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Mercantile Bank, N.A
Filed Pursuant to
Rule 424 (b)(3)
File No. 333-71639
The board of directors of Mercantile Bank, National Association has
approved the acquisition of Mercantile Bank by Wells Fargo & Company under the
terms of an Agreement and Plan of Reorganization and a related Agreement and
Plan of Consolidation. The acquisition requires the approval of Mercantile
Bank's shareholders. A special meeting of shareholders will be held to vote on
the acquisition. The date, time, and place of the meeting are as follows:
WEDNESDAY, FEBRUARY 24, 1999
1:30 P.M., LOCAL TIME
835 EAST LEVEE STREET
BROWNSVILLE, TEXAS 78520
Wells Fargo also proposes to acquire Mercantile Financial Enterprises, Inc.
("MFE") in a merger immediately before the acquisition of Mercantile Bank. MFE
owns approximately 96.0% of the outstanding common stock of Mercantile Bank. The
one and only shareholder of MFE has agreed with Wells Fargo to consent to the
merger.
In the acquisitions, Wells Fargo will exchange $174,000,000 of its common
stock for all of the outstanding MFE common stock and the outstanding Mercantile
Bank common stock held by shareholders of Mercantile Bank other than MFE. Of
-----
this total amount, Mercantile Bank shareholders other than MFE will receive
Wells Fargo common stock equal to approximately 4.0% of the sum of $174,000,000
plus approximately $14.0 million in net liabilities of MFE. Based on 110,551
shares of outstanding Mercantile Bank common stock held by Bank shareholders
other than MFE, this works out to approximately $68.00 per share of Mercantile
- -----
Bank common stock.
The approximate number of shares of Wells Fargo common stock you would
receive for each share of Mercantile Bank common stock you own may be calculated
by dividing $68.00 by a "measurement price," based on the average closing price
of a share of Wells Fargo common stock as reported on the New York Stock
Exchange for the 10-trading day period ending on the day immediately before the
special meeting. Under the Reorganization Agreement, the minimum and maximum
measurement prices have been fixed at $37.00 and $41.00, even if the actual
average of the closing prices over the 10-day trading period is lower than
$37.00 or higher than $41.00.
For example, if the special meeting were held on February 11, 1999, the
date of this proxy statement-prospectus, the actual average for the 10-trading
day period ending February 10 would be $34.00, the measurement price would be
$37.00, and you would receive approximately 1.84 shares of Wells Fargo common
stock for each share of Mercantile Bank common stock you own.
Whether or not you plan to attend the special meeting, please complete and
return the enclosed proxy card.
Please read this proxy statement-prospectus carefully. It describes the
proposed acquisitions and provides important information about the special
meeting.
Graciela Gutierrez
Chief Executive Officer
____________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE WELLS FARGO COMMON STOCK TO BE
ISSUED OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proxy Statement-Prospectus dated February 11, 1999.
First mailed to shareholders of Mercantile Bank on or about February 12, 1999.
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MERCANTILE BANK, N.A.
835 EAST LEVEE STREET
BROWNSVILLE, TEXAS 78520
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 24, 1999
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NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Mercantile
Bank, National Association (the "Bank") has been called by the board of
directors of the Bank and will be held at the offices of the Bank, 835 East
Levee Street, Brownsville, Texas 78520 on Wednesday, February 24, 1999 at 1:30
p.m., local time.
The purposes of the special meeting are:
(1) to consider and vote on a proposal to approve the acquisition of the
Bank (the "Consolidation") by Wells Fargo & Company ("Wells Fargo"),
pursuant to an Agreement and Plan of Reorganization (the "Reorganization
Agreement"), dated as of October 28, 1998, by and among Mercantile Financial
Enterprises, Inc. ("Mercantile"), the Bank, and Wells Fargo, and a related
Agreement and Plan of Consolidation, substantially in the form attached as
Exhibit A-2 to the Reorganization Agreement (the "Consolidation Agreement").
(2) to transact such other business as may properly come before the
special meeting or any adjournments or postponements thereof.
Holders of record of shares of the Bank common stock at the close of
business on January 15, 1999, the record date for the special meeting, are
entitled to notice of and to vote at the special meeting or at any postponements
or adjournments thereof. The affirmative vote of two-thirds of the outstanding
shares of common stock of the Bank is required to approve the Consolidation.
The board of directors of the Bank has concluded that the Consolidation is
fair to and in the best interests of the Bank and its shareholders and
unanimously recommends that the Bank shareholders vote for the approval of the
Consolidation.
The terms of the Consolidation and the Wells Fargo common stock to be issued
in the Consolidation are described in detail in the accompanying proxy
statement-prospectus. To ensure that your vote will be counted, please complete,
date and sign the enclosed proxy card and return it promptly in the enclosed
postage-paid envelope, whether or not you currently plan to attend the special
meeting. You may revoke your proxy in the manner described in the accompanying
proxy statement-prospectus at any time before it is voted at the special
meeting.
By Order of the Board of Directors
Graciela Gutierrez
Chief Executive Officer
Brownsville, Texas
February __, 1999
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE Stock Exchange Listing..................... 30
MERGER AND CONSOLIDATION TRANSACTIONS Accounting Treatment....................... 30
AND THIS PROXY-STATEMENT-PROSPECTUS......... 1
THE REORGANIZATION AGREEMENT................ 30
SUMMARY..................................... 3 Basic Plan of Reorganization............... 30
Parties to the Transactions................ 3 Representations and Warranties............. 32
Reasons for the Transactions; Certain Covenants.......................... 33
Recommendation of the Board Conditions to the Completion of the
of Directors of Mercantile Bank........... 4 Transactions.............................. 34
Opinion of Financial Advisor............... 4 Termination of the Reorganization
Required Vote; Voting Agreements........... 5 Agreement................................. 34
The Transactions........................... 5 Effect of Termination...................... 36
Comparative Per Common Share Data.......... 11 Waiver and Amendment....................... 36
Selected Historical Financial Expenses................................... 36
Information............................... 12
Share Prices and Dividends for Wells COMPARISON OF RIGHTS OF HOLDERS OF
Fargo Common Stock........................ 14 MERCANTILE BANK COMMON STOCK AND
WELLS FARGO COMMON STOCK.................... 36
SPECIAL MEETING OF BANK SHAREHOLDERS........ 16 Capital Stock.............................. 37
Date, Time, and Place of Rights Plan................................ 37
Special Meeting........................... 16 Directors.................................. 37
Matters to be Considered at the Amendment of Charter Document
Special Meeting........................... 16 and Bylaws................................ 38
Record Date................................ 16 Approval of Mergers and Asset Sales........ 38
Voting Rights; Votes Required Preemptive Rights.......................... 39
for Approval.............................. 16 Appraisal Rights........................... 39
Voting and Revocation of Proxies........... 17 Special Meetings........................... 39
Solicitation of Proxies.................... 17 Directors' Duties.......................... 39
Security Ownership of Certain Action Without a Meeting................... 40
Beneficial Owners and Management; Limitation of Director Liability........... 40
Voting Agreements......................... 17 Indemnification of Officers and
Directors................................. 40
THE TRANSACTIONS............................ 18 Dividends.................................. 41
Background of and Reasons for the Corporate Governance Procedures;
Transactions.............................. 18 Nomination of Directors................... 41
Opinion of Financial Advisor............... 19
Additional Interests of Mercantile Bank's INFORMATION ABOUT THE ENTITIES
Management in the Transactions............ 23 TO BE ACQUIRED.............................. 42
Appraisal Rights........................... 24 General.................................... 42
Exchange of Certificates................... 25 Legal Proceedings.......................... 42
Regulatory Approvals....................... 25 Market Price and Dividends................. 42
Effect on Mercantile Bank's Voting Securities and Principal
Employee Benefit Plans.................... 26 Shareholders of MFE and
Material U.S. Federal Income Tax Mercantile Bank........................... 43
Consequences of the Transactions.......... 26 Year 2000 Compliance....................... 44
Resale of Wells Fargo Common Stock......... 29
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MANAGEMENT'S DISCUSSION AND APPENDIX D UNITED STATES CODE
ANALYSIS OF FINANCIAL CONDITION TITLE 12, SECTION 215,
AND RESULTS OF OPERATIONS................... 45 PARAGRAPHS (A)-(C)............ D-1
Results of Operations....................... 45
Financial Condition......................... 54 APPENDIX E BANKING CIRCULAR 259.......... E-1
Impact on Inflation, Changing Prices
and Monetary Policies...................... 62
CERTAIN REGULATORY AND OTHER
CONSIDERATIONS PERTAINING TO
WELLS FARGO................................. 63
Bank Regulatory Agencies................... 63
Bank Holding Company Activities;
Interstate Banking........................ 63
Dividend Restrictions...................... 64
Holding Company Structure.................. 65
Regulatory Capital Standards and
Related Matters........................... 66
FDIC Insurance............................. 68
Fiscal and Monetary Policies............... 69
Competition................................ 69
EXPERTS..................................... 70
LEGAL MATTERS............................... 70
INFORMATION CONCERNING WELLS
FARGO MANAGEMENT............................ 70
WHERE YOU CAN FIND MORE
INFORMATION................................. 71
FINANCIAL STATEMENTS OF
MERCANTILE BANK............................. F-1
APPENDIX A AGREEMENT AND PLAN
OF REORGANIZATION
(INCLUDING THE AGREEMENT
AND PLAN OF MERGER AS
EXHIBIT A-1).................. A-1
APPENDIX B AGREEMENT AND PLAN
OF CONSOLIDATION.............. B-1
APPENDIX C OPINION OF ALEX
SHESHUNOFF & CO............... C-1
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QUESTIONS AND ANSWERS
ABOUT THE MERGER AND CONSOLIDATION TRANSACTIONS
AND THIS PROXY STATEMENT-PROSPECTUS
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
document, please fill out and sign your proxy card. Then mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the special meeting. You can also attend the
special meeting and vote your shares of Mercantile Bank common stock in
person.
Q: IS IT IMPORTANT THAT I VOTE AT THE SPECIAL MEETING?
Q. Yes. In order for Wells Fargo's acquisition of Mercantile Bank to be
approved, the holders of at least two-thirds of the outstanding shares of
Mercantile Bank common stock must vote in favor of the acquisition. You
should be aware that Mercantile Bank Financial Enterprises, Inc. ("MFE")
has agreed with Wells Fargo to vote all shares of Mercantile Bank common
stock MFE owns in favor of the acquisition. Because MFE owns 96% of this
stock, it has the ability to approve the acquisition of Mercantile Bank by
Wells Fargo even if every other shareholder votes against it.
