the Merger from qualifying for
pooling-of-interests accounting treatment. Except as set forth above, there
are no other Equity Securities of Mercantile outstanding. All of the issued and
outstanding shares of Mercantile Common Stock are validly issued, fully paid,
and nonassessable, and have not been issued in violation of any preemptive
right of any shareholder of Mercantile. At the Effective Time, the
Mercantile Common Stock to be issued in the Merger will be duly authorized,
validly issued, fully paid and nonassessable, will not be issued in violation
of any preemptive right of any shareholder of Mercantile and will be listed
for trading on the NYSE.
3.03 Authorization.
-------------
(a) Mercantile and Merger Sub each have the corporate power and
authority to enter into this Agreement and to carry out their
respective obligations hereunder. The execution, delivery and
performance of this Agreement by Mercantile and Merger Sub and the
consummation by Mercantile and Merger Sub of the transactions
contemplated hereby have been duly authorized by all requisite
corporate action of Mercantile and Merger Sub. Subject to the receipt
of such approvals of the Regulatory Authorities as may be required by
statute or regulation, this Agreement is a valid and binding obligation
of Mercantile and Merger Sub enforceable against each in accordance
with its terms.
(b) Neither the execution, delivery and performance by
Mercantile and Merger Sub of this Agreement, nor the consummation by
Mercantile and Merger Sub of the transactions contemplated hereby, nor
compliance by Mercantile and Merger Sub with any of the provisions
hereof, will (i) violate, conflict with or result in a breach of any
provisions of, or constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) or result in the
termination of, or accelerate the performance required by, or result in
a right of termination or acceleration of, or result in the creation
of, any Lien upon any of the properties or assets of Mercantile or
Merger Sub under any of the terms, conditions or provisions of (x)
their respective Articles of Incorporation or By-Laws, or (y) any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Mercantile or Merger Sub is a
party or by which they may be bound, or to which Mercantile or Merger
Sub or any of their respective properties or assets may be subject, or
(ii) subject to compliance with the statutes and regulations referred
to in subsection (c) of this Section 3.03, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Mercantile or Merger Sub or any of their respective
properties or assets; other than violations, conflicts, breaches,
defaults, terminations, accelerations or Liens which would not have a
Material Adverse Effect on Mercantile and its Subsidiaries, taken as a
whole.
(c) Other than in connection with or in compliance with the
provisions of the Missouri Statute, the DGCL, the Securities Act, the
Exchange Act, the securities or blue
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<PAGE> 187
sky laws of the various states or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHCA, the FDI
Act or any required approvals of any other Regulatory Authority, no notice
to, filing with, exemption or review by, or authorization, consent or
approval of, any public body or authority is necessary for the
consummation by Mercantile and Merger Sub of the transactions contemplated
by this Agreement.
3.04 Mercantile Financial Statements. The supplemental consolidated
-------------------------------
balance sheets of Mercantile and its Subsidiaries as of December 31, 1996,
1995 and 1994 and related supplemental consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996, together with the notes thereto, audited
by KPMG Peat Marwick LLP, as filed with the SEC on Form 8-K dated May 13,
1997 (collectively, the "Mercantile Financial Statements"), have been
prepared in accordance with GAAP, present fairly the consolidated financial
position of Mercantile and its Subsidiaries at the dates thereof and the
consolidated results of operations, changes in shareholders' equity and cash
flows of Mercantile and its Subsidiaries for the periods stated therein and
are derived from the books and records of Mercantile and its Subsidiaries,
which are complete and accurate in all material financial respects and have
been maintained in accordance with good business practices. Neither
Mercantile nor any of its Subsidiaries has any material contingent
liabilities that are not described in the Mercantile Financial Statements.
3.05 Mercantile Reports. Since January 1, 1995, each of Mercantile
------------------
and its Subsidiaries has filed all reports, registrations and statements,
together with any required amendments thereto, that it was required to file
with any Regulatory Authority. All such reports and statements filed with
any such Regulatory Authority are collectively referred to herein as the
"Mercantile Reports." As of its respective date, each Mercantile Report
complied in all material respects with all the rules and regulations
promulgated by the applicable Regulatory Authority and did not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
3.06 Material Adverse Effect. Since June 30, 1997, there has been no
-----------------------
Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole.
3.07 Registration Statement, Etc. None of the information regarding
----------------------------
Mercantile or any of its Subsidiaries to be supplied by Buyers for inclusion
or included in (i) the Registration Statement, (ii) the Proxy Statement, or
(iii) any other documents to be filed with any Regulatory Authority in
connection with the transactions contemplated hereby will, at the respective
times such documents are filed with any Regulatory Authority and, in the case
of the Registration Statement, when it becomes effective and, with respect to
the Proxy Statement, when mailed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make
the statements therein not misleading or, in the case of the Proxy Statement
or any amendment thereof or supplement thereto, at the time of the meeting of
shareholders referred to in Section 5.03, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation
of any proxy for such meeting. All documents which Mercantile or Merger Sub
are responsible for filing with any Regulatory Authority in connection with
the Merger will comply as to form in all material respects with the
provisions of applicable law.
3.08 Taxes. Mercantile and each of its Subsidiaries have timely filed
-----
or will timely file (including extensions) all tax returns required to be
filed at or prior to the Closing Date ("Buyer
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Returns"). Mercantile and each of its Subsidiaries have paid, or set up
adequate reserves of the Mercantile Financial Statements for the payment of, all
taxes required to be paid in respect of all periods up to and including the
latest period covered by the Mercantile Financial Statements. Neither
Mercantile nor any of its Subsidiaries has any material liability for any such
taxes in excess of the amounts so paid or reserves so established, and no
deficiencies for any tax, assessment or governmental charge have been proposed,
asserted or assessed (tentatively or definitely) against Mercantile or any of
its Subsidiaries which would not be covered by existing reserves. Neither
Mercantile nor any of its Subsidiaries is delinquent in the payment of any
material tax, assessment or governmental charge, nor has it requested any
extension of time within which to file any tax returns in respect of any fiscal
year which have not been since filed and no requests for waivers of the time to
assess any tax are pending. There is no deficiency or refund litigation or, to
the best knowledge of Mercantile, matter in controversy with respect to
Mercantile Returns. Neither Seller nor any of the Subsidiaries has extended or
waived any statute of limitations on the assessment of any tax due that is
currently in effect.
3.09 Material Adverse Effect. Since June 30, 1997, there has been no
-----------------------
Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole.
3.10 Litigation and Other Proceedings. Except as otherwise disclosed
--------------------------------
in the Mercantile Financial Statements, neither Mercantile nor any of its
Subsidiaries is a party to any pending or, to the best knowledge of
Mercantile, threatened claim, action, suit, investigation or proceeding, or
is subject to any order, judgment or decree, except for matters which, in the
aggregate, will not have, or reasonably could not be expected to have, a
Material Adverse Effect on Mercantile and its Subsidiaries, taken as a whole.
Without limiting the generality of the foregoing, there are no actions, suits
or proceedings pending or, to the best knowledge of Mercantile, threatened
against Mercantile or any of its Subsidiaries or any of their respective
officers or directors by any stockholder of Mercantile or any of its
Subsidiaries (or any former stockholders of Mercantile or any of its
Subsidiaries) or involving claims under the Community Reinvestment Act of
1977, as amended, the Bank Secrecy Act, the fair lending laws or any other
similar laws.
3.11 Compliance with Laws.
--------------------
(a) To the best knowledge of Mercantile, Mercantile and each of
its Subsidiaries have all permits, licenses, authorizations, orders and
approvals of, and have made all filings, applications and registrations
with, all Regulatory Authorities that are required in order to permit
them to own or lease their respective properties and assets and to
carry on their respective businesses as presently conducted; all such
permits, licenses, certificates of authority, orders and approvals are
in full force and effect and, to the best knowledge of Mercantile, no
suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current; in each case
except for permits, licenses, authorizations, orders, approvals,
filings, applications and registrations, the failure to have (or have
made) would not have a Material Adverse Effect on Mercantile and its
Subsidiaries, taken as a whole.
(b) (i) Each of Mercantile and its Subsidiaries has complied
with all laws, regulations and orders (including, without limitation,
zoning ordinances, building codes, ERISA, and securities, tax,
environmental, civil rights, and occupational health and safety laws
and regulations including, without limitation, in the case of
Mercantile or any of its Subsidiaries that is a bank or savings
association, banking organization,
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banking corporation or trust company, all statutes, rules, regulation and
policy statements pertaining to the conduct of banking, deposit-taking,
lending or related business, or to the exercise of trust powers and
governing instruments applicable to it and to the conduct of its business,
and (ii) neither Mercantile nor any of its Subsidiaries is in default
under, and no event has occurred which, with the lapse of time or
notice or both, could result in a default under, the terms of any
judgment, order, writ, decree, permit, or license of any Regulatory
Authority or court, whether federal, state, municipal or local, and
whether at law or inequity, except in the case of subparts (i) or (ii),
where failure to comply or default would not have a Material Adverse
Effect on Mercantile and its Subsidiaries, taken as a whole.