You should carefully read the information under the heading "The
Transactions-Appraisal Rights" in the enclosed proxy statement-prospectus,
as well as Appendix D and E to this document, before deciding how to vote.
If you disagree with the acquisition and wish to dissent, you are entitled
to an appraisal of the value of your shares of Mercantile Bank common
stock. IN ORDER TO EXERCISE THIS APPRAISAL RIGHT, A DISSENTING SHAREHOLDER
MUST VOTE AGAINST THE ACQUISITION AND STRICTLY FOLLOW THE PROCEDURES
OUTLINED IN APPENDIX D ATTACHED TO THE PROXY STATEMENT-PROSPECTUS. A
DISSENTING SHAREHOLDER WHO FAILS TO FOLLOW THESE PROCEDURES WILL LOSE HIS
OR HER APPRAISAL RIGHTS.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger and consolidation transactions are completed, Wells
Fargo will send you written instructions for exchanging your stock
certificates.
Q: WHAT IS THE PURPOSE OF THIS DOCUMENT?
A: This document serves as a proxy statement for Mercantile Bank and as a
prospectus of Wells Fargo. As a proxy statement it is being provided to
Bank shareholders because Mercantile Bank's board of directors is
soliciting their proxy to use at the special meeting. As a prospectus, it
is being provided to both the MFE shareholder and Mercantile Bank
shareholders because Wells Fargo will exchange shares of its common stock
for shares of MFE common stock and Mercantile Bank common stock.
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Q: DO I NEED TO READ THE ENTIRE DOCUMENT, INCLUDING THE APPENDICES?
A: Absolutely. Much of this proxy statement-prospectus summarizes information
that is set forth in greater detail elsewhere in this document or in the
appendices to this document. Each summary is qualified in its entirety by
reference to the information being summarized. For example, the summary of
the terms of the Reorganization Agreement is qualified in its entirety by
reference to the full text of the Reorganization Agreement, a copy of which
is included as Appendix A. If there are any differences, the information in
the Reorganization Agreement will control over the information in the
summary. As a result, to fully understand the transactions and your rights
as a Bank shareholder, you will need to read carefully this entire document
including appendices.
Q: IS THERE OTHER INFORMATION I SHOULD CONSIDER?
A: This proxy statement-prospectus incorporates important business and
financial information about Wells Fargo that is included in the documents
being delivered together with this proxy statement-prospectus.
For example, Wells Fargo's supplemental restated consolidated financial
statements for the year ended December 31, 1997 are not included in this
document. Instead, they are incorporated from Wells Fargo's current report
on Form 8-K filed with the SEC on January 19, 1999.
INFORMATION THAT IS INCORPORATED FROM ANOTHER DOCUMENT IS CONSIDERED PART OF
THIS PROXY-STATEMENT PROSPECTUS. IT'S CONSIDERED TO HAVE BEEN DISCLOSED TO YOU
WHETHER OR NOT YOU ACTUALLY REVIEW THIS INFORMATION.
Q: WHERE CAN I FIND THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE?
A: The documents containing the information incorporated in this proxy-
statement-prospectus are being delivered with this copy of the proxy
statement-prospectus. See page 71 under "Where you Can Find More
Information" for a list of the documents that Wells Fargo has incorporated
by reference into this proxy statement-prospectus that accompany this
document.
Q: WHAT ABOUT REPORTS FILED BY WELLS FARGO AFTER THE DATE OF THIS PROXY
STATEMENT-PROSPECTUS?
A: Reports filed by Wells Fargo with the SEC after the date of this proxy
statement-prospectus may update, modify, or correct information in the
documents incorporated by reference. You should review these reports, as
they could disclose a change in the business prospects, financial
condition, or other affairs of Wells Fargo since the date of this proxy
statement-prospectus.
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SUMMARY
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This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
transactions in which Wells Fargo will acquire MFE and Mercantile Bank fully,
and for a more complete description of the transactions' legal terms, you should
carefully read this document and the other information available to you. See
"Where You Can Find More Information."
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PARTIES TO THE TRANSACTIONS
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WELLS FARGO & COMPANY....................... Through its subsidiaries and affiliates, Wells Fargo provides retail, commercial,
420 Montgomery Street real estate and mortgage banking, asset management and consumer finance, as well as
San Francisco, California 94163 a variety of other financial services. These financial services include equipment
(415) 477-1000 leasing, agricultural finance, securities brokerage and investment banking,
insurance agency services, computer and data processing services, trust services,
mortgage-backed securities servicing, and venture capital investment.
At September 30, 1998, Wells Fargo had assets of $195.9 billion, deposits of $130.0
billion and stockholders' equity of $20.6 billion. Based on assets at September 30,
1998, Wells Fargo was the 7th largest commercial banking organization in the United
States.
MERCANTILE FINANCIAL ENTERPRISES,
INC. ("MFE")................................ MFE is incorporated in Delaware and is wholly-owned by Hemisphere Financial Ltd., a
835 East Levee Street privately held British Virgin Islands corporation. MFE currently holds 96.0% of the
Brownsville, Texas 78520 outstanding common stock of Mercantile Bank, which constitutes substantially all of
(956) 548-6248 MFE's assets. Other than holding common stock of Mercantile Bank, MFE does not
actively engage in any other investment or business activities.
MERCANTILE BANK, NATIONAL ASSOCIATION....... Mercantile Bank is a national banking association and one of the largest
835 East Levee Street independently owned banks in South Texas providing continuous personal commitment,
Brownsville, Texas 78520 financial strength and export services to the Rio Grande Valley, the Coastal bend
(956) 546-2421 and northern Mexico. Mercantile Bank currently operates a total of 12 offices in
South Texas, of which two are located in Brownsville, seven are located in Corpus
Christi, one in Portland, one in Harlingen, and one in Ingleside. At September 30,
1998, Mercantile Bank had approximately $841.2 million in total assets and $658.7
million in total deposits.
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REASONS FOR THE TRANSACTIONS; RECOMMENDATION
OF THE BOARD OF
DIRECTORS OF MERCANTILE BANK
(SEE PAGE 18).................................. The board of directors of Mercantile Bank has identified various benefits that
are likely to result from the transactions in which Wells Fargo will acquire
Mercantile Bank. The board of directors believes that this acquisition will:
. Offer the shareholders of Mercantile Bank the opportunity to acquire a
publicly traded equity interest in a larger, more diversified financial
institution with a history of paying dividends and which is looking to expand
its presence in Southern Texas;
. Expand the portfolio of banking products and services offered to customers and
the Brownsville community and enable Mercantile Bank to better compete with
other banks and financial institutions in the market; and
. Increase the profitability of the companies involved through cost savings,
operating efficiencies, economies of scale and stronger market positions.
See "The Transactions-Background of and Reasons for the Transactions" for the
factors considered by the board of directors of Mercantile Bank in recommending
that shareholders of Mercantile Bank approve its acquisition by Wells Fargo.
MERCANTILE BANK'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT BANK
SHAREHOLDERS VOTE "FOR" THE APPROVAL OF WELLS FARGO'S ACQUISITION OF MERCANTILE
BANK.
OPINION OF FINANCIAL ADVISOR.................. In deciding to approve the acquisition of Mercantile Bank, its board of directors
considered the opinion of Alex Sheshunoff & Co. Investment Banking, its financial
advisors, as to the fairness of the consideration to be received by Mercantile
Bank's minority shareholders from a financial point of view. The opinion is
included as Appendix C to this proxy statement-prospectus, and we encourage you
to read it.
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REQUIRED VOTE; VOTING AGREEMENTS.............. Shareholders who hold at least two-thirds of the outstanding shares of Mercantile
Bank common stock must vote to approve the acquisition of Mercantile Bank by Wells
Fargo. MFE has agreed to vote all of the shares of Mercantile Bank common stock it
holds, which constitutes approximately 96.0% of the outstanding Mercantile Bank
common stock, for approval of this acquisition. As a result, MFE has the ability to
approve the acquisition even if every other Mercantile Bank shareholder votes
against it. Shareholders should carefully read the information under the heading
"The Transactions-Appraisal Rights" on page 24 in the proxy statement-prospectus
before deciding how to vote.
THE TRANSACTIONS
HOW WELLS FARGO WILL ACQUIRE MFE AND
MERCANTILE BANK............................ MFE and a subsidiary of Wells Fargo will merge. MFE will be the surviving company
in the merger and will become a subsidiary of Wells Fargo. Immediately after,
Mercantile Bank will consolidate with a bank subsidiary of Wells Fargo under the
name and charter of Mercantile Bank.
WHAT MERCANTILE BANK SHAREHOLDERS
Will Receive (see page 31)................. In the transactions, Wells Fargo will exchange $174,000,000 of its common stock for
all of the outstanding MFE common stock and the outstanding Mercantile Bank common
stock held by shareholders of Mercantile Bank other than MFE. Of this total amount,
the shareholder of MFE will receive Wells Fargo common stock equal to approximately
96.0% of an amount equal to $174,000,000 minus the net liabilities of MFE. Because
the shares of Mercantile Bank common stock held by MFE will be indirectly acquired
by Wells Fargo in the Merger, MFE will not receive any additional shares of Wells
Fargo common stock for those shares. Mercantile Bank shareholders other than MFE
will receive Wells Fargo common stock equal to approximately 4.0% of the sum of
$174,000,000 plus the net liabilities of MFE. Based on estimated net cash
liabilities of MFE of $14.0 million as of September 30, 1998, and 110,551 shares of
outstanding Mercantile Bank common stock held by Bank shareholders other than MFE,
this works out to approximately $68.00 per share of Mercantile Bank common stock.
You may calculate the approximate number of shares of
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Wells Fargo common stock you would receive for each share of Mercantile Bank common
stock you own by dividing $68.00 by a "measurement price," based on the average of
the closing prices of a share of Wells Fargo common stock as reported on the New
York Stock Exchange composite tape for the period of 10 trading days ending on the
day immediately before the special meeting. Under the terms of the transactions,
the minimum and maximum measurement prices have been fixed at $37.00 and $41.00,
even if the actual average of the closing prices over the 10-day trading period is
lower than $37.00 or higher than $41.00.
For example, if the special meeting were held on February 11, 1999, the date of
this proxy statement-prospectus, the actual average for the 10-day trading period
ending February 10 would be $34.00, the measurement price would be $37.00, and you
would receive approximately 1.84 shares of Wells Fargo common stock for each share
of Mercantile Bank common stock you own.
The actual number of shares to be received by Mercantile Bank shareholders other
than MFE will be determined using a formula which is explained in detail under the
heading "The Reorganization Agreement-Basic Plan of Reorganization-Structure and
Consideration" on page 31 of this proxy statement-prospectus.
MANAGEMENT AND OPERATIONS OF THE
MERCANTILE BANK AFTER THE TRANSACTIONS...... When the transactions are complete, Wells Fargo will own all of the outstanding
shares of Mercantile Bank common stock. As a result, Wells Fargo will be able to
elect or appoint all of the directors and officers of Mercantile Bank.
As a result of the transactions, Mercantile Bank will become a subsidiary of Wells
Fargo. Wells Fargo expects that Mercantile Bank will operate at its current
location, providing products and services offered by Wells Fargo affiliates.
ADDITIONAL INTERESTS OF MERCANTILE BANK'S
MANAGEMENT IN THE TRANSACTIONS
(SEE PAGE 23) .............................. Mercantile Bank's management will receive the same consideration for their shares
of Mercantile Bank common stock as you will. In considering the recommendation of
the board of directors of Mercantile Bank to approve the Reorganization Agreement
and the
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Consolidation Agreement, you should be aware that Mercantile Bank's directors and
executive officers have interests in the transactions that are different from, or
in addition to, the interests of Mercantile Bank shareholders generally. These
interests include, among other things, the following:
. Wells Fargo has entered into employment agreements with Ms. Graciela Gutierrez
and Messrs. James A. Scott and Edward J. Bacak, pursuant to which each of them
will be employed by Wells Fargo for a one-year period.
. The employment agreement of Ms. Gutierrez and Messrs. Scott and Bacak contain
economic incentives to refrain from competing with Wells Fargo for a period of
one year after the terms of their respective employment agreements expire.
Mercantile Bank's board of directors was aware of these interests when it approved
the transactions.
CONDITIONS TO THE COMPLETION OF THE
TRANSACTIONS (SEE PAGE 34)................... A number of conditions must be satisfied before the transactions can be completed,
including the following:
. The transactions must be consented to in writing by the shareholder of the
outstanding MFE common stock and must be approved by the holders of at least
two-thirds of the outstanding Mercantile Bank common stock. Under a voting
agreement with Wells Fargo, the MFE shareholder and MFE (which holds 96.0% of
the Mercantile Bank common stock) have agreed to approve the transactions.
. The transactions must be approved by the holders of at least two-thirds of the
outstanding Mercantile Bank common stock. Under a voting agreement with Wells
Fargo, MFE has agreed to vote all of its shares of Mercantile Bank common stock
in favor of the transactions.
. The transactions must be approved by governmental authorities.
. MFE and Mercantile Bank must receive a legal opinion that their shareholders
will not recognize any gain or loss for federal income tax purposes as a result
of the transactions (except for cash received in lieu of fractional shares).
. Wells Fargo must receive an opinion from MFE's and Mercantile Bank's outside
auditors that there are
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no facts that would prevent Wells Fargo from accounting for the transactions
as a pooling of interests.
. There cannot be any change since December 31, 1997 that has had, or might
reasonably be expected to have, a material adverse effect on MFE and
Mercantile Bank taken as a whole.
. Either Mercantile Bank must be in full compliance with current Year 2000
requirements or there must not be any feature of Mercantile Bank's data
processing, operating, or platform systems that would prevent those systems
from being converted to Wells Fargo's systems.
Some of the conditions to the transactions are subject to exceptions and/or
to a "materiality" standard. Some conditions may also be waived by the party
entitled to assert the condition.
REGULATORY APPROVALS (SEE PAGE 25)............ The transactions are subject to the prior approval of the Federal Reserve Board,
as the regulator of bank holding companies such as Wells Fargo. The transaction
involving Mercantile Bank is also subject to the approval of the Office of the
Comptroller of the Currency (the "OCC"), as the regulator of Mercantile Bank.
The Federal Reserve Board approved the transactions on January 27, 1999. OCC
approval has not yet been received as of the date of this proxy statement-
prospectus.
Because Wells Fargo will acquire control of Mercantile Bank, Wells Fargo is also
required to notify the Texas Division of Banking.
The approval of an application means only that the regulatory criteria for
approval have been satisfied or waived. It does not mean that the approving
authority has determined that the consideration to be received by the
shareholder of MFE and Mercantile Bank shareholders other than MFE is fair.
Regulatory approval does not constitute an endorsement or recommendation of the
transactions.
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TERMINATION OF THE AGREEMENTS TO COMPLETE THE
TRANSACTION (SEE PAGE 34)................... Wells Fargo, MFE, and Mercantile Bank can mutually agree to terminate the
agreements to complete the transactions. Also, either party can terminate these
agreements under the following circumstances:
. if a court or other governmental authority prohibits the transactions; or
. if the transactions are not completed by April 30, 1999, unless the failure to
complete the transactions on or before that date is the fault of the party
seeking to terminate. MFE can terminate the agreements within five business days
after a 20-day trading day period ending on the day before MFE's shareholder
consents to the transactions using a formula based on the Wells Fargo
measurement price, the closing price of Wells Fargo common stock on the trading
day before the agreements were signed, and the stock prices of a group of
publicly traded bank holding companies. Shareholders should review the
information under the heading "Termination of the Reorganization Agreement-
Termination by MFE" (see page 34) for a description of this termination right
and the formula.
ACCOUNTING TREATMENT (SEE PAGE 30)........... Wells Fargo expects to account for the transactions under the pooling method of
accounting, assuming all of the criteria for a pooling transaction are satisfied.
Under the pooling of interests accounting method, Wells Fargo will carry forward
the assets and liabilities of MFE and Mercantile Bank at their historical recorded
values. Because the transactions are not material to the consolidated financial
statements of Wells Fargo, Wells Fargo will not restate its balance sheet amounts
and results of operations for prior periods to reflect the combination of MFE and
Mercantile Bank with Wells Fargo.
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APPRAISAL RIGHTS (SEE PAGE 24 AND
APPENDIX D) ........................... Mercantile Bank shareholders who dissent are entitled to an appraisal of the value
of their shares of Mercantile Bank common stock. To exercise this right, dissenting
shareholders must follow the procedures outlined in Appendix D. Failure to comply
strictly with these procedures will result in the forfeiture of dissenters' rights.
MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES IN THE TRANSACTIONS (SEE
PAGE 26) .............................. The transactions have been structured so that the MFE shareholder and Mercantile
Bank shareholders generally will not recognize any gain or loss for U.S. federal
income tax purposes as a result of the transactions except for cash received in
lieu of fractional shares. The transactions are conditioned on the receipt by MFE
and Mercantile Bank of a legal opinion to this effect.
THIS TAX TREATMENT MAY NOT APPLY TO ALL SHAREHOLDERS. YOU SHOULD CONSULT YOUR OWN
TAX ADVISOR FOR A FULL UNDERSTANDING OF THE SPECIFIC TAX CONSEQUENCES OF THE
TRANSACTIONS TO YOU.
MARKET INFORMATION (SEE PAGE 14)........ Wells Fargo common stock is listed on the New York Stock Exchange and the Chicago
Stock Exchange under the symbol "WFC." Before November 3, 1998, the common stock
traded under the symbol "NOB." The symbol was changed following the combination of
Norwest Corporation and old Wells Fargo on November 2, 1998.
On October 27, 1998, the last full trading day before MFE, Mercantile Bank, and
Wells Fargo signed the Reorganization Agreement, Wells Fargo common stock closed at
$36.1875 per share. On February 10, 1999, Wells Fargo common stock closed at $32.75
per share.
There is no public market for MFE common stock or Mercantile Bank common stock.
CERTAIN REGULATORY AND OTHER Wells Fargo, its banking subsidiaries, and many of its nonbanking subsidiaries are
CONSIDERATIONSWELLS FARGO subject to extensive regulation by a number of federal and state agencies.
(SEE PAGE 63) This regulation may affect, among other things, Wells Fargo's earnings and/or
restrict its ability to pay dividends on Wells Fargo common stock.
</TABLE>
10
<PAGE>
COMPARATIVE PER COMMON SHARE DATA
The following table presents selected comparative per common share data for
Wells Fargo common stock on a historical and pro forma combined basis and for
Mercantile Bank common stock on a historical and pro forma equivalent basis. The
historical information for Wells Fargo has been restated to reflect the
combination of Norwest Corporation and old Wells Fargo under the "pooling of
interests" accounting method.
The pro forma information in the table assumes that Wells Fargo will
exchange approximately 1.8 shares of its common stock for each share of
Mercantile Bank common stock not held by MFE. This is the "assumed exchange
ratio" that would result if the Wells Fargo measurement price were $38.00 and
the "Bank Consolidation Value" were $187,950,000. See "The Reorganization
Agreement-Basic Plan of Reorganization." The pro forma information also assumes
the transactions are accounted for using the pooling method of accounting. See
"The Transactions-Accounting Treatment."
As you review the table, keep the following in mind:
. Pro Forma Combined Book Value. The pro forma combined book value per
share of Wells Fargo common stock represents the historical total
combined common stockholders' equity for Wells Fargo and Mercantile
Bank divided by total pro forma common shares of the combined
entities. The pro forma equivalent book value per share of Mercantile
Bank common stock represents the pro forma combined book value per
share of Wells Fargo common stock multiplied by the assumed exchange
ratio of 1.8.
. Dividends Declared. This information assumes no changes in cash
dividends per share by Wells Fargo. The pro forma equivalent dividends
per share of Mercantile Bank common stock represent cash dividends
declared per share of Wells Fargo common stock multiplied by the
assumed exchange ratio.
. Pro Forma Combined Net Income. The pro forma combined net income per
share of Wells Fargo common stock (based on weighted average number of
common and common equivalent shares) is the combined historical net
income for Wells Fargo and Mercantile Bank divided by the average pro
forma common and common equivalent shares of the combined entities.
The pro forma equivalent net income per share of Mercantile Bank
common stock represents the pro forma combined net income per share
multiplied by the assumed exchange ratio.
The information in the table should be read with (a) the selected
historical information (and related notes) for Wells Fargo and Mercantile Bank
appearing elsewhere in this proxy statement-prospectus, (b) the complete
financial statements of Mercantile Bank appearing elsewhere in this proxy
statement-prospectus, and (c) the restated financial statements of Wells Fargo
included in the documents incorporated by reference in this proxy statement-
prospectus. See "Where You Can Find More Information." The information in the
table is not necessarily indicative of the results of the future operations of
the combined entity or the actual results that would have occurred had the
transactions become effective prior to the periods indicated.