(c) Neither Mercantile nor any of its Subsidiaries is subject
to or reasonably likely to incur a liability as a result of its
ownership, operation, or use of any Property of Mercantile (whether
directly or, to the best knowledge of Mercantile, as a consequence of
such Property being acquired in foreclosure or in lieu of foreclosure
or being a part of the investment portfolio of Mercantile or any of its
Subsidiaries) (A) that is contaminated by or contains any Toxic
Substances, including, without limitation, petroleum, asbestos, PCBs,
pesticides, herbicides and any other substance or waste that is
hazardous to human health or the environment and regulated by federal,
state or local law, or (B) on which any Toxic Substance has been
stored, disposed of, placed or used at the Property or in the
construction of structures thereon; and which, in each case,
reasonably could be expected to have a Material Adverse Effect on
Mercantile and its Subsidiaries, taken as a whole. "Property" shall
include all property (real or personal, tangible or intangible) owned
or controlled by Mercantile or any of its Subsidiaries, including
without limitation, property acquired under foreclosure or in lieu of
foreclosure, property in which any venture capital or similar unit of
Mercantile or any of its Subsidiaries has an interest and, to the best
knowledge of Mercantile, property held by Mercantile or any of its
Subsidiaries in its capacity as a trustee. No claim, action, suit or
proceeding is pending and no material claim has been asserted against
Mercantile or any of its Subsidiaries relating to the Property of
Mercantile or any of its Subsidiaries, and, to the best knowledge of
Mercantile, no such claim, action, suit or proceeding has been
threatened, before any court or other Regulatory Authority or
arbitration tribunal relating to Toxic Substances, pollution or the
environment, and there is no outstanding judgment, order, writ,
injunction, decree or award against or affecting Mercantile or any of
its Subsidiaries with respect to the same. Except for statutory or
regulatory restrictions of general application, no Regulatory Authority
has placed any restriction on the business of Mercantile or any of its
Subsidiaries which reasonably could be expected to have a Material
Adverse Effect on Mercantile and its Subsidiaries, taken as a whole.
(d) Neither Mercantile nor any of its Subsidiaries has receive
any notification or communication that has not been finally resolved
from any Regulatory Authority (i) asserting that Mercantile or any of
its Subsidiaries or any Property is not in substantial compliance with
any of the statutes, regulations or ordinances that such Regulatory
Authority enforces, except with respect to matters which reasonably
could not be expected to have a Material Adverse Effect on Mercantile
and its Subsidiaries, taken as a whole, (ii) threatening to revoke any
license, franchise, permit or governmental authorization that
reasonably could be expected to have a Material Adverse Effect on
Mercantile and its Subsidiaries, taken as a whole, including, without
limitation, such
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company's status as an insured depository institution under the FDI Act,
(iii) requiring or threatening to require Mercantile or any of its
Subsidiaries, or indicating that Mercantile or any of its Subsidiaries may
be required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or limiting
of purporting to direct, restrict or limit in any manner the operation of
Mercantile or any of its Subsidiaries, including, without limitation, any
restriction on the payment of dividends. No such cease and desist order,
agreement or memorandum of understanding or other agreement is currently
in effect.
(e) Neither Mercantile nor any of its Subsidiaries is required
by Section 32 of the FDI Act to give prior notice to any federal
banking agency of the proposed addition of any individual to its board
of directors or the employment of an individual as a senior executive
officer.
3.12 Accuracy of Information. The statements contained in this
-----------------------
Agreement, the Schedules and any other written document executed and
delivered by or on behalf of the Buyers pursuant to the terms of this
Agreement are true and correct as of the date hereof or as of the date
delivered in all material respects, and such statements and documents do not
omit any material fact necessary to make the statements contained therein not
misleading.
3.13 Brokers and Finders. Neither Mercantile, Merger Sub nor any of
-------------------
their respective officers, directors or employees has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for Mercantile or Merger Sub in connection with this
Agreement or the transactions contemplated hereby.
ARTICLE IV
CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME
4.01 Conduct of Businesses Prior to the Effective Time. During the
-------------------------------------------------
period from the date of this Agreement to the Effective Time, Seller shall
and shall cause each of the Seller Subsidiaries to, conduct their businesses
according to the ordinary and usual course consistent with past and current
practices and shall use their best efforts to maintain and preserve their
business organization, employees and advantageous business relationships and
retain the services of their officers and key employees.
4.02 Forbearances of Seller. Except as otherwise contemplated by this
----------------------
Agreement, and except to the extent required by law, regulation or Regulatory
Authority, or with the prior written consent of Buyers (unless otherwise
specifically noted in this Section 4.02), during the period from the date of
this Agreement to the Effective Time, Seller shall not and shall not permit
any of the Seller Subsidiaries to:
(a) declare, set aside or pay any dividends or other
distributions, directly or indirectly, in respect of its capital stock
(other than dividends from any of the Seller Subsidiaries to Seller or
to another of the Seller Subsidiaries);
(b) enter into or amend any employment, severance or similar
agreement or arrangement with any director, officer or employee, or
materially modify any of the
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Seller Employee Plans or grant any salary or wage increase or materially
increase any employee benefit (including incentive or bonus payments),
except (i) normal individual increases in compensation to employees
consistent with past practice, (ii) as required by law or contract, (iii)
such increases of which Seller notifies Buyers in writing and which Buyers
do not disapprove within 10 days of the receipt of such notice and (iv)
pursuant to the provisions of Section 5.10 hereof;
------------
(c) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement in
principle with respect to, any merger, consolidation or business
combination (other than the Merger), any acquisition of a material
amount of assets or securities, any disposition of a material amount of
assets or securities or any release or relinquishment of any material
contract rights;
(d) propose or adopt any amendments to its Certificate of
Incorporation or other charter document or By-Laws;
(e) issue, sell, grant, confer or award any of its Equity
Securities, except that the Seller may issue shares of Seller Common
Stock upon exercise of the Seller Stock Options outstanding on the date
of this Agreement and pursuant to the option granted to Mercantile in
connection with the transaction contemplated by this Agreement, or
effect any stock split or adjust, combine, reclassify or otherwise
change its capitalization as it existed on the date of this Agreement;
(f) purchase, redeem, retire, repurchase or exchange, or
otherwise acquire or dispose of, directly or indirectly, any of its
Equity Securities, whether pursuant to the terms of such Equity
Securities or otherwise;
(g) without first consulting with and obtaining the written
consent of Mercantile, cause or permit HomeBanc to enter into, renew or
increase any loan or credit commitment (including stand-by letters of
credit) to, or invest or agree to invest in any person or entity or
modify any of the material provisions or renew or otherwise extend the
maturity date of any existing loan or credit commitment (collectively,
"Lend to") in an amount equal to or in excess of $300,000 or in any
amount which, when aggregated with any and all loans or credit
commitments of Seller and the Seller Subsidiaries to such person or
entity, would be equal to or in excess of $500,000; provided, however,
that Seller or any of the Seller Subsidiaries may make any such loan or
credit commitment in the event (A) Seller or any Seller Subsidiary has
delivered to Buyers or their designated representative a notice of its
intention to make such loan and such information as Buyers or their
designated representative may reasonably require in respect thereof and
(B) Buyers or their designated representative shall not have reasonably
objected to such loan by giving written or facsimile notice of such
objection within two (2) business days following the delivery to Buyers
or their designated representative of the notice of intention and
information as aforesaid; provided further, however, that nothing in
this paragraph shall prohibit Seller or any Seller Subsidiary from
honoring any contractual obligation in existence on the date of this
Agreement. Notwithstanding this Section 4.02(g), Seller shall be
authorized without first consulting with Buyers or obtaining Buyers'
prior written consent, to cause or permit HomeBanc to increase the
aggregate amount of any credit facilities theretofore established in
favor of
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any person or entity (each a "Pre-Existing Facility"), provided that the
aggregate amount of any and all such increases shall not be in excess of
the lesser of 10% of such Pre-Existing Facilities or $25,000;
(h) directly or indirectly (including through its officers,
directors, employees or other representatives) (i) initiate, solicit or
encourage any discussions, inquiries or proposals with any third party
(other than Buyers) relating to the disposition of any significant
portion of the business or assets of Seller or any of the Seller
Subsidiaries or the acquisition of Equity Securities of Seller or any
of the Seller Subsidiaries or the merger of Seller or any of the Seller
Subsidiaries with any person (other than Buyers) or any similar
transaction (each such transaction being referred to herein as an
"Acquisition Transaction"), or (ii) provide any such person with
information or assistance or negotiate with any such person with
respect to an Acquisition Transaction, and Seller shall promptly notify
Buyers orally of all the relevant details relating to all inquiries,
indications of interest and proposals which it may receive with respect
to any Acquisition Transaction;
(i) take any action that would (A) materially impede or delay
the consummation of the transactions contemplated by this Agreement or
the ability of Buyers or Seller to obtain any approval of any
Regulatory Authority required for the transactions contemplated by this
Agreement or to perform its covenants and agreements under this
Agreement, (B) prevent or impede the transactions contemplated hereby
from qualifying as a reorganization within the meaning of Section 368
of the Code or (C) prevent the Merger from qualifying for pooling-of-
interests accounting treatment;
(j) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or
assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual,
corporation or other entity;
(k) materially restructure or change its investment securities
portfolio, through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported, or execute individual
investment transactions of greater than $2,000,000 for U.S. Treasury or
Federal Agency Securities and $250,000 for all other investment
instruments;
(l) agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction or
intentionally take or omit to take any other act which would make any
of the representations and warranties in Article II of this Agreement
untrue or incorrect in any material respect if made anew after engaging
in such activity, entering into such transaction, or taking or omitting
such other act; or
(m) enter into, increase or renew any loan or credit commitment
(including standby letters of credit) to any executive officer or
director of Seller or any of the Seller Subsidiaries, any holder of 10%
or more of the outstanding shares of Seller Common Stock, or any entity
controlled, directly or indirectly, by any of the foregoing or engage
in any transaction with any of the foregoing which is of the type or
nature sought to be regulated in 12 U.S.C. Sec. 371c and 12 U.S.C. Sec.
371c-1, without first obtaining the prior
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written consent of Buyers, which consent shall not be unreasonably
withheld. For purposes of this subsection (m), "control" shall have the
meaning associated with that term under 12 U.S.C. Sec. 371c.
4.03 Forbearances of the Buyers. During the period from the date of
--------------------------
this Agreement to the Closing Date, the Buyers shall not, without the prior
consent of Seller, agree in writing or otherwise to engage in any activity,
enter into any transaction or take or omit to take any other action:
(a) that would (i) materially impede or delay the consummation
of the transactions contemplated by this Agreement or the ability of
Mercantile or Seller to obtain any necessary approvals of any
regulatory authority required for the transactions contemplated by this
Agreement or to perform its covenants and agreements under this
Agreement, (ii) prevent or impede the transactions contemplated hereby
from qualifying as a reorganization within the meaning of Section 368
of the Code or (iii) prevent the Merger from qualifying for pooling-of-
interests accounting treatment; or
(b) which would make any of the representations and warranties
of Article III of this Agreement untrue or incorrect in any material
respect if made anew after engaging in such activity, entering into
such transaction, or taking or omitting such other action.
ARTICLE V
ADDITIONAL AGREEMENTS
5.01 Access and Information; Due Diligence. Buyers and Seller shall
-------------------------------------
each afford to the other, and to the other's accountants, counsel and other
representatives, full access during normal business hours, during the period
prior to the Effective Time, to all their respective properties, books,
contracts, commitments and records and, during such period, each shall
furnish promptly to the other (i) a copy of each report, schedule and other
document filed or received by it during such period pursuant to the
requirements of federal and state securities laws and (ii) all other
information concerning its business, properties and personnel as the other
may reasonably request. Each party shall, and shall cause its advisors and
representatives to, (A) hold confidential all information obtained in
connection with any transaction contemplated hereby with respect to the other
party and its Subsidiaries which is not otherwise public knowledge, (B) in
the event of a termination of this Agreement, return all documents (including
copies thereof) obtained hereunder from the other party or any of its
Subsidiaries to such other party of its Subsidiaries and (C) use its best
efforts to cause all information obtained pursuant to this Agreement or in
connection with the negotiation of this Agreement to be treated as
confidential and not use, or knowingly permit others to use, any such
information unless such information becomes generally available to the
public.
5.02 Registration Statement; Regulatory Matters.
------------------------------------------
(a) Mercantile shall prepare and, subject to the review and
consent of Seller with respect to matters relating to Seller, file with
the SEC as soon as is reasonably practicable the Registration Statement
(or the equivalent in the form of preliminary proxy materials) with
respect to the shares of Mercantile Common Stock to be issued in the
Merger and the exercise of the Seller Stock Options after the Effective
Time.
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Mercantile shall prepare and, subject to the review and consent
of Seller with respect to matters relating to Seller, use its best
efforts to file as soon as is reasonably practicable an application for
approval of the Merger with the Federal Reserve Board, and such
additional regulatory authorities as may require an application, and
shall use its best efforts to cause the Registration Statement to
become effective. Mercantile shall also take any action required to be
taken under any applicable state blue sky or securities laws in
connection with the issuance of such shares and the exercise of such
options, and Seller and the Seller Subsidiaries shall furnish
Mercantile all information concerning Seller and the Seller
Subsidiaries and the shareholders thereof as Mercantile may reasonably
request in connection with any such action.
(b) Seller and Buyers shall cooperate and use their respective
best efforts to prepare all documentation, to effect all filings and to
obtain all permits, consents, approvals and authorizations of all third
parties and Regulatory Authorities necessary to consummate the
transactions contemplated by this Agreement and, as and if directed by
Mercantile, to consummate such other transactions by and among
Mercantile's Subsidiaries and the Seller Subsidiaries concurrently with
or following the Effective Time, provided that such actions do not:
(i) materially impede or delay the receipt of any approval referred to
in Section 6.01(b); (ii) prevent or impede the transactions
contemplated hereby from qualifying as a reorganization within the
meaning of Section 368 of the Code; (iii) prevent or impede the
transactions contemplated hereby from qualifying for pooling-of-
interests accounting treatment unless Buyers first waive Seller's
covenants in Sections 5.02(b) and 5.16 hereof and the condition to
Buyers' obligations to consummate the Merger set forth in Section
6.03(f) hereof; or (iv) materially impede or delay the consummation of
the transactions contemplated by this Agreement.
5.03 Stockholder Approval. Seller shall call a special meeting of its
--------------------
stockholders to be held as soon as is reasonably possible for the purpose of
voting upon this Agreement and the Merger and related matters. In connection
with such meeting, Mercantile shall prepare, subject to the review and
consent of Seller, the Proxy Statement (which shall be part of the
Registration Statement to be filed with the SEC by Mercantile) and mail the
same to the stockholders of Seller. The Board of Directors of Seller shall
submit for approval of Seller's stockholders the matters to be voted upon at
such meeting. The Board of Directors of Seller hereby does and, subject to
the fiduciary duties of the Seller's Board of Directors, as advised by
outside legal counsel, will recommend this Agreement and the transactions
contemplated hereby to the stockholders of Seller and use its reasonable best
efforts to obtain any vote of Seller's stockholders necessary for the
approval of this Agreement.
5.04 Current Information. During the period from the date of this
-------------------
Agreement to the Closing Date, (i) each party will promptly furnish the other
with copies of all monthly and other interim financial statements as the same
become available and shall cause one or more of its designated
representatives to confer on a regular and frequent basis with
representatives of the other party and (ii) Mercantile shall promptly furnish
to the Seller copies of all filings by Mercantile with each of the Federal
Reserve Board and the SEC. Each party shall promptly notify the other party
of the following events immediately upon learning of the occurrence thereof,
describing the same and, if applicable, the steps being taken by the affected
party with respect thereto: (a) the occurrence of any event which could cause
any representation or warranty of such party or any schedule, statement,
report, notice, certificate or other writing furnished by such party to be
untrue or misleading in any material respect; (b) any
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Material Adverse Effect; (c) the issuance or commencement of any governmental
and/or regulatory agency complaint, investigation or hearing or any
communications indicating that the same may be contemplated and, as to any such
matter which shall now or hereafter be in effect, any communications pertaining
thereto; or (d) the institution or the threat of any material litigation against
such party.
5.05 Conforming Entries.
------------------
(a) Notwithstanding that Seller believes that Seller and Seller
Subsidiaries have established all reserves and taken all provisions for
possible loan losses required by GAAP and applicable laws, rules and
regulations, Seller recognizes that Buyers may have adopted different
loan, accrual and reserve policies (including loan classifications and
levels of reserves for possible loan losses). Subject to applicable
laws, regulations and other requirements of Regulatory Authorities,
from and after the date of this Agreement to the Effective Time, Seller
and Buyers shall consult and cooperate with each other with respect to
conforming the loan, accrual and reserve policies of Seller and the
Seller Subsidiaries to those policies of Buyers, as specified in each
case in writing to Seller, based upon such consultation and as
hereinafter provided.
(b) Subject to applicable laws, regulations and other
requirements of Regulatory Authorities, in addition, from and after the
date of this Agreement to the Effective Time, Seller and Buyers shall
consult and cooperate with each other with respect to determining
appropriate Seller accruals, reserves and charges to establish and take
in respect of excess equipment write-off or write-down of various
assets and other appropriate charges and accounting adjustments taking
into account the parties' business plans following the Merger, as
specified in each case in writing to Seller, based upon such
consultation and as hereinafter provided.
(c) Subject to applicable laws, regulations and other
requirements of Regulatory Authorities, Seller and Buyers shall consult
and cooperate with each other with respect to determining the amount
and the timing for recognizing for financial accounting purposes
Seller's expenses of the Merger and the restructuring charges, if any,
related to or to be incurred in connection with the Merger.
(d) Subject to applicable laws, regulations and other
requirements of Regulatory Authorities, Seller shall (i) establish and
take such reserves and accruals to conform Seller's loan, accrual and
reserve policies to Mercantile's policies, (ii) establish and take such
accruals, reserves and charges in order to implement such policies in
respect of excess facilities and equipment capacity, severance costs,
litigation matters, write-off or write-down of various assets and other
appropriate accounting adjustments, and to recognize for various
accounting purposes such expenses of the Merger and restructuring
charges related to or to be incurred in connection with the Merger, and
(iii) effect such divestitures or otherwise implement such
restructuring in respect of its investment securities portfolio to
conform Seller's investment securities portfolio policies to
Mercantile's policies, in the case of each of the foregoing at such
times as are requested by Mercantile in a written notice to Seller;
provided, however, that on the date such reserves, accruals and charges
are to be taken, Mercantile shall certify to Seller that all conditions
to the Closing have been satisfied or waived (except to the extent that
any
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waiting period associated therewith may then have commenced but not
expired) and that Mercantile is otherwise in compliance with this
Agreement.
(e) No reserves, accruals or charges taken in accordance with
Section 5.05(d) above may be a basis to assert a violation of a breach
of a representation, warranty or covenant of Seller herein.