11
<PAGE>
<TABLE>
<CAPTION>
WELLS FARGO BANK
COMMON STOCK COMMON STOCK
-------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL EQUIVALENT
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
BOOK VALUE:
09/30/98 $ 12.40 12.42 33.02 22.36
12/31/97 11.92 11.94 30.10 21.46
DIVIDENDS DECLARED:
Nine Months Ended 09/30/98 0.515 0.515 -- 0.927
Year Ended 12/31/97 0-.615 0.615 -- 1.107
Year Ended 12/31/96 0.525 0.525 1.000 0.945
Year Ended 12/31/95 0.450 0.450 -- 0.810
NET INCOME:
Basic:
Nine Months Ended 09/30/98 1.31 1.31 2.15 2.36
Year Ended 12/31/97 1.50 1.50 2.85 2.70
Year Ended 12/31/96 1.38 1.38 2.95 2.48
Year Ended 12/31/95 1.66 1.66 3.03 2.99
DILUTED:
Nine Months 0 9/30/98 1.29 1.29 2.15 2.32
Year Ended 12/31/97 1.48 1.48 2.85 2.66
Year Ended 12/31/96 1.36 1.36 2.95 2.45
Year Ended 12/31/95 1.62 1.62 3.03 2.92
</TABLE>
SELECTED HISTORICAL FINANCIAL INFORMATION
Wells Fargo. The following selected financial information is to aid you in
your analysis of the financial aspects of the transactions. Except for the
balance sheet data for September 30, 1997, the information for Wells Fargo is
derived from information contained in its current report on Form 8-K filed with
the SEC on January 19, 1999 and should be read with that information. A copy of
the current report on Form 8-K, which is incorporated by reference, is being
delivered to Bank shareholders with this proxy statement-prospectus. See "Where
You Can Find More Information." The balance sheet data for September 30, 1997
for Wells Fargo is derived from the quarterly reports on Form 10-Q for the
quarter ended September 30, 1997 of Norwest Corporation and old Wells Fargo. The
information for Mercantile Bank is derived from its historical financial
statements (and related notes) contained elsewhere in this proxy statement-
prospectus.
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
-------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income................ $ 10,458 10,159 13,602 12,841 9,802 8,159 7,707
Interest expense............... 3,769 3,691 4,954 4,619 3,879 2,745 2,547
-------- ------- ------- ------- ------- ------- ------
Net interest income 6,689 6,468 8,648 8,222 5,923 5,414 5,160
Provision for credit losses.... 921 799 1,140 500 312 365 708
Non-interest income 4,815 4,138 5,599 4,724 3,141 2,805 2,640
Non-interest expenses.......... 7,042 6,675 8,914 8,679 5,551 5,217 5,183
-------- ------- ------- ------- ------- ------- -------
Income before income taxes 3,541 3,132 4,193 3,767 3,201 2,637 1,909
Income tax expense............. 1,397 1,283 1,694 1,539 1,213 995 779
-------- ------- ------- ------- ------- ------- -------
Net income..................... $ 2,144 1,849 2,499 2,228 1,988 1,642 1,130
======== ======= ======= ======= ======= ======= =======
PER COMMON SHARE DATA
Net income:
Basic........................ $ 1.31 1.11 1.50 1.38 1.66 1.40 1.85
Diluted...................... 1.29 1.09 1.48 1.36 1.62 1.36 1.74
Dividends declared............. 0.515 0.450 0.615 0.525 0.450 0.383 0.320
BALANCE SHEET DATA
At period end:
Total assets.................. $195,863 182,907 185,685 188,633 122,200 112,674 107,170
Long-term debt................ 18,486 17,516 17,335 18,142 16,726 12,039 11,072
Total stockholders' equity 20,558 19,743 19,778 20,051 9,239 7,629 7,947
</TABLE>
Mercantile Bank. The following selected financial data for Mercantile Bank
should be read in conjunction with the financial statements of Mercantile Bank
and the notes thereto and the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Mercantile
Bank." The selected financial data at December 31 for each of the years 1993
through 1997 have been derived from Mercantile Bank's Financial Statements which
have been audited by Burton, McCumber & Cortez, L.L.P., independent public
accountants. The selected financial data at and for the nine months ended
September 30, 1998 and 1997 have been derived from financial statements of
Mercantile Bank which have not been audited but, in the opinion of management,
contain all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the financial position and results of operations of Mercantile
Bank at and for those time periods.
Because MFE does not conduct any other investment or business activities
other than holding approximately 96.0% of the outstanding Mercantile Bank common
stock, MFE's selected financial data is materially the same as that of
Mercantile Bank's. Instead of including MFE's selected financial data, reference
is hereby made to the selected financial data of Mercantile Bank below.
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 41,603 $ 40,648 $ 55,288 $ 54,318 $ 54,414 $ 46,789 $ 41,541
Interest expense 21,187 20,548 27,720 26,753 26,315 18,632 16,632
--------- --------- --------- --------- --------- --------- ---------
Net interest income 20,416 20,100 27,568 27,565 28,099 28,157 24,909
Provision for loan losses 575 525 845 263 100 265 (1,285)
Non-interest income 5,020 4,993 6,447 5,334 7,078 8,060 8,190
Non-interest expense 16,252 16,622 22,005 22,028 23,019 22,407 22,917
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 8,609 7,946 11,165 10,608 12,058 13,545 11,467
Income taxes 2,725 2,403 3,364 2,537 3,778 4,333 3,540
--------- --------- --------- --------- --------- --------- ---------
Net income $ 5,884 $ 5,543 $ 7,801 $ 8,071 $ 8,280 $ 9,212 $ 7,927
========= ========= ========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE
Net income per share: $ 2.15 $ 2.02 $ 2.85 $ 2.95 $ 3.03 $ 3.38 $ 2.98
========= ========= ========= ========= ========= ========= =========
Dividends declared per common
share $ - $ - $ - $ 1.00 $ - $ - $ -
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA
At end of period:
Total assets $ 841,174 $ 807,673 $ 862,436 $ 834,281 $ 812,903 $ 758,134 $ 774,726
Total liabilities 750,710 728,027 779,974 761,906 743,838 708,083 723,319
Total shareholders' equity 90,464 79,646 82,462 72,375 69,065 50,051 51,407
</TABLE>
SHARE PRICES AND DIVIDENDS FOR WELLS FARGO COMMON STOCK
The following table sets forth the high and low sales prices per share of
the Wells Fargo common stock, and the cash dividends paid on Wells Fargo common
stock, for the quarterly periods indicated. Wells Fargo common stock is listed
on the New York Stock Exchange and the Chicago Stock Exchange under the symbol
"WFC." Before November 3, 1998, the common stock was traded under the symbol
"NOB." The symbol was changed following the combination of Norwest Corporation
and old Wells Fargo on November 2, 1998. The prices for Wells Fargo common stock
are as reported on the New York Stock Exchange. The cash dividend and stock
price information for 1996 and the first three quarters of 1997 has been
adjusted to reflect the two-for-one split, effected in the form of a 100% stock
dividend, of Wells Fargo common stock on October 10, 1997. There is no public
market for MFE or Mercantile Bank common stock.
14
<PAGE>
<TABLE>
<CAPTION>
WELLS FARGO COMMON STOCK
------------------------
HIGH LOW DIVIDENDS
----- ---- ---------
<S> <C> <C> <C>
1996
First Quarter 18.5625 15.2500 0.120
Second Quarter 18.7500 16.5000 0.135
Third Quarter 20.5000 16.0000 0.135
Fourth Quarter 23.4375 20.3750 0.135
1997
First Quarter 26.6250 21.3750 0.150
Second Quarter 29.6250 22.1875 0.150
Third Quarter 32.1563 28.1250 0.150
Fourth Quarter 39.5000 29.7500 0.165
1998
First Quarter 43.8750 34.7500 0.165
Second Quarter 43.7500 34.0000 0.165
Third Quarter 39.7500 27.5000 0.185
Fourth Quarter 40.8800 30.1900 0.185
1999
First Quarter
(through February 10, 1999) 40.4375 32.1875 --
</TABLE>
The timing and amount of future dividends will depend on earnings, cash
requirements, the financial condition of Wells Fargo and its subsidiaries,
applicable government regulations and other factors deemed relevant by Wells
Fargo's board of directors. As described in "Certain Regulatory and Other
Considerations Pertaining to Wells Fargo-Dividend Restrictions," various federal
and state laws limit the ability of affiliate banks to pay dividends to Wells
Fargo. Because of limitations on the ability of Wells Fargo Bank, N.A. to pay
dividends, OCC approval will likely be required before Wells Fargo Bank, N.A.
may pay dividends to the parent company. See "Certain Regulatory and Other
Considerations Pertaining to Wells Fargo-Dividend Restrictions."
15
<PAGE>
SPECIAL MEETING OF MERCANTILE BANK SHAREHOLDERS
Mercantile Bank is sending you this proxy statement-prospectus to provide you
with information concerning the acquisition by Wells Fargo of Mercantile Bank
in a consolidation transaction (the "Consolidation") under the terms of an
Agreement and Plan of Reorganization among Wells Fargo, MFE, and Mercantile Bank
(the "Reorganization Agreement") and a related Agreement and Plan of
Consolidation (the "Consolidation Agreement") and to solicit your proxy for use
at the special meeting. At the special meeting, Bank shareholders will be asked
to approve the Consolidation and Reorganization Agreement and the related
Consolidation Agreement.
DATE, TIME, AND PLACE OF SPECIAL MEETING
The date, time and place of the special meeting are as follows:
Wednesday, February 24, 1999
1:30 p.m., local time
Mercantile Bank, National Association
835 East Levee Street
Brownsville, Texas 78520
Mercantile Bank shareholders are requested to promptly sign, date, and return
the accompanying proxy card in the enclosed postage-paid and pre-addressed
envelope. Failure to return a properly executed proxy card or to vote at the
meeting will have the same effect as a vote against approval of the
Reorganization Agreement and the Consolidation Agreement.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The purposes of the special meeting are (a) to consider and vote upon the
approval of the Reorganization Agreement and the Consolidation Agreement, and
(b) to transact such other business as may properly come before the special
meeting or any adjournments or postponements thereof.
For the reasons set forth, Mercantile Bank's board of directors has, by
unanimous vote, approved the Reorganization Agreement and the Consolidation
Agreement and recommends a vote "FOR" approval of the Reorganization Agreement
and the Consolidation Agreement.
RECORD DATE
Mercantile Bank has established January 15, 1999 as the record date for the
meeting (the "Mercantile Bank Record Date"). Only Mercantile Bank shareholders
of record on that date are entitled to attend and vote at the special meeting.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
On the Mercantile Bank Record Date, there were 2,739,928 shares of Mercantile
Bank common stock outstanding and entitled to vote at the special meeting. The
holders of Mercantile Bank common stock are entitled to one vote per share. The
presence, in person or by proxy, at the special meeting of the holders of a
majority of the outstanding shares is necessary for a quorum. Approval of the
Consolidation requires the affirmative vote, in person or by proxy, of the
holders of at least two-thirds of the outstanding shares of Mercantile Bank
common stock on the Mercantile Bank Record Date.