5.06 Environmental Reports. Buyer may perform, at Buyers' expense, as
---------------------
soon as reasonably practicable, but not later than ninety (90) days after the
date hereof, a phase one environmental investigation and/or asbestos survey
by Environmental Operations, Inc. on all real property owned, leased or
operated by Seller or any of the Seller Subsidiaries as of the date hereof
(but excluding property held in trust or in a fiduciary capacity and space in
retail and similar establishments leased by Seller for automatic teller
machines or leased bank branch facilities where the space leased comprises
less than 20% of the total space leased to all tenants of such property) and
within fifteen (15) days after being notified by Sellers of the acquisition
or lease of any real property acquired or leased by Seller or any of the
Seller Subsidiaries after the date hereof (but excluding property held in
trust or in a fiduciary capacity and space in retail and similar
establishments leased by Seller for automatic teller machines or leased bank
facilities where the space leased comprises less than 20% of the total space
leased to all tenants of such property). If the results of the phase one
investigation indicate, in Buyers' reasonable opinion, that additional
investigation is warranted, Buyers may perform, at Buyers' expense, a phase
two subsurface investigation or investigations by Environmental Operations,
Inc. on properties deemed to warrant such additional study. Buyers shall
perform any such phase two investigation as soon as reasonably practicable
after receipt of the phase one report(s) for such properties. Should the
cost of taking all remedial or other corrective actions and measures (i)
required by applicable law or (ii) recommended by Environmental Operations,
Inc. in such phase one or two report or reports, in the aggregate, exceed the
sum of $750,000, as reasonably estimated by Environmental Operations, Inc.,
or if the cost of such actions or measures cannot be so reasonably estimated
by Environmental Operations, Inc. to be such amounts or less with any
reasonable degree of certainty, Buyers shall have the right pursuant to
Section 7.01(e) hereof, for a period of 15 business days following receipt
from Environmental Operations, Inc. of such estimate or indication that the
cost of such actions and measures cannot be so reasonably estimated, to
terminate this Agreement.
5.07 Agreements of Affiliates. Set forth as Schedule 5.07 is a list
------------------------ -------------
(which includes all individual and beneficial ownership and also identifies
how all such beneficially owned shares are registered on the stock record
book of Seller) of all persons whom Seller believes to be "affiliates" of
Seller for purposes of Rule 145 under the Securities Act and for
pooling-of-interests accounting treatment. Seller shall use its best efforts
to cause each person who is identified as an "affiliate" to deliver to
Mercantile, as of the date hereof, or as soon as practicable hereafter, a
written agreement in substantially the form set forth as Exhibit A to this
---------
Agreement providing that each such person will agree not to sell, pledge,
transfer or otherwise dispose of the shares of Mercantile Common Stock to be
received by such person in the Merger during the period designated in such
letter and thereafter in compliance with the applicable provisions of the
Securities Act. Prior to the Closing Date, and via letter, Seller shall amend
and supplement Schedule 5.07 and use its best efforts to cause each additional
-------------
person who is identified as an "affiliate" to execute a written agreement as
provided in this Section 5.07.
5.08 Expenses. Each party hereto shall bear its own expenses incident
--------
to preparing, entering into and carrying out this Agreement and to
consummating the Merger; provided, however, that any and all fees (excluding
reasonable out-of-pocket expenses) paid by Seller to its legal counsel,
Silver,
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Freedman & Taff, L.L.P, related to the preparation of this Agreement
and all other related agreements and documentation in connection with the
consummation of the transactions contemplated herein, shall not exceed
$250,000; provided further, however, that the Buyers shall pay all printing
expenses and filing fees incurred in connection with this Agreement, the
Registration Statement and the Proxy Statement.
5.09 Miscellaneous Agreements and Consents.
-------------------------------------
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use its respective best efforts to
take, or cause to be taken, all action, and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contem-
plated by this Agreement as expeditiously as possible, including,
without limitation, using its respective best efforts to lift or
rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions
contemplated hereby. Each party shall, and shall cause each of its
respective Subsidiaries to, use its best efforts to obtain consents of
all third parties and Regulatory Authorities necessary or, in the
opinion of Buyers, desirable for the consummation of the transactions
contemplated by this Agreement.
(b) Subject to applicable laws, regulations and other
requirements of Regulatory Authorities, Seller, prior to the Effective
Time, shall (i) consult and cooperate with Buyers regarding the
implementation of those policies and procedures established by Buyers
for its governance and that of its Subsidiaries and not otherwise
referenced in Section 5.05 hereof, including, without limitation,
policies and procedures pertaining to the accounting, asset/liability
management, audit, credit, human resources, treasury and legal
functions, and (ii) at the reasonable request of Buyers, conform
Seller's existing policies and procedures in respect of such matters to
Buyers' policies and procedures or, in the absence of any existing
Seller policy or procedure regarding any such function, introduce
Buyers' policies or procedures in respect thereof, unless to do so
would cause Seller or any of the Seller Subsidiaries to be in violation
of any law, rule or regulation of any Regulatory Authority having
jurisdiction over Seller and/or the Seller Subsidiary affected thereby;
provided, however, that on the date such reserves, accruals and charges
are to be taken, Mercantile shall certify to the Seller that all
conditions to the Closing have been satisfied or waived (except to the
extent that any waiting period associated therewith may then have
commenced but not expired) and that Mercantile is otherwise in
compliance with this Agreement.
5.10 Employee Agreements and Benefits.
--------------------------------
(a) Following the Effective Time, Buyers shall cause the
Surviving Corporation to honor in accordance with their terms all
employment, severance and other compensation contracts set forth on
Schedule 2.11(b) between Seller, any of the Seller Subsidiaries, and
any current or former director, officer, employee or agent thereof, and
all provisions for vested benefits or other vested amounts earned or
accrued through the Effective Time under the Seller Employee Plans.
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(b) Subject to Section 5.15, the provisions of the Seller Stock
Plans and any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the Equity
Securities of Seller or any of the Seller Subsidiaries shall be deleted
and terminated as of the Effective Time.
(c) Except as set forth in Section 5.10(b) hereof, the Seller
Employee Plans shall not be terminated by reason of the Merger but
shall continue thereafter as plans of the Surviving Corporation until
such time as the employees of Seller and the Seller Subsidiaries are
integrated into Mercantile's employee benefit plans that are available
to other employees of Mercantile and its Subsidiaries, subject to the
terms and conditions specified in such plans and to such changes
therein as may be necessary to reflect the consummation of the Merger.
Mercantile shall take such steps as are necessary or required to
integrate the employees of Seller and the Seller Subsidiaries into
Mercantile's employee benefit plans and policies (including, without
limitation, vacation and sick leave policies) available to other
employees of Mercantile and its Subsidiaries as soon as practicable
after the Effective Time, with (i) full credit for prior service with
Seller or any of the Seller Subsidiaries for purposes of vesting,
eligibility for participation and benefit accruals (but not benefit
accruals under any defined benefit plan), and co-payments and
deductibles, and (ii) waiver of all waiting periods and pre-existing
condition exclusions or penalties.
(d) Buyers shall cause the Surviving Corporation to provide to
the employees of Seller and the Seller Subsidiaries full credit for
prior service with Seller and with the Seller Subsidiaries for purposes
of severance benefits under Buyer's guidelines in respect of such
matters, which guidelines currently provide a severance benefit
equivalent to two weeks salary for the first year of service and one
additional week of salary for each additional year of service
thereafter, with a maximum aggregate entitlement equal to 26 weeks of
salary.
5.11 Press Releases. Except as may be required by law, Seller and the
--------------
Buyers shall consult with each other as to the form and substance of any
proposed press release or other proposed public disclosure of matters related
to this Agreement or any of the transactions contemplated hereby.
5.12 State Takeover Statutes. Seller will take all steps necessary to
-----------------------
exempt the transactions contemplated by this Agreement and any agreement
contemplated hereby from, and if necessary challenge the validity of, any
applicable state takeover law.
5.13 Directors' and Officers' Indemnification. Mercantile agrees that
----------------------------------------
the Merger shall not affect or diminish any of the duties and obligations of
indemnification of Seller or any of the Seller Subsidiaries existing as of
the Effective Time in favor of employees, agents, directors or officers of
Seller or any of the Seller Subsidiaries arising by virtue of its Articles of
Incorporation, Charter or By-Laws in the form in effect at the date of this
Agreement or arising by operation of law or arising by virtue of any
contract, resolution or other agreement or document existing at the date of
this Agreement, and such duties and obligations shall continue in full force
and effect for so long as they would (but for the Merger) otherwise survive
and continue in full force and effect. To the extent that Seller's existing
directors' and officers' liability insurance policy would provide coverage
for any action or omission occurring prior to the Effective Time, Seller
agrees to give proper notice to the insurance carrier and to Mercantile of a
potential claim thereunder so as to preserve Seller's rights to such
insurance coverage.
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Mercantile represents that the directors' and officers' liability insurance
policy maintained by it provides for coverage of "prior acts" for directors and
officers of entities acquired by Mercantile including Seller and the Seller
Subsidiaries on and after the Effective Time.
5.14 Tax Opinion Certificates. Seller shall use its reasonable best
------------------------
efforts to cause such of its executive officers, directors and/or holders of
one percent (1%) or more of the Seller Common Stock (including shares
beneficially held or constructively owned) as may be reasonably requested by
Thompson Coburn to timely execute and deliver to Thompson Coburn certificates
substantially in the form of Exhibit B or Exhibit C hereto, as the case may
be.