16
<PAGE>
VOTING AND REVOCATION OF PROXIES
Shares represented by proxies properly executed and received in time to be
voted at the special meeting will be voted in accordance with the instructions
indicated on the proxies. Proxies which do not contain voting instructions will
be voted "FOR" the proposal to approve the Reorganization Agreement and the
Consolidation Agreement. All proxies voted "FOR" such matters, including
proxies on which no instructions are indicated, may, at the discretion of the
proxy holder, be voted "FOR" a motion to adjourn or postpone the special meeting
to another time and/or place for the purpose of soliciting additional proxies or
otherwise; provided however, that no proxy which is voted against approval of
the Reorganization Agreement and the Consolidation Agreement or on which the
relevant shareholder specifically abstains from voting with respect to such
approval will be voted in favor of any such adjournment or postponement.
You may revoke your proxy at any time before it is voted by (a) filing either
an instrument revoking the proxy or a duly executed proxy bearing a later date
with the corporate secretary of Mercantile Bank before or at the special
meeting, or (b) voting the shares subject to the proxy in person at the special
meeting. Attendance at the special meeting will not by itself result in your
proxy being revoked.
It is not expected that any matters other than as described herein will be
brought before the special meeting. If, however, other matters are properly
brought before the special meeting, persons appointed as proxies will have
discretion to vote or act thereon in their best judgment.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Mercantile Bank may solicit proxies from Mercantile Bank shareholders personally
or by telephone or other means without additional remuneration therefor.
Mercantile Bank will also provide persons, trusts, firms, banks, and
corporations holding shares in their names or in the names of nominees, which in
any case are beneficially owned by others, with proxy materials for transmittal
to such beneficial owners and will reimburse such record owners for their
expenses in doing so. Mercantile Bank will bear the cost of solicitation of
proxies from Bank shareholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; VOTING
AGREEMENTS
As of the Mercantile Bank Record Date, MFE and the directors and officers of
Mercantile Bank beneficially held, in the aggregate, the ability to direct the
voting with respect to 2,712,258 shares of Mercantile Bank common stock,
comprising approximately 99.02% of the voting power of Mercantile Bank common
stock outstanding on the Mercantile Bank Record Date. In addition, pursuant to
a voting agreement between Wells Fargo and MFE, MFE, which holds 2,629,371
shares, or approximately 96.0% of the voting power of Mercantile Bank common
stock, has agreed to vote its shares in favor of the Consolidation.
17
<PAGE>
THE TRANSACTIONS
BACKGROUND OF AND REASONS FOR THE TRANSACTIONS
Merger activity among financial institutions has continued at a heightened
level during the past several years. From time to time during this period,
Mercantile Bank was approached informally by various parties to see if it would
consider a business combination. The board of directors of Mercantile Bank was
interested in a combination because it recognized that a stronger and bigger
institution would be more likely to possess the financial resources to compete
more effectively in the rapidly changing marketplace for banking and financial
services in the southern Texas area.
In 1996, Mercantile Bank agreed to be acquired by Laredo National Bancshares,
Inc. However, the proposed combination failed to receive permission from the
Federal Reserve Board and Laredo National Bancshares, Inc. withdrew its
application to acquire Mercantile Bank in January of 1998.
After the termination of the proposed combination with Laredo National
Bancshares, Inc., the board of directors of Mercantile Bank retained Alex
Sheshunoff & Co. Investment Banking ("Sheshunoff") to seek potential partners
for a business combination, and Sheshunoff approached a number of possible
acquirors to assess their level of interest in an acquisition. Wells Fargo
(formerly Norwest Corporation) expressed strong interest because it was looking
to increase its presence in the Rio Grande Valley, the Coastal Bend, and
northern Mexico. In the Rio Grande Valley, Wells Fargo operates through its
wholly-owned subsidiary, First Valley Bank, which has 16 branches in four Texas
counties.
A number of conversations took place in August and September of 1998 between
the management of Wells Fargo and the management of both Mercantile Bank and MFE
as the only shareholder of Mercantile Bank. As a result of these discussions,
which included a purchase price and other terms, Wells Fargo commenced a due
diligence investigation of Mercantile Bank and MFE, and the parties began
negotiating a definitive acquisition agreement, under which Wells Fargo would
acquire both MFE by a merger of MFE with a subsidiary of Wells Fargo (the
"Merger") and Mercantile Bank in the Consolidation (the "Transactions"). The
Reorganization Agreement was approved by Mercantile Bank's board of directors
and the MFE board of directors on October 19, 1998, and executed on October 28,
1998.
In reaching its decision to enter into the Reorganization Agreement, the
boards of directors of Mercantile Bank and MFE consulted with its legal, tax,
and other advisors and considered a number of factors including, but not limited
to, the following:
(i) the price to be received by Mercantile Bank shareholders and the MFE
shareholder, including how the price to be received related to prices received
by other comparable banking organizations;
(ii) the fairness opinion of Sheshunoff to Mercantile Bank's minority
shareholders that the exchange ratio was fair, from a financial point of view,
to the minority holders of Mercantile Bank common stock;
(iii) the increased investment liquidity that the receipt of Wells Fargo
common stock would provide to Mercantile Bank shareholders and the MFE
shareholder;
18
<PAGE>
(iv) the fact that Wells Fargo is a diversified financial services company
with banking operations in 21 states and nonbanking operations (including
insurance, investment services, mortgages, and consumer finance) in all 50
states;
(v) the ability to expand the portfolio of banking products and services
offered to customers and the Brownsville community, thus enabling Mercantile
Bank to better compete with other banks and financial institutions in the
Brownsville and surrounding markets;
(vi) the tax-free nature of the exchange of Mercantile Bank common stock
and MFE common stock for Wells Fargo common stock; and
(vii) the opportunity for cost savings, operating efficiencies, and
economies of scale.
OPINION OF FINANCIAL ADVISOR
General. Mercantile Bank retained Sheshunoff to provide its opinion of the
fairness of the consideration to be received by Mercantile Bank's shareholders
other than MFE in connection with the Consolidation and related matters. As
part of its investment banking business, Sheshunoff is regularly engaged in the
valuation of securities in connection with mergers and acquisitions and
valuations for estate, corporate and other purposes. Mercantile Bank's board of
directors decided to retain Sheshunoff based on its experience as a financial
advisor in mergers and acquisitions of financial institutions, and its knowledge
of financial institutions. On October 9, 1998, Sheshunoff rendered its written
opinion that, as of such date, the consideration was fair, from a financial
point of view, to the holders of Mercantile Bank's common stock other than MFE.
The full text of the Sheshunoff's opinion which sets forth, among other
things, assumptions made, procedures followed, matters considered, and
limitations on the review undertaken, is attached as Appendix C to this proxy
statement-prospectus. Mercantile Bank's shareholders are urged to read the
Sheshunoff opinion carefully and in its entirety. Sheshunoff's opinion is
addressed to Mercantile Bank's board of directors and is not a recommendation to
any shareholder of Mercantile Bank as to how such shareholder should vote at the
special meeting.
In connection with its opinion, Sheshunoff: (i) reviewed the Reorganization
Agreement, including the Consolidation Agreement; (ii) reviewed certain publicly
available financial statements and other information of Mercantile Bank and
Wells Fargo, respectively; (iii) reviewed certain internal financial statements
and other financial and operating data of Mercantile Bank provided to Sheshunoff
by its management; (iv) reviewed the reported prices and share trading activity
for Wells Fargo; (v) discussed the past and current operations, financial
condition, and future prospects of Mercantile Bank with its executive
management; (vi) compared Mercantile Bank and Wells Fargo from a financial point
of view with certain other banking companies that Sheshunoff deemed to be
relevant; (vii) compared the financial performance of Wells Fargo and the prices
and trading activity of Wells Fargo common stock with that of certain other
comparable publicly traded companies and their securities; (viii) reviewed the
financial terms, to the extent publicly available, of certain comparable merger
transactions nationally, in the Southern United States, and in Texas, and; (ix)
performed such other analyses and reviews as Sheshunoff deemed appropriate.
In connection with its review, Sheshunoff relied upon and assumed the accuracy
and completeness of all of the information listed above and provided to it or
made publicly available. Sheshunoff did not assume any responsibility for
independent verification of such information. With respect to internal
19
<PAGE>
confidential financial projections, Sheshunoff assumed that such projections
were reasonably prepared on the basis that reflects the best currently available
estimates and judgments of the future financial performance of Mercantile Bank.
Sheshunoff did not independently verify the validity of such assumptions.
Sheshunoff also did not make any independent evaluation or appraisal of the
assets or liabilities of Mercantile Bank, nor was Sheshunoff furnished with any
such appraisals. Sheshunoff did not examine any individual loan files of
Mercantile Bank. Sheshunoff is not an expert in the evaluation of loan
portfolios for the purposes of assessing the adequacy of the allowance for
losses with respect thereto and has assumed that such allowances for each of the
companies are in the aggregate, adequate to cover such losses.
With respect to Wells Fargo, Sheshunoff relied solely upon publicly available
data regarding Wells Fargo's financial condition and performance. Sheshunoff
did not meet with or discuss this publicly available information with the
management of Wells Fargo. Sheshunoff did not conduct any independent
evaluation or appraisal of the assets, liabilities or business prospects of
Wells Fargo, was not furnished with any evaluations or appraisals, and did not
review any individual credit files of Wells Fargo.
Sheshunoff's opinion is necessarily based on economic, market, and other
conditions as in effect on, and the information made available to Sheshunoff as
of October 9, 1998, the date of its opinion.
In connection with rendering its opinion, Sheshunoff performed a variety of
financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
As a result, such an opinion is not readily susceptible to partial analysis or
summary description. Moreover, the evaluation of the fairness, from a financial
point of view, of the consideration to be received by the minority shareholders
of Mercantile Bank is to some extent a subjective one based on the experience
and judgment of Sheshunoff and not merely the result of mathematical analysis of
financial data. Accordingly, notwithstanding the separate factors summarized
below, Sheshunoff believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion. The ranges of valuations
resulting from any particular analysis described below should not be taken to be
Sheshunoff's view of the actual value of Mercantile Bank.
In performing its analyses, Sheshunoff made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of Mercantile Bank. The analyses performed
by Sheshunoff are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. The analyses do not purport to be appraisals or to reflect the prices
at which a company might actually be sold. In addition, Sheshunoff's analyses
should not be viewed as determinative of Mercantile Bank's board of director's
or Mercantile Bank's management's opinion with respect to the value of
Mercantile Bank.