5.15 Employee Stock Options.
----------------------
(a) At the Effective Time, all rights with respect to Seller
Common Stock pursuant to Seller Stock Options that are outstanding at
the Effective Time, whether or not then exercisable, shall be converted
into and become rights with respect to Mercantile Common Stock, and
Mercantile shall assume all Seller Stock Options in accordance with the
terms of the Seller Stock Plan under which it was issued and the Seller
Stock Option Agreement by which it is evidenced. From and after the
Effective Time, (i) each Seller Stock Option assumed by Mercantile
shall be exercised solely for shares of Mercantile Common Stock, (ii)
the number of shares of Mercantile Common Stock subject to each Seller
Stock Option shall be equal to the number of shares of Seller Common
Stock subject to such Seller Stock Option immediately prior to the
Effective Time multiplied by the Exchange Ratio and (iii) the per share
exercise price under each Seller Stock Option shall be adjusted by
dividing the per share exercise price under such Seller Stock Option by
the Exchange Ratio and rounding down to the nearest cent; provided,
however, that the terms of each Seller Stock Option shall, in
accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction subsequent to the
Effective Time. It is intended that the foregoing assumption shall be
undertaken in a manner that will not constitute a "modification" as
defined in the Code, as to any Seller Stock Option that is an
"incentive stock option" as defined under the Code.
(b) The shares of Mercantile Common Stock covered by the stock
options to be issued pursuant to Section 5.15(a) shall be covered by an
effective registration statement filed on Form S-8 with the SEC and
shall be duly authorized, validly issued and in compliance with all
applicable federal and state securities laws, fully paid and
nonassessable and not subject to or in violation of any preemptive
rights. Mercantile shall use its best efforts to maintain the
effectiveness of such registration statement (and maintain current
status of the prospectus contained therein) for as long as such options
remain outstanding. Mercantile shall at and after the Effective Time
have reserved sufficient shares of Mercantile Common Stock for issuance
with respect to such options. Mercantile shall also take any action
required to be taken under any applicable state blue sky or securities
laws in connection with the issuance of such shares.
5.16 Best Efforts to Insure Pooling. Each of Mercantile and Seller
------------------------------
undertakes and agrees to use its best efforts to cause the Merger to qualify
for pooling-of-interests accounting treatment.
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ARTICLE VI
CONDITIONS
6.01 Conditions to Each Party's Obligation To Effect the Merger. The
----------------------------------------------------------
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. The approval of this Agreement and
--------------------
the Merger shall have received the requisite vote of stockholders of
Seller at the special meeting of stockholders called pursuant to
Section 5.03 hereof.
(b) Regulatory Approval. This Agreement and the transactions
-------------------
contemplated hereby shall have been approved by the Federal Reserve
Board and any other federal and/or state regulatory agencies whose
approval is required for consummation of the transactions contemplated
hereby and all requisite waiting periods imposed by the foregoing shall
have expired.
(c) Effectiveness of Registration Statement. The Registration
---------------------------------------
Statement shall have been declared effective and shall not be subject
to a stop order or any threatened stop order.
(d) No Judicial Prohibition. Neither Seller, Mercantile nor
-----------------------
Merger Sub shall be subject to any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger.
(e) Tax Opinion. Each of Buyers and Seller shall have received
-----------
from Thompson Coburn an opinion (which opinion shall not have been
withdrawn at or prior to the Effective Time) reasonably satisfactory in
form and substance to it to the effect that the Merger will constitute
a reorganization within the meaning of Section 368 of the Code and to
the effect that, as a result of the Merger, except with respect to
fractional share interests and assuming that such Seller Common Stock
is a capital asset in the hands of the holder thereof at the Effective
Time, (i) holders of Seller Common Stock who receive Mercantile Common
Stock in the Merger will not recognize gain or loss for federal income
tax purposes on the receipt of such stock, (ii) the basis of such
Mercantile Common Stock will equal the basis of the Seller Common Stock
for which it is exchanged and (iii) the holding period of such
Mercantile Common Stock will include the holding period of the Seller
Common Stock for which it is exchanged.
6.02 Conditions to Obligations of Seller. The obligations of Seller
-----------------------------------
to effect the Merger shall be subject to the fulfillment or waiver at or
prior to the Effective Time of the following additional conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Buyers set forth in Article III of this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time (as though made on and as of the
Effective Time, except (i) to the extent such representations and
warranties are by their express provisions made as of a specified date
or period, (ii)
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where the facts which caused the failure of any representation or warranty
to be so true and correct have not resulted, and are not likely to result,
in a Material Adverse Effect on Mercantile and its Subsidiaries, taken as
a whole, and (iii) for the effect of transactions contemplated by this
Agreement, and Seller shall have received a certificate of any Executive
Vice President of Mercantile, signing solely in his capacity as an officer
of Mercantile, to such effect.
(b) Performance of Obligations. Buyers shall have performed in
--------------------------
all material respects all obligations required to be performed by it
under this Agreement prior to the Effective Time, and Seller shall have
received a certificate of any Executive Vice President of Mercantile,
signing solely in his capacity as an officer of Mercantile, to that
effect.
(c) Permits, Authorizations, etc. Buyers shall have obtained
----------------------------
any and all material permits, authorizations, consents, waivers and
approvals required for the lawful consummation of the Merger.
(d) No Material Adverse Effect. Since the date of this
--------------------------
Agreement, there shall have been no Material Adverse Effect on
Mercantile and its Subsidiaries, taken as a whole.
(e) Opinion of Counsel. Mercantile shall have delivered to
------------------
Seller an opinion of Mercantile's counsel dated as of the Closing Date
or a mutually agreeable earlier date in substantially the form set
forth as Exhibit D to this Agreement.
6.03 Conditions to Obligations of the Buyers. The obligations of the
---------------------------------------
Buyers to effect the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the following additional conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Seller set forth in Article II of this Agreement shall be
true and correct in all material respects as of the date of this
Agreement and as of the Effective Time (as though made on and as of the
Effective Time, except (i) to the extent such representations and
warranties are by their express provisions made as of a specific date
or period, (ii) where the facts which caused the failure of any
representation or warranty to be so true and correct have not resulted,
and are not likely to result, in a Material Adverse Effect on Seller
and its Subsidiaries, taken as a whole, and (iii) for the effect of
transactions contemplated by this Agreement) and Buyers shall have
received a certificate of the Chairman and the President of Seller,
signing solely in their capacities as officers of Seller, to such
effect.
(b) Performance of Obligations. Seller shall have performed in
--------------------------
all material respects all obligations required to be performed by it
under this Agreement prior to the Effective Time, and Buyers shall have
received a certificate of the Chairman and the President of Seller
signing solely in their capacities as officers of Seller, to that
effect.
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(c) Permits, Authorizations, etc. Seller shall have obtained
-----------------------------
any and all material permits, authorizations, consents, waivers and
approvals required for the lawful consummation by it of the Merger.
(d) No Material Adverse Effect. Since the date of this
--------------------------
Agreement, there shall have been no Material Adverse Effect on Seller
and the Seller Subsidiaries, taken as a whole.
(e) Opinion of Counsel. Seller shall have delivered to Buyers
------------------
an opinion of Seller's counsel dated as of the Closing Date or a
mutually agreeable earlier date in substantially the form set forth as
Exhibit E to this Agreement.
---------
(f) Pooling Letter. The Buyers shall have received as soon as
--------------
practicable after the date of this Agreement an opinion of KPMG Peat
Marwick LLP, satisfactory in form and substance to the Buyers, to the
effect that the Merger will qualify for pooling-of-interests accounting
treatment, which opinion shall have not been withdrawn; provided,
however, that this condition of Closing shall be deemed waived by
Mercantile to the extent that (i) the failure of KPMG Peat Marwick LLP
to deliver such an opinion or (ii) the withdrawal by KPMG Peat Marwick
LLP of such an opinion, is due solely to the actions of Mercantile's
affiliates with respect to their shares of Mercantile Common Stock or
Seller's Common Stock.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.01 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing Date, whether before or after approval by the stockholders of
Seller:
(a) by mutual consent by the Executive Committee of the Board
of Directors of Mercantile and by the Board of Directors of Seller;
(b) by the Executive Committee of the Board of Directors of
Mercantile or the Board of Directors of Seller at any time after
September 30, 1998 if the Merger shall not theretofore have been
consummated (provided that the terminating party is not then in
material breach of any representation, warranty, covenant or other
agreement contained herein);
(c) by the Executive Committee of the Board of Directors of
Mercantile or the Board of Directors of Seller if (i) the Federal
Reserve Board or any other federal and/or state regulatory agency whose
approval is required for the consummation of the transactions
contemplated hereby has denied approval of the Merger and such denial
has become final and nonappealable or (ii) the stockholders of Seller
shall not have approved this Agreement at the meeting referred to in
Section 5.03;
(d) by the Executive Committee of the Board of Directors of
Mercantile, on the one hand, or by the Board of Directors of Seller, on
the other hand, in the event of a material volitional breach by the
other party to this Agreement of any representation,
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warranty, covenant or agreement contained herein, which breach is not
cured within 30 days after written notice thereof is given to the
breaching party by the non-breaching party or is not waived by the
non-breaching party during such period; or
(e) by the Executive Committee of the Board of Directors of
Mercantile pursuant to and in accordance with the provisions of Section
5.06 hereof.
7.02 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 7.01 above, this Agreement shall forthwith
become void and there shall be no liability on the part of Buyers or Seller
or their respective officers or directors except as set forth in the second
sentence of Section 5.01 and in Sections 5.08 and 8.02, and except that no
proper termination of this Agreement pursuant to Section 7.01(d) shall
relieve the breaching party of any liability to the non-breaching party
hereto arising from the intentional, deliberate or willful breach of any
representation, warranty, covenant or agreement contained herein, after
giving notice to such breaching party and an opportunity to cure as set forth
in Section 7.01(d).