The following is a summary of the analyses performed by Sheshunoff in
connection with its opinion dated as of October 9, 1998. Where available, the
following discussion contains financial information updated to January 11, 1999:
Analysis of Selected Transactions. Sheshunoff performed an analysis of
premiums paid in selected pending or recently completed acquisitions of banking
organizations in Texas, in the southern United
20
<PAGE>
States, and nationally, with comparable characteristics to Mercantile Bank and
Wells Fargo transaction. Three sets of comparable transactions were analyzed to
ensure a thorough comparison.
The first set of comparable transactions (the "state transactions") was
comprised to reflect the asset size and regional location of Mercantile Bank.
The regional transactions specifically consisted of six (6) mergers and
acquisitions of banks with total assets above $250 million and located in Texas
which sold for common stock between June 1, 1997 and January 11, 1999. The
analysis yielded multiples of the regional transactions' purchase price relative
to: (i) book value ranging from 2.08 times to 4.65 times with an average of 2.99
times and a median of 2.84 times (compared with the multiple implied in the
Consolidation, based on the closing price of Wells Fargo common stock at January
11, 1999, of 1.99 times September 30, 1998 book value); (ii) last 12 months
earnings ranging from 14.6 times to 28.2 times with an average of 20.3 times and
a median of 19.2 times (compared with the multiple implied in the Consolidation,
based on the closing price of the Wells Fargo common stock at January 11, 1999,
of 22.1 times last 12 months earnings as of September 30, 1998); (iii) total
assets ranging between 21.9% and 29.4% with an average of 23.7% and a median of
22.8% (compared with the multiple implied in the Consolidation, based on the
closing price of the Wells Fargo common stock at January 11, 1998, of 21.4% of
September 30, 1998 total assets); and (iv) total deposits ranging from 23.9% to
34.6% with an average of 26.6% and a median of 25.6% (compared with the multiple
implied in the Consolidation, based on the closing price of the Wells Fargo
common stock at January 11, 1999, of 27.3% of deposits as of September 30,
1998).
The second set of comparable transactions (the "southern transactions") was
comprised to reflect a broader defined group of comparable transactions based on
the asset size, location and type of consideration received. The southern
transactions specifically consisted of six (6) mergers and acquisitions of banks
in the southern United States with total assets between $500 million and $1
billion and located in the South which sold for common stock between January 1,
1998 and January 11, 1999. The analysis yielded multiples of the regional
transactions' purchase price relative to: (i) book value ranging from 2.08 times
to 4.65 times with an average of 3.08 times and a median of 2.82 times (compared
with the multiple implied in the Consolidation, based on the closing price of
Wells Fargo common stock at January 11, 1999, of 1.99 times September 30, 1998
book value); (ii) last 12 months earnings ranging from 16.6 times to 29.7 times
with an average of 24.1 times and a median of 26.6 times (compared with the
multiple implied in the Consolidation, based on the closing price of the Wells
Fargo common stock at January 11, 1999, of 22.1 times last 12 months earnings as
of September 30, 1998); (iii) total assets ranging between 20.2% and 29.8% with
an average of 26.1% and a median of 27.2% (compared with the multiple implied in
the Consolidation, based on the closing price of the Wells Fargo common stock at
January 11, 1998, of 21.4% of September 30, 1998 total assets); and (iv) total
deposits ranging from 23.2% to 36.8% with an average of 30.7% and a median of
31.2% (compared with the multiple implied in the Consolidation, based on the
closing price of the Wells Fargo common stock at January 11, 1999, of 27.3% of
deposits as of September 30, 1998).
The third set of comparable transactions (the "national transactions") was
comprised to reflect a broader universe than exhibited by the southern
transactions. These national transactions specifically consisted of fifteen
(15) mergers and acquisitions of banks in the United States with total assets
between $500 million and $1 billion which sold for common stock between January
1, 1998 and January 11, 1999. The analysis yielded multiples of the regional
transactions' purchase price relative to: (i) book value ranging from 2.08 times
to 4.65 times with an average of 3.17 times and a median of 3.16 times (compared
with the multiple implied in the Consolidation, based on the closing price of
Wells Fargo common stock at January 11, 1999, of 1.99 times September 30, 1998
book value); (ii) last 12 months earnings ranging from 16.6 times to 37.6 times
with an average of 26.7 times and a median of 26.0 times
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(compared with the multiple implied in the Consolidation, based on the closing
price of the Wells Fargo common stock at January 11, 1999, of 22.1 times last 12
months earnings as of September 30, 1998); (iii) total assets ranging between
20.2% and 36.4% with an average of 28.4% and a median of 29.4% (compared with
the multiple implied in the Consolidation, based on the closing price of the
Wells Fargo common stock at January 11, 1998, of 21.4% of September 30, 1998
total assets); and (iv) total deposits ranging from 23.2% to 43.0% with an
average of 33.0% and a median of 34.6% (compared with the multiple implied in
the Consolidation, based on the closing price of the Wells Fargo common stock at
January 11, 1999, of 27.3% of deposits as of September 30, 1998).
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Sheshunoff estimated the present value of the future stream of after-tax cash
flow that Mercantile Bank could produce through the year 2003, under various
circumstances, assuming that Mercantile Bank performed in accordance with the
earnings/return projections of management. Sheshunoff estimated the terminal
value for Mercantile Bank at the end of the period by applying multiples of
earnings ranging from 15 times to 20 times and then discounting the cash flow
streams, dividends paid to the shareholders (assuming all earnings in excess of
that required to maintain a tangible equity to tangible asset percentage of 6.0%
are paid out in dividends) and terminal value using discount rates ranging from
12% to 14% chosen to reflect different assumptions regarding the required rates
of return of Mercantile Bank and the inherent risk surrounding the underlying
projections. This discounted cash flow analysis indicated a range of $53 per
share to $67 per share based on 2,739,928 fully diluted shares outstanding.
This compares favorably to the value of the consideration for Mercantile Bank of
$65.562 per share, based on the closing price per share of Wells Fargo common
stock at January 11, 1999.
Sheshunoff also performed a cash flow analysis using an estimated terminal
value for Mercantile Bank at the end of the period by applying multiples of book
value ranging from 2.00 times to 3.00 times and then discounting the cash flow
streams, dividends paid to the shareholders (assuming all earnings in excess of
that required to maintain a tangible equity to tangible asset percentage of
6.0% are paid out in dividends) and terminal value using discount rates ranging
from 12% to 14% chosen to reflect different assumptions regarding the required
rates of return of Mercantile Bank and the inherent risk surrounding the
underlying projections. This discounted cash flow analysis indicated a range of
$47 per share to $64 per share. This compares favorably to the value of the
consideration for Mercantile Bank of $65.562 per share, based on the closing
price per share of Wells Fargo common stock at January 11, 1999.
Sheshunoff stated that the discounted cash flow analysis is a widely-used
valuation methodology but noted that that it relies on numerous assumptions,
including asset and earnings growth rates, terminal values and discount rates.
The analysis did not purport to be indicative of the actual values or expected
values of Mercantile Bank common stock.
Comparable Company Analysis. Sheshunoff compared selected balance sheet data,
asset quality, capitalization and profitability measures and market statistics
using financial data at or for the twelve months ended September 30, 1998 and
market data as of January 11, 1999 for Wells Fargo to a group of selected bank
holding companies which Sheshunoff deemed to be relevant.
The group of selected bank holding companies (the "Comparable Composite")
included BankAmerica Corporation, Citigroup, Inc., Chase Manhattan Corporation,
First Union Corporation, J.P. Morgan & Company and Bank One Corporation Capital
City Bank Group, Inc., Hamilton Bancorp, Inc., Republic Banking Corporation of
Florida, and Republic Bancshares, Inc. This comparison, among other things,
showed that: (i) Wells Fargo's tangible equity to tangible asset percentage was
6.22%, compared to an average of 5.77% and a median of 5.59% for the Comparable
Composite; (ii) for the last
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twelve months ended September 30, 1998, Wells Fargo's return on average equity
was 20.9%, compared to an average of 14.7% and a median of 15.9% for the
Comparable Composite; (iii) for the last twelve months ended September 30, 1998,
Wells Fargo's return on average assets was 1.66%, compared to an average of
1.01% and a median of 0.94% for the Comparable Composite; (iv) as of September
30, 1998, Wells Fargo's nonperforming loans to total loans ratio was 0.48%,
compared to an average of 0.73% and a median of 0.60% for the Comparable
Composite; (v) as of January 11, 1999, Wells Fargo's price per share to
September 30, 1998 book value per share was 4.03 times, compared to an average
of 2.94 times and median of 3.06 times for the Comparable Composite; and (vi) as
of January 11, 1999, Wells Fargo Corporation's price per share to projected 1999
earnings per share was 17.2 times, compared to an average of 15.5 times and
median of 15.0 times for the Comparable Composite.
Sheshunoff also compared selected stock market results of Wells Fargo to the
publicly available corresponding data of other composites which Sheshunoff
deemed to be relevant, including SNL Securities, L.P.'s ("SNL") index of all
publicly traded banks, the aforementioned Comparable and the S&P 500.
No company or transaction used in the comparable company and comparable
transaction analyses is identical to Mercantile Bank or the Consolidation.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of Mercantile Bank and other factors that could affect
the public trading value of the companies to which they are being compared.
Mathematical analysis (such as determining the average or median) is not in
itself a meaningful method of using comparable transaction data or comparable
company data.
Pursuant to an engagement letter dated February 12, 1998, between Mercantile
Bank and Sheshunoff, Mercantile Bank agreed to pay Sheshunoff a retainer fee of
$10,000 and a transaction fee based upon the consideration paid to Mercantile
Bank. Mercantile Bank also agreed to indemnify and hold harmless Sheshunoff and
its officers and employees against certain liabilities in connection with its
services under the engagement letter, except for liabilities resulting from the
negligence of Sheshunoff.
ADDITIONAL INTERESTS OF MERCANTILE BANK MANAGEMENT IN THE TRANSACTIONS
In considering the recommendation of Mercantile Bank's board of directors to
approve the Reorganization Agreement and the Consolidation Agreement, you should
be aware that Mercantile Bank's directors and executive officers have interests
in the Consolidation that are different from, or in addition to, the interests
of Bank shareholders generally. Mercantile Bank's board of directors was aware
of these interests when it approved the Consolidation.