7.03 Amendment. This Agreement, the Exhibits and the Schedules hereto
---------
may be amended by the parties hereto, by action taken by or on behalf of the
Executive Committee of the Board of Directors of Mercantile and the
respective Boards of Directors of Merger Sub or Seller, at any time before or
after approval of this Agreement by the stockholders of Seller; provided,
however, that after any such approval by the stockholders of Seller no such
modification shall (A) alter or change the amount or kind of Merger
Consideration to be received by holders of Seller Common Stock as provided in
this Agreement or (B) adversely affect the tax treatment to Seller
stockholders as a result of the receipt of the Merger Consideration. This
Agreement, the Exhibits and the Schedules hereto may not be amended except by
an instrument in writing signed on behalf of each of Buyers and Seller.
7.04 Waiver. Any term, condition or provision of this Agreement may
------
be waived in writing at any time by the party which is, or whose shareholders
or stockholders, as the case may be, are, entitled to the benefits thereof.
ARTICLE VIII
GENERAL PROVISIONS
8.01 Non-Survival of Representations, Warranties and Agreements. No
----------------------------------------------------------
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein
and each such representation and warranty shall survive such investigation.
Except as set forth below in this Section 8.01, all representations,
warranties and agreements in this Agreement of Buyers and Seller or in any
instrument delivered by Buyers or Seller pursuant to or in connection with
this Agreement shall expire at the Effective Time or upon termination of this
Agreement in accordance with its terms. In the event of consummation of the
Merger, the agreements contained in or referred to in Sections 1.05-1.10,
5.02(b), 5.08, 5.10, 5.13 and 5.15 shall survive the Effective Time. In the
event of termination of this Agreement in accordance with its terms, the
agreements contained in or referred to in the second sentence of Section 5.01
and Sections 5.08, 7.02 and 8.02 shall survive such termination.
8.02 Indemnification. Buyers and Seller (hereinafter, in such
---------------
capacity being referred to as the "Indemnifying Party") agree to indemnify
and hold harmless each other and their officers,
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directors and controlling persons (each such other party being hereinafter
referred to, individually and/or collectively, as the "Indemnified Party")
against any and all losses, claims, damages or liabilities, joint or several, to
which the Indemnified Party may become subject under the Securities Act, the
Exchange Act or other federal or state law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof): (a) arise primarily out of any information furnished to the
Indemnified Party by the Indemnifying Party and included in the Registration
Statement as originally filed or in any amendment thereof, or in the Proxy
Statement, or in any amendment therefor or supplement thereof, or are based
primarily upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement as originally filed or in any
amendment thereof, or in the Proxy Statement, or in any amendment thereof or
supplement thereto, and provided for inclusion thereof by the Indemnifying Party
or (b) arise primarily out of or are based primarily upon the omission or
alleged omission by the Indemnifying Party to state in the Registration
Statement as originally filed or in any amendment thereof, or in the Proxy
Statement, or in any amendment thereof, a material fact required to be stated
therein or necessary to make the statements made therein not misleading, and
agrees to reimburse each such Indemnified Party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
8.03 No Assignment; Successors and Assigns. This Agreement shall be
-------------------------------------
binding upon and inure to the benefit of the parties hereto and their
respective successors (including any corporation deemed to be a successor
corporation of any of the parties by operation of law) and assigns, but
neither this Agreement nor any right or obligation set forth in any provision
hereof may be transferred or assigned (except by operation of law) by any
party hereto without the prior written consent of all other parties, and any
purported transfer or assignment in violation of this Section 8.03 shall be
void and of no effect. There shall not be any third party beneficiaries of
any provisions hereof except for Sections 1.07, 1.09, 1.10, 5.10, 5.13, 5.15
and 8.02 which may be enforced against Mercantile or Seller, as the case may
be, by the parties therein identified or described.
8.04 Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be held to
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remaining provisions of this Agreement.
8.05 No Implied Waiver. No failure or delay on the part of any party
-----------------
hereto to exercise any right, power or privilege hereunder or under any
instrument executed pursuant hereto shall operate as a waiver nor shall any
single or partial exercise of any right, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege.
8.06 Headings. Article, section, subsection and paragraph titles,
--------
captions and headings herein are inserted only as a matter of convenience and
for reference, and in no way define, limit, extend or describe the scope of
this Agreement or the intent of any provision hereof.
8.07 Entire Agreement. This Agreement and the Schedules and Exhibits
----------------
hereto constitute the entire agreement between the parties with respect to
the subject matter hereof, supersede all prior negotiations, representations,
warranties, commitments, offers, letters of interest or intent, proposal
letters, contracts, writings or other agreements or understandings with
respect thereto. No
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waiver, and no modification or amendment, of any provision of this Agreement,
shall be effective unless specifically made in writing and duly signed by all
parties thereto.
8.08 Counterparts. This Agreement may be executed in one or more
------------
counterparts, and any party to this Agreement may execute and deliver this
Agreement by executing and delivering any of such counterparts, each of which
when executed and delivered shall be deemed to be an original and all of
which taken together shall constitute one and the same instrument.
8.09 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to be duly received (a) on the date given if
delivered personally or by cable, telegram, telex or telecopy or (b) on the
date received if mailed by registered or certified mail (return receipt
requested), to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(i) if to the Buyers:
Mercantile Bancorporation Inc.
Mercantile Tower
P.O. Box 524
St. Louis, MO 63166-0524
Attention: John W. Rowe
Executive Vice President
Telecopy: (314) 425-2752
Copy to:
Jon W. Bilstrom, Esq.
General Counsel
Mercantile Bancorporation Inc.
Mercantile Tower
P.O. Box 524
St. Louis, MO 63166-0524
Telecopy: (314) 425-1386
and
Robert M. LaRose, Esq.
Thompson Coburn
One Mercantile Center
St. Louis, Missouri 63101
Telecopy: (314) 552-7000
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(ii) if to Seller:
Homecorp, Inc.
1107 East State Street
Rockford, Illinois 61110
Attention: C. Steven Sjogren
President and Chief Executive Officer
Telecopy: (815) 987-2227
Copy to:
Christopher R. Kelly, Esq.
Silver, Freedman & Taff L.L.P.
1100 New York Avenue, Suite 700
Washington, D.C. 20005
Telecopy: (202) 682-0354
8.10 Governing Law. This Agreement shall be governed by and
-------------
controlled as to validity, enforcement, interpretation, effect and in all
other respects by the internal laws of the State of Missouri applicable to
contracts made in that state.
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<PAGE> 207
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective corporate seals to be affixed hereto, all as of the date first
written above.
Attest: MERCANTILE BANCORPORATION INC.
/s/David W. Grant By:/s/John W. Rowe
- --------------------------- -------------------------------------------
David W. Grant John W. Rowe
Executive Vice President, Mercantile Bank
National Association, Authorized Officer
Attest: AMERIBANC, INC.
/s/David W. Grant By:/s/John W. Rowe
- --------------------------- -------------------------------------------
David W. Grant John W. Rowe
Vice President
Attest: HOMECORP, INC.
/s/John Perkins By:/s/C. Steven Sjogren
- --------------------------- -------------------------------------------
C. Steven Sjogren
President and Chief Executive Officer
A-45
<PAGE> 208
ANNEX B
-------
[Letterhead of Charles Webb & Company,
a Division of
Keefe, Beuyette & Woods, Inc.]
October 29, 1997
Board of Directors
HomeCorp, Inc.
1107 East State Street
Rockford, Illinois 61104
Dear Gentlemen:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders
of HomeCorp, Inc. (the "Company"), of the consideration to be received by
such stockholders in the merger (the "Merger") between the Company and
Mercantile Bancorporation Inc., a Missouri corporation ("Mercantile"). We
have not been requested to opine as to, and our opinion does not in any
matter address, the Company's underlying business decision to proceed with or
effect the Merger.
Pursuant to the Agreement and Plan of Merger, dated October 29, 1997, by and
between the Company and Mercantile (the "Agreement"), at the effective time
of the Merger, Mercantile will acquire all of the Company's issued and
outstanding shares of common stock and common stock equivalents (1,708,552
common shares outstanding and 206,384 shares subject to currently outstanding
options, for a total of 1,914,936 fully diluted shares as of the date of the
Agreement) and the holders of such shares of Company common stock will
receive in exchange for each .4968 shares of common stock of Mercantile (the
"Exchange Ratio"). The unexercised and outstanding options awarded pursuant
to the Company's stock option plans will be converted into the right to
receive such number of shares of Mercantile common stock as determined by
multiplying the number of Company shares subject to option by the Exchange
Ratio. The per share exercise price shall be the exercise price of the
Company option divided by the Exchange Ratio. The complete terms of the
proposed transaction are described in the Agreement, and this summary is
qualified in its entirety by reference thereto.
Charles Webb & Company, as part of its investment banking business, is
regularly engaged in the evaluation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, and
distributions of listed and unlisted securities. We are familiar with the
market for common stocks of publicly traded banks, savings institutions and
bank and savings institution holding companies.
In connection with this opinion we reviewed certain financial and other
business data supplied to us by the Company including (i) Annual Reports,
Proxy Statements and Form 10-Ks for the years ended December 31, 1994, 1995
and 1996, (ii) Form 10-Qs for the quarters ended March 31, 1997 and June 30,
1997, (iii) the Company's press release announcing September 30, 1997 results
of operations, and (iv) certain other information we deemed relevant. We
discussed with senior management of the Company and its wholly owned
subsidiary, HomeBanc, the current position and prospective outlook for the
Company. We considered historical quotations
B-1
<PAGE> 209
and the prices of recorded transactions in the Company's common stock for the
past three years. We reviewed financial and stock market data of other
savings institutions, particularly in the midwestern region of the United
States, and the financial and structural terms of several other recent
transactions involving mergers and acquisitions of savings institutions or
proposed changes of control of comparably situated companies.