Employment Agreements. Ms. Graciela Gutierrez and Messrs. James S. Scott and
Edward J. Bacak have entered into employment agreements with Wells Fargo,
pursuant to which each of them will be employed by Wells Fargo for a one-year
period following the effective date of the Consolidation. Ms. Gutierrez will
receive base annual compensation of $180,000, Mr. Scott will receive base annual
compensation of $170,000 and Mr. Bacak will receive base annual compensation of
$100,000. Ms. Gutierrez and Messrs. Scott and Bacak will also be eligible for
all benefits available to similarly-situated, regular, full-time employees of
Wells Fargo and its affiliates (other than participation in Wells Fargo's
severance plan). The employment agreement of Ms. Gutierrez and Messrs. Scott
and Bacak contain economic incentives to refrain from competing with Wells Fargo
for a period of one year after the terms of their respective employment
agreements expire. Specifically, Ms. Gutierrez will receive a total of
$180,000, payable in two semiannual installments, Mr. Scott will receive a total
of $170,000 payable in
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two semi-annual installments, and Mr. Bacak will receive a total of $100,000,
also payable in two semiannual installments.
APPRAISAL RIGHTS
Under federal law, any shareholder of Mercantile Bank who dissents from the
Consolidation has the right to receive cash equal to the value of the
shareholder's shares as measured on the effective date of the Consolidation.
This right is subject to the following conditions: (a) the shareholder must
vote against approval of the Consolidation at the special meeting or give notice
in writing at or before the special meeting to the presiding officer that such
shareholder dissents from the proposed Consolidation; (b) the shareholder must,
within 30 days after the effective date of the Consolidation, make a written
request for payment to the surviving bank; (c) the written request must be
accompanied by surrender of the shareholder's stock certificate(s). Any
shareholder who votes against the Consolidation at the special meeting, or who
gives notice in writing at or before the special meeting to the presiding
officer that such shareholder dissents, will be notified in writing of the
effective date of the Consolidation. Failure to comply strictly with each of
the foregoing conditions will result in the loss of appraisal rights.
The value of the shares of any dissenting shareholder will be determined by an
appraisal made by a committee of three persons, one to be selected by the
majority vote of the dissenting shareholders, one by the board of directors of
the surviving bank, and the third by the two so chosen. The valuation agreed
upon by any two of the three appraisers will govern. If the value so fixed is
not satisfactory to any dissenting shareholder, that shareholder may, within
five days after being notified of the appraised value of such shareholder's
shares, appeal to the OCC, who will cause a reappraisal to be made which will be
final and binding as to the value of such shares. If a shareholder dissents
and, within 90 days from the effective date of the Consolidation, one or more of
the appraisers is not selected for any reason, or the appraisers fail to
determine the value of such shares, the OCC will, upon written request of any
interested party, cause an appraisal to be made which will be final and binding
on all parties. The expenses of the OCC in making the reappraisal or the
appraisal, as the case may be, will be paid by the surviving bank.. The value
of the shares ascertained will be promptly paid to the dissenting shareholder by
the surviving bank.
The foregoing is a summary of Title 12, Section 215 of the United States Code.
It is not a complete statement of the provisions of Section 215 and is qualified
in its entirety by reference to the relevant provisions of Section 215, the text
of which is attached to this proxy statement-prospectus as Appendix D. Any
shareholder of Mercantile Bank who desires to exercise dissenters' appraisal
rights should carefully review and comply with the relevant provisions of
Section 215. APPRAISAL RIGHTS WILL BE FORFEITED IF THE PROCEDURAL REQUIREMENTS
OF SECTION 215 ARE NOT STRICTLY COMPLIED WITH.
Attached to this proxy statement-prospectus as Appendix E is a copy of Banking
Circular 259 regarding the valuation methods used by the OCC to estimate the
value of a bank's shares when the OCC is involved in the appraisal of shares
held by dissenting shareholders. The results of appraisals performed by the OCC
between January 1, 1985 and September 30, 1991 are also summarized in Appendix
E. YOU SHOULD CONSIDER CAREFULLY THE INFORMATION IN BANKING CIRCULAR 259 BEFORE
DECIDING WHETHER TO EXERCISE YOUR APPRAISAL RIGHTS.
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EXCHANGE OF CERTIFICATES
After completion of the Transactions, Norwest Bank Minnesota, National
Association, acting as exchange agent for Wells Fargo, will mail to each holder
of record of shares of MFE common stock and Mercantile Bank common stock a form
of letter of transmittal, together with instructions for the exchange of the
holder's MFE or Mercantile Bank stock certificates for a certificate
representing Wells Fargo common stock.
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
No dividend or other distribution declared on Wells Fargo common stock after
completion of the Transactions will be paid to the holder of any certificates
for shares of MFE common stock or Mercantile Bank common stock until after the
certificates have been surrendered for exchange.
When the exchange agent receives a surrendered certificate or certificates
from a shareholder, together with a properly completed letter of transmittal, it
will issue and mail to the shareholder a certificate representing the number of
shares of Wells Fargo common stock to which the shareholder is entitled, plus
the amount in cash of any remaining fractional share and any cash dividends that
are payable with respect to the shares of Wells Fargo common stock so issued.
No interest will be paid on the fractional share amount or amounts payable as
dividends or other distributions.
A certificate for Wells Fargo common stock may be issued in a name other than
the name in which the surrendered certificate is registered if (a) the
certificate surrendered is properly endorsed and accompanied by all documents
required to transfer the shares to the new holder and (b) the person requesting
the issuance of the Wells Fargo common stock certificate either pays to the
exchange agent in advance any transfer and other taxes due or establishes to the
satisfaction of the exchange agent that such taxes have been paid or are not
due.
The exchange agent will issue stock certificates for Wells Fargo common stock
in exchange for lost, stolen or destroyed certificates for MFE common stock or
Mercantile Bank common stock upon receipt of a lost certificate affidavit and a
bond indemnifying Wells Fargo for any claim that may be made against Wells Fargo
as a result of the lost, stolen or destroyed certificates.
After completion of the Transactions, no transfers will be permitted on either
the books of MFE or Mercantile Bank. If, after completion of the Transactions,
certificates for MFE common stock or Mercantile Bank common stock are presented
for transfer to the exchange agent, they will be canceled and exchanged for
certificates representing Wells Fargo common stock.
None of Wells Fargo, MFE, Mercantile Bank, the exchange agent, or any other
person will be liable to any former holder of MFE common stock or Mercantile
Bank common stock for any amount delivered in good faith to a public official
pursuant to applicable abandoned property, escheat, or similar laws.
REGULATORY APPROVALS
The Transactions are subject to the prior approval of the Federal Reserve
Board. The approval of the Federal Reserve Board is required because Wells
Fargo is a bank holding company registered under the Bank Holding Company Act of
1956 (the "Bank Holding Company Act"). Wells Fargo filed an application with
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board")
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requesting approval of the Transactions and the Federal Reserve Board approved
the application on January 27, 1999 The Consolidation of Mercantile Bank with
Norwest Interim Bank is subject to the approval of the Office of the Comptroller
of the Currency ("OCC"), because transactions like the Consolidation, which
involve national banks like Mercantile Bank, must be approved by the OCC, the
primary regulator of national banks. An application for approval of the
Consolidation was filed with the OCC on January 8, 1999. The OCC's approval has
not yet been received.
Because the Transactions will result in the acquisition by Wells Fargo of
Mercantile Bank, Wells Fargo must give notice of the Transactions to the Texas
Division of Banking.
The approval of an application means only that the regulatory criteria for
approval have been satisfied or waived. It does not mean that the approving
authority has determined that the consideration to be received by the
shareholder of MFE and Mercantile Bank shareholders is fair. Regulatory
approval does not constitute an endorsement or recommendation of the
Transactions.
Wells Fargo, MFE, and Mercantile Bank are not aware of any governmental
approvals or compliance with banking laws and regulations that are required for
the Transactions to become effective other than those described above. Wells
Fargo, MFE, and Mercantile Bank intend to seek any other approval and to take
any other action that may be required to effect the Transactions. There can be
no assurance that any required approval or action can be obtained or taken prior
to the effective date of the consent of the MFE shareholder or the special
meeting.
The Transactions cannot be completed unless all necessary regulatory approvals
are granted. In addition, Wells Fargo may elect not to complete the
Transactions if any condition under which any regulatory approval is granted is
unreasonably burdensome to Wells Fargo. See "The Reorganization Agreement-
Conditions to the Completion of the Transactions" and "-Termination of the
Reorganization Agreement."
EFFECT ON MERCANTILE BANK'S EMPLOYEE BENEFIT PLANS
The Reorganization Agreement provides that, subject to any eligibility
requirements applicable to such plans, employees of Mercantile Bank will be
entitled to participate in those Wells Fargo employee benefit and welfare plans
specified in the Reorganization Agreement. Eligible employees of Mercantile
Bank will enter each of such plans no later than the first day of the calendar
quarter which begins at least 32 days after completion of the Consolidation.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED HEREIN FOR
GENERAL INFORMATION ONLY. THE SHAREHOLDER OF MFE AND THE SHAREHOLDERS OF
MERCANTILE BANK ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER AND CONSOLIDATION,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, AND FOREIGN INCOME OR
OTHER TAX LAWS.
Set forth below is a summary of the opinion to be provided by Kilpatrick
Stockton LLP concerning the material federal income tax consequences to the
shareholder of MFE common stock who disposes of its MFE common stock in the
Merger and the shareholders of Mercantile Bank common stock who dispose of their
Mercantile Bank common stock in the Consolidation. This discussion is primarily
based
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on the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations promulgated thereunder.
Material Federal Income Tax Aspects of the Merger. The following discussion
is limited to the material federal income tax aspects of the Merger to a holder
of MFE common stock who is a citizen or resident of the United States and who,
on the date of disposition of his shares of MFE common stock, holds such shares
as a capital asset. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular investors in light of their
personal investment circumstances, or to certain types of investors, including
insurance companies, tax-exempt organizations, financial institutions, broker-
dealers, "S" corporations, limited liability corporations, foreign corporations
and tax payers subject to alternative minimum tax. Further, this discussion
does not consider the state, local, or foreign tax consequences of the Merger to
a holder of MFE common stock.
MFE has been advised by its special tax counsel, Kilpatrick Stockton LLP, that
based on the Code, judicial decisions, and certain factual assumptions, the
Merger will qualify as a "reorganization" within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code. The following is a summary of the
federal income tax consequences set forth in the form of legal opinion to be
delivered by Kilpatrick Stockton LLP, a copy of which is included as an exhibit
to the registration statement filed by Wells Fargo. In rendering this opinion,
Kilpatrick Stockton LLP has assumed, among other matters, that no shareholder of
MFE receiving Wells Fargo common stock in the Merger has the intention, at the
time of the Merger, of disposing of any Wells Fargo common stock received or
requesting registration of any shares except as permitted under the
Reorganization Agreement or the agreement executed by the affiliates of MFE in
favor of Wells Fargo.