For Mercantile, we reviewed the audited financial statements for the fiscal
year ended December 31, 1995 and 1996, quarterly financial statements
(unaudited) for the quarters ending March 31, 1997, June 30, 1997 and
September 30, 1997 and certain other information deemed relevant.
We have also reviewed the Agreement and the Stock Option Agreement among
Mercantile and the Company.
For purposes of this opinion we have relied, without independent
verification, on the accuracy and completeness of the material furnished to
us by the Company and Mercantile and the material otherwise made available to
us, including information from published sources, and we have not made any
independent effort to verify such data. With respect to the financial
information, including forecasts and asset valuations we received from the
Company, we assumed (with your consent) that they had been reasonably
prepared reflecting the best currently available estimates and judgment of
the Company's management. In addition, we have not made or obtained any
independent appraisals or evaluations of the assets or liabilities, and
potential and/or contingent liabilities of the Company or Mercantile. We
have further relied on the assurances of management of the Company and
Mercantile that they are not aware of any facts that would make such
information inaccurate or misleading. We express no opinion on matters of a
legal, regulatory, tax or accounting nature or the ability of the Merger, as
set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated
benefits of the Merger to the Company or the ability to consummate the
Merger. Our opinion is based on the market, economic and other relevant
considerations as they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to the Company in connection with the Merger and will receive a fee
for such services, a majority of which is contingent upon the consummation of
the Merger. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement by the Company in connection with
the Merger.
Based upon and subject to the foregoing, as outlined in the foregoing
paragraphs and based on such other matters as we considered relevant, it is
our opinion that as of the date hereof, the consideration to be received by
the stockholders of the Company in the Merger is fair, from a financial point
of view, to the stockholders of the Company.
B-2
<PAGE> 210
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of the Company used to
solicit stockholder approval of the Merger. It is understood that this
letter is directed to the Board of Directors of the Company in its
consideration of the Agreement, and is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote with respect to the Merger.
Very truly yours,
/s/ Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
B-3
<PAGE> 211
PROXY HOMECORP, INC.
1107 EAST STATE STREET
ROCKFORD, ILLINOIS 61104
For the Special Meeting of Stockholders to be held February 26, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder(s) of HOMECORP, INC. ("HomeCorp"), does
hereby nominate, constitute and appoint C. Steven Sjogren and Karl H.
Frickerson or each of them (with full power to act alone), true and lawful
proxies and attorneys-in-fact, with full power of substitution, for the
undersigned and in the name, place and stead of the undersigned to vote all of
the shares of Common Stock, $0.01 par value, of HomeCorp ("HomeCorp Common
Stock") standing in the name of the undersigned on its books at the close of
business on January 20, 1998 at the Special Meeting of Stockholders ("Special
Meeting") to be held at Northern Illinois University Rockford Education Center,
8500 East State Street, Rockford, Illinois, on Thursday, February 26, 1998, at
10:00 a.m. Central Time, and at any adjournments or postponements thereof, with
all the powers the undersigned would possess if personally present.
The undersigned hereby revokes any other proxies to vote at such meeting
and hereby ratifies and confirms all that the proxies and attorneys-in-fact,
or each of them, appointed hereunder may lawfully do by virtue hereof. Said
proxies and attorneys-in-fact, without limiting their general authority, are
specifically authorized to vote in accordance with their best judgment with
respect to all matters incident to the conduct of the Special Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO
DIRECTION IS GIVEN HEREIN, THIS PROXY WILL BE VOTED "FOR" THE
PROPOSAL LISTED ABOVE.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY.
DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED.
HOMECORP, INC. SPECIAL MEETING
1. To consider and vote upon the adoption and approval of the Agreement and
Plan of Merger, dated October 29, 1997 (the "Merger Agreement"), pursuant to
which HomeCorp will be merged (the "Merger") with and into Ameribanc, Inc., a
Missouri corporation and wholly owned subsidiary of Mercantile Bancorporation
Inc. ("MBI"), in a transaction that would result in the business and operations
of HomeCorp being continued through such wholly owned subsidiary, and whereby,
upon consummation of the merger, each share of HomeCorp Common Stock will be
converted into the right to receive 0.4968 of a share of MBI common stock, as
set forth in detail in the accompanying Proxy Statement/Prospectus.
/ / FOR / / AGAINST / / ABSTAIN
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
Check appropriate box Date---------------- NO. OF SHARES
Indicate changes below:
Address Change? / / Name Change? / / ------------------------------
------------------------------
Signature(s) In Box
When signing as attorney,
executor, administrator,
trustee or Guardian, please
give your full title. If more
than one person holds the
power to vote the same shares,
all must sign. All joint
owners must sign. The
undersigned hereby
acknowledges receipt of the
notice of Special Meeting and
the Proxy Statement Prospectus
(with all enclosures and
attachments), dated January
26, 1998 relating to the
Special Meeting.
<PAGE> 212
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
------------------------------------------
Item 20. Indemnification of Officers and Directors
- ---------------------------------------------------
Sections 351.355(1) and (2) of The General and Business
Corporation Law of the State of Missouri provide that a corporation may
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful,
except that, in the case of an action or suit by or in the right of the
corporation, the corporation may not indemnify such persons against judgments
and fines and no person shall be indemnified as to any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his duty to the corporation, unless and
only to the extent that the court in which the action or suit was brought
determines upon application that such person is fairly and reasonably
entitled to indemnity for proper expenses. Section 351.355(3) provides that,
to the extent that a director, officer, employee or agent of the corporation
has been successful in the defense of any such action, suit or proceeding or
any claim, issue or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred in connection
with such action, suit or proceeding. Section 351.355(7) provides that a
corporation may provide additional indemnification to any person
indemnifiable under subsection (1) or (2), provided such additional
indemnification is authorized by the corporation's articles of incorporation
or an amendment thereto or by a shareholder-approved bylaw or agreement, and
provided further that no person shall thereby be indemnified against conduct
which was finally adjudged to have been knowingly fraudulent, deliberately
dishonest or willful misconduct or which involved an accounting for profits
pursuant to Section 16(b) of the Securities Exchange Act of 1934.
Article 12 of the Restated Articles of Incorporation of MBI
provides that MBI shall extend to its directors and executive officers the
indemnification specified in subsections (1) and (2) and the additional
indemnification authorized in subsection (7) and that it may extend to other
officers, employees and agents such indemnification and additional
indemnification.
Pursuant to directors' and officers' liability insurance
policies, with total annual limits of $45,000,000, MBI's directors and
officers are insured, subject to the limits, retention, exceptions and other
terms and conditions of such policy, against liability for any actual or
alleged error, misstatement, misleading statement, act or omission, or
neglect or breach of duty by the directors or officers of MBI, individually
or collectively, or any matter claimed against them solely by reason of their
being directors or officers of MBI.
II-1
<PAGE> 213
Item 21. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
A. Exhibits. See Exhibit Index.
---------
B. Financial Statement Schedules. Not Applicable.
-----------------------------
Item 22. Undertakings
- ----------------------
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of MBI pursuant to the foregoing provisions, or
otherwise, MBI has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
MBI of expenses incurred or paid by a director, officer or controlling person
of MBI in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, MBI will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) MBI hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
MBI's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) MBI hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(4) MBI undertakes that every prospectus (i) that is filed
pursuant to paragraph (3) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415 (Section
230.415 of this chapter), will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offering therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) MBI hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day
II-2
<PAGE> 214
of receipt of such request and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in the documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
(6) MBI hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(7) MBI hereby undertakes:
(a) To file during any period in which offers and
sales are being made, a post-effective amendment to
this Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof), which
individually or in the aggregate, represent a
fundamental change in the information set
forth in the Registration Statement;
notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if
the total dollar value of securities offered
would not exceed that which was registered)
and any deviation from the low or high end of
the estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in
the effective Registration Statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in the Registration Statement.
(b) That for the purpose of determining any
liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be
a new registration statement relating to the
securities offered therein, and the offering of
such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
II-3
<PAGE> 215
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to Registration Statement
relating to the acquisition of HomeCorp, Inc. to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
St. Louis, State of Missouri, on January 22, 1998.
MERCANTILE BANCORPORATION INC.
By /s/ John Q. Arnold
--------------------------------------------
John Q. Arnold
Vice Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
<F*> Chairman of the Board, January 22, 1998
- --------------------------------- President and Chief Executive
Thomas H. Jacobsen Officer
Principal Executive Officer
/s/ John Q. Arnold Vice Chairman and January 22, 1998
- -------------------------------- Chief Financial Officer
John Q. Arnold
Principal Financial Officer
/s/ Michael T. Normile Senior Vice President - Finance January 22, 1998
- --------------------------------- and Control
Michael T. Normile
Principal Accounting Officer
<F*> Director January 22, 1998
- ---------------------------------
Richard E. Beumer
<F*> Director January 22, 1998
- ---------------------------------
Harry M. Cornell, Jr.
<F*> Director January 22, 1998
- ---------------------------------
William A. Hall
II-4
<PAGE> 216
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
<F*> Director January 22, 1998
- ---------------------------------
Thomas A. Hays
<F*> Director January 22, 1998
- ---------------------------------
Frank Lyon, Jr.
<F*> Director January 22, 1998
- ---------------------------------
Robert W. Murray
<F*> Director January 22, 1998
- ---------------------------------
Harvey Saligman
<F*> Director January 22, 1998
- ---------------------------------
Craig D. Schnuck
<F*> Director January 22, 1998
- ---------------------------------
Alvin J. Siteman
<F*> Director January 22, 1998
- ---------------------------------
Robert L. Stark
<F*> Director January 22, 1998
- ---------------------------------
Patrick T. Stokes
<F*> Director January 22, 1998
- ---------------------------------
John A. Wright
</TABLE>
By /s/ John Q. Arnold
---------------------------------
John Q. Arnold
John Q. Arnold, by signing his name hereto, does sign this document on behalf
of the persons named above, pursuant to a power of attorney duly executed by
such persons and previously filed.
II-5
<PAGE> 217
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ---
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of October 29, 1997,
by and among MBI, Ameribanc and HomeCorp (included in the
Registration Statement as Annex A).<F*>
--------
2.2 Stock Option Agreement, dated as of October 29, 1997, by and
between MBI and HomeCorp.<F*>
2.3 Form of Voting Agreement, dated as of October 29, 1997, and
entered into by and between MBI and certain of the
stockholders of HomeCorp.<F*>
3.1 MBI's Restated Articles of Incorporation, as amended and
currently in effect, filed as Exhibit 3 to MBI's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997,
incorporated herein by reference.
3.2 MBI's by-laws, as amended and currently in effect, filed as
Exhibit 3.2 to Amendment No. 2 to MBI's Registration
Statement on Form S-4 (No. 333-17757), are incorporated
herein by reference.
4.1 Form of Indenture Regarding Subordinated Securities between
MBI and The First National Bank of Chicago, Trustee, filed
as Exhibit 4.1 to MBI's Report on Form 8-K dated September
24, 1992, is incorporated herein by reference.
4.2 Rights Agreement, dated as of May 23, 1988, between MBI and
Mercantile Bank, as Rights Agent (including as exhibits
thereto the form of Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock and the form of Right Certificate), filed
as Exhibits 1 and 2 to MBI's Registration Statement No.
0-6045 on Form 8-A, dated May 24, 1988, is incorporated
herein by reference.
4.3 Form of Indenture Regarding Senior Debt Securities, filed as
Exhibit 4.1 to MBI's Registration Statement on Form S-3
(No. 333-25775), is incorporated herein by reference.
4.4 Form of Indenture Regarding Subordinated Debt Securities,
filed as Exhibit 4.2 to MBI's Registration Statement on
Form S-3 (No. 333-25775), is incorporated herein by
reference.
4.5 Indenture, dated February 4, 1997, First Supplemental
Indenture, dated February 4, 1997, and Supplemental
Indenture of First Supplemental Indenture, dated May 22,
1997, between MBI, as issuer, and The Chase Manhattan
Bank, as Indenture Trustee, filed as Exhibits 4.5, 4.6 and
4.12, respectively, to MBI's Registration Statement on
Form S-4 (No. 333-25131), are incorporated herein by
reference.
5.1 Opinion of Thompson Coburn as to the legality of the
securities being registered.<F*>
II-6
<PAGE> 218
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ---
<C> <S> <C>
8.1 Opinion of Thompson Coburn regarding certain tax matters in
the Merger.<F*>
10.1 The Mercantile Bancorporation Inc. 1987 Stock Option Plan,
as amended, filed as Exhibit 10-3 to MBI's Report on Form
10-K for the year ended December 31, 1989, is
incorporated herein by reference.
10.2 The Mercantile Bancorporation Inc. Amended and
Restated Executive Incentive Compensation Plan, filed as
Annex H to MBI's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders, is incorporated herein by
reference.
10.3 The Mercantile Bancorporation Inc. Employee Stock Purchase
Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K
for the year ended December 31, 1989, is incorporated
herein by reference.
10.4 The Mercantile Bancorporation Inc. 1991 Employee Incentive
Plan, filed as Exhibit 10-7 to MBI's Report on Form 10-K
for the year ended December 31, 1990, is incorporated
herein by reference.
10.5 Amendment Number One to the Mercantile Bancorporation Inc.
1991 Employee Incentive Plan, filed as Exhibit 10-6 to
MBI's Report on Form 10-K for the year ended December 31,
1994, is incorporated herein by reference.
10.6 The Mercantile Bancorporation Inc. Amended and Restated
Stock Incentive Plan, filed as Annex G to MBI's definitive
Proxy Statement for the 1997 Annual Meeting of
Shareholders, is incorporated herein by reference.
10.7 The Mercantile Bancorporation Inc. 1994 Stock Incentive Plan
for Non-Employee Directors, filed as Appendix E to MBI's
definitive Proxy Statement for the 1994 Annual Meeting of
Shareholders, is incorporated herein by reference.
10.8 The Mercantile Bancorporation Inc. Voluntary Deferred
Compensation Plan, filed as Appendix D to MBI's definitive
Proxy Statement for the 1994 Annual Meeting of
Shareholders, is incorporated herein by reference.
10.9 Form of Employment Agreement for Thomas H. Jacobsen, as
amended, filed as Exhibit 10-8 to MBI's Report on Form
10-K for the year ended December 31, 1989, is incorporated
herein by reference.
10.10 Form of Change of Control Employment Agreement for John W.
McClure, W. Randolph Adams, John Q. Arnold and Certain
Other Executive Officers, filed as Exhibit 10-10 to MBI's
Report on Form 10-K for the year ended December 31, 1989,
is incorporated herein by reference.
10.11 Agreement and Plan of Reorganization, dated August 4, 1995,
by and between MBI and Hawkeye Bancorporation, filed as
Exhibit 2.1 to MBI's Registration Statement (File No.
33-63609), is incorporated herein by reference.
II-7
<PAGE> 219
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ---
<C> <S> <C>
10.12 The Mercantile Bancorporation Inc. Supplemental Retirement
Plan, filed as Exhibit 10-12 to MBI's Report on Form 10-K
for the year ended December 31, 1992, is incorporated
herein by reference.
10.13 Agreement and Plan of Reorganization, dated October 27,
1996, by and among MBI, Ameribanc, Inc. and Mark Twain
Bancshares, Inc., filed as Exhibit 2.1 to MBI's Report on
Form 8-K filed November 6, 1996, is incorporated herein by
reference.
10.14 Amendment to Agreement and Plan of Reorganization, dated
January 24, 1997, by and among MBI, Ameribanc, Inc. and
Mark Twain Bancshares, Inc., filed as Exhibit 10-16 to
Amendment No. 2 to MBI's Registration Statement (File No.
333-17757), is incorporated herein by reference.
10.15 Stock Option Agreement, dated October 27, 1996, by and
between MBI, as grantee, and Mark Twain Bancshares, Inc.,
as issuer, filed as Exhibit 2.2 to MBI's Report on Form
8-K filed on November 6, 1996, is incorporated herein by
reference.
10.16 Agreement and Plan of Reorganization, dated December 22,
1996, by and between MBI and Roosevelt Financial Group,
Inc., filed as Exhibit 2.1 to MBI's Report on Form 8-K
filed on December 30, 1996, is incorporated herein by
reference.
10.17 Stock Option Agreement, dated December 22, 1996, by and
between MBI, as grantee, and Roosevelt Financial Group,
Inc., as issuer, filed as Exhibit 2.1 to MBI's Report on
Form 8-K filed on December 30, 1996, is incorporated
herein by reference.
10.18 Employment Agreement for Alvin J. Siteman, dated November
18, 1996, filed as Exhibit 10.3 to MBI's Report on Form
10-Q for the quarter ended March 31, 1997, is incorporated
herein by reference.
10.19 Employment Agreement for John P. Dubinsky, dated October 27,
1996, filed as Exhibit 10.4 to MBI's Report on Form 10-Q
for the quarter ended March 31, 1997, is incorporated
herein by reference.
10.20 Employment Agreement for Stanley J. Bradshaw, dated December
22, 1996, filed as Exhibit 10 to MBI's Report on Form 10-Q
for the quarter ended June 30, 1997, is incorporated
herein by reference.
23.1 Consent of KPMG Peat Marwick LLP with regard to the use of
its reports on MBI's financial statements.<F**>
23.2 Consent of Ernst & Young LLP with regard to the use of its
report on HomeCorp's financial statements.<F**>
23.3 Consent of KPMG Peat Marwick LLP with regard to the use of
its report on HomeCorp's financial statements.<F**>
II-8
<PAGE> 220
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ---
<C> <S> <C>
23.4 Consent of KPMG Peat Marwick LLP with regard to the use of
its report on Roosevelt's financial statements.<F**>
23.5 Consent of Charles Webb & Company (included in Annex B of
-------
this Registration Statement).<F*>
23.6 Consent of Thompson Coburn (included in Exhibit 5.1).<F*>
24.1 Power of Attorney (included on signature page hereto).<F*>
<FN>
- --------------------------------
<F*> Previously filed on December 18, 1997
<F**>Filed herewith.
</TABLE>
II-9
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Mercantile Bancorporation Inc.:
We consent to the use of our reports incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 22, 1998
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Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Relationships with
Independent Accountants" and "Experts" and to the use of our report dated
January 22, 1997, with respect to the consolidated financial statements of
HomeCorp, Inc. included in the Proxy Statement of HomeCorp, Inc. that is made
a part of this Amendment No. 1 to the Registration Statement (Form S-4 No.
333-42557) and related Prospectus of Mercantile Bancorporation Inc. for the
registration of 951,380 shares of its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
January 22, 1998
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Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
HomeCorp, Inc.:
We consent to the use of our report related to the consolidated financial
statements of HomeCorp, Inc. included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 22, 1998
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Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Mercantile Bancorporation Inc.:
We consent to the use of our report related to the consolidated financial
statements of Roosevelt Financial Group, Inc. incorporated herein by reference
and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 22, 1998