The Merger will qualify for federal income tax purposes as a "Reorganization"
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and,
as such, will result in the following federal income tax consequences to the
shareholder of MFE common stock:
1. No gain or loss will be realized by the shareholder of MFE common stock
to the extent it exchanges its shares of MFE common stock for shares of Wells
Fargo common stock pursuant to the terms of the Merger.
2. The aggregate basis of Wells Fargo common stock received by the MFE
shareholder in the Merger will be the same as the aggregate basis of the MFE
common stock surrendered and exchanged therefor, decreased by the amount of
cash received and increased by the amount of gain realized by the such MFE
shareholder under the exchange.
3. The holding period of Wells Fargo common stock received by the MFE
shareholder will include the period during which MFE common stock surrendered
therefor was held, provided the MFE common stock is a capital asset in the
hands of the MFE shareholder on the date of the exchange. The payment of cash
in lieu of fractional shares of Wells Fargo common stock will be treated as a
sale or exchange of such fractional shares potentially eligible for capital
gains treatment.
4. Dissenting shareholders whose shares of MFE common stock are disposed
of pursuant to the exercise of appraisal rights will realize gain or loss
equal to the difference between the amount of cash received from the exercise
of such dissenters rights and such dissenting shareholder's aggregate adjusted
tax basis in the stock exchanged.
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5. Unless an exemption applies, under the backup withholding rules of
Section 3406 of the Code, an exchange agent shall be required to withhold, and
will withhold, 31% of all cash payments to which the MFE shareholder is
entitled pursuant to the Merger (unless such MFE shareholder provides its
taxpayer identification number-social security number in the case of an
individual, or Employer Identification Number in other cases) and certifies
that such number is correct.
Neither the foregoing discussion nor the opinion of Kilpatrick Stockton LLP to
MFE is binding on the Internal Revenue Service ("IRS") or the courts. AS SUCH,
THE FOREGOING PRESENTS ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES TO SHAREHOLDERS OF MFE COMMON STOCK OF THE TRANSACTIONS
CONTEMPLATED BY THE MERGER. ACCORDINGLY, THE MFE SHAREHOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ALL TAX CONSEQUENCES STEMMING FROM
THE MERGER THAT MAY SPECIFICALLY AFFECT THE MFE SHAREHOLDER.
Material Federal Income Tax Aspects of the Consolidation. The following
discussion is limited to the material federal income tax aspects of the
Consolidation to a holder of Mercantile Bank common stock who is a citizen or
resident of the United States and who, on the date of disposition of his shares
of Mercantile Bank common stock, holds such shares as a capital asset. This
discussion does not purport to deal with all aspects of taxation that may be
relevant to particular investors in light of their personal investment
circumstances, or to certain types of investors, including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, "S"
corporations, limited liability corporations, foreign corporations and tax
payers subject to alternative minimum tax. Further, this discussion does not
consider the state, local, or foreign tax consequences of the Consolidation to a
holder of Mercantile Bank common stock.
Mercantile Bank has been advised by its special counsel, Kilpatrick Stockton
LLP, that based on the Code, judicial decisions, and certain factual
assumptions, the Consolidation will qualify as a "reorganization" within the
meaning of Section 368(a)(1)(B) of the Code. The following is a summary of the
federal income tax consequences set forth in the form of legal opinion to be
delivered by Kilpatrick Stockton LLP, a copy of which is included as an exhibit
to the registration statement filed by Wells Fargo. In rendering this opinion,
Kilpatrick Stockton LLP has assumed, among other matters, that no shareholder of
Mercantile Bank receiving Wells Fargo common stock in the Consolidation has the
intention, at the time of the Consolidation, of disposing of any Wells Fargo
common stock received or requesting registration of any shares except as
permitted under the Reorganization Agreement or the agreement executed by the
affiliates of Mercantile Bank in favor of Wells Fargo.
The Consolidation will qualify for federal income tax purposes as a
"Reorganization" within the meaning of Section 368(a)(1)(B) of the Code, and, as
such, will result in the following federal income tax consequences to holders of
Mercantile Bank common stock:
1. No gain or loss will be realized by holders of Mercantile Bank common
stock to the extent they exchange their shares of Mercantile Bank common stock
for shares of Wells Fargo common stock pursuant to the terms of the
Consolidation.
2. The aggregate basis of Wells Fargo common stock received by each
Mercantile Bank shareholder in the Consolidation will be the same as the
aggregate basis of Mercantile Bank common stock surrendered and exchanged
therefor, decreased by the amount of cash received and increased by the amount
of gain realized by the shareholder under the exchange.
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3. The holding period of Wells Fargo common stock received by each
Mercantile Bank shareholder will include the period during which Mercantile
Bank common stock surrendered therefor was held, provided Mercantile Bank
common stock is a capital asset in the hands of Mercantile Bank shareholder on
the date of the exchange. The payment of cash in lieu of fractional shares of
Wells Fargo common stock will be treated as a sale or exchange of such
fractional shares potentially eligible for capital gains treatment.
4. Dissenting shareholders whose shares of Mercantile Bank common stock
are disposed of pursuant to the exercise of appraisal rights will realize gain
or loss equal to the difference between the amount of cash received from the
exercise of such dissenters rights and such dissenting shareholder's aggregate
adjusted tax basis in the stock exchanged.
5. Unless an exemption applies, under the backup withholding rules of
Section 3406 of the Code, an exchange agent shall be required to withhold, and
will withhold, 31% of all cash payments to which a Bank shareholder is
entitled pursuant to the Consolidation (unless such shareholder provides his
taxpayer identification number-social security number in the case of an
individual, or Employer Identification Number in other cases) and certifies
that such number is correct.
Neither the foregoing discussion nor the opinion of Kilpatrick Stockton LLP to
Bank is binding on the Internal Revenue Service ("IRS") or the courts. AS SUCH,
THE FOREGOING PRESENTS ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES TO SHAREHOLDERS OF MERCANTILE BANK COMMON STOCK OF THE TRANSACTIONS
CONTEMPLATED BY THE CONSOLIDATION. ACCORDINGLY, EACH MERCANTILE BANK
SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO ALL
TAX CONSEQUENCES STEMMING FROM THE CONSOLIDATION THAT MAY SPECIFICALLY AFFECT
HIM OR HER.
RESALE OF WELLS FARGO COMMON STOCK
The Wells Fargo common stock issued in the Merger will be freely transferable
under the Securities Act, except for shares issued to MFE's shareholder and
those shareholders of Mercantile Bank who are considered to be "affiliates" of
MFE, Mercantile Bank, or Wells Fargo under Rule 145 under the Securities Act of
1933, as amended (the "Securities Act") or of Wells Fargo under Rule 144 under
the Securities Act. The definition of "affiliate" is complex and depends on the
specific facts, but generally includes directors, executive officers, 10%
stockholders, and other persons with the power to direct the management and
policies of the company in question.
Affiliates of MFE and Mercantile Bank may not sell the shares of Wells Fargo
common stock received in the Transactions except (a) pursuant to an effective
registration statement under the Securities Act, (b) in compliance with an
exemption from the registration requirements of the Securities Act, or (c) in
compliance with Rule 144 and Rule 145 under the Securities Act. Generally,
those rules permit resales of stock received by affiliates so long as Wells
Fargo has complied with certain reporting requirements and the selling
stockholder complies with certain volume and manner of sale restrictions. In
addition, because the Transactions will be accounted for as a "pooling of
interests," affiliates of MFE and Mercantile Bank may not sell or otherwise
reduce their economic interest in Wells Fargo common stock after the
Transactions are completed until Wells Fargo has published financial results
------
which include at least 30 days of combined financial results of Wells Fargo,
MFE, and Mercantile Bank.
MFE and Mercantile Bank have agreed to use their best efforts to deliver to
Wells Fargo signed representations by each person who may be deemed to be an
affiliate of MFE and Mercantile Bank that the person will not sell, transfer or
otherwise dispose of the shares of Wells Fargo common stock to be
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received by the person in the Transactions except in compliance with the
applicable provisions of the Securities Act and the rules and regulations
promulgated under pooling of interests rules.
This proxy statement-prospectus does not cover any resales of Wells Fargo
common stock received by affiliates of MFE.
STOCK EXCHANGE LISTING
The shares of Wells Fargo common stock to be issued in the Transactions will
be listed on the New York Stock Exchange and the Chicago Stock Exchange.
ACCOUNTING TREATMENT
Wells Fargo will account for the Transactions as a pooling of interests,
assuming all of the criteria for a pooling transaction are satisfied. Under the
pooling of interests accounting method, Wells Fargo will carry forward the
assets and liabilities of MFE and Mercantile Bank at their historical recorded
values. Because the Transactions are not material to the consolidated financial
statements of Wells Fargo, Wells Fargo will not restate its balance sheet
amounts and results of operations for prior periods to reflect the combination
of MFE and Mercantile Bank with Wells Fargo.
The unaudited pro forma data included in this proxy statement-prospectus for
the Transactions have been prepared using the pooling of interests method of
accounting. See "Summary-Comparative Per Common Share Data."
THE REORGANIZATION AGREEMENT
The following is a summary of certain provisions of the Reorganization
Agreement which includes a related Merger Agreement as Exhibit A-1 and the
Consolidation Agreement as Exhibit A-2 attached to this proxy statement-
prospectus as Appendix A. A copy of the Consolidation Agreement is also
attached to this proxy statement-prospectus as Appendix B. The Reorganization
Agreement is incorporated by reference into this proxy statement-prospectus.
This summary is qualified in its entirety by reference to the full text of the
Reorganization Agreement. Mercantile Bank shareholders are encouraged to read
the Reorganization Agreement carefully and in its entirety. Parenthetical
references are to the relevant paragraph or paragraphs of the Reorganization
Agreement.
BASIC PLAN OF REORGANIZATION
STRUCTURE AND CONSIDERATION.
The Merger and the Merger Consideration. Under the Reorganization Agreement,
a wholly-owned subsidiary of Wells Fargo, will merge into MFE, with MFE as the
surviving corporation. In the Merger, each outstanding share of MFE common
stock outstanding at the Effective Time of the Merger, will be exchanged for a
number of shares of Wells Fargo common stock computed as follows (paragraph
1(a)(i)):
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(A) If the Wells Fargo Measurement Price is equal to or less than $37.00,
the number of shares of Wells Fargo common stock will be determined by (i)
dividing the Merger Value by $37.00, and (ii) dividing the result by the total
number of outstanding shares of MFE common stock.
(B) If the Wells Fargo Measurement Price is between $37.00 and $41.00, the
number of shares of Wells Fargo common stock will be determined by (i)
dividing the Merger Value by the Wells Fargo Measurement Price, and (ii)
dividing the result thereof by the total number of outstanding shares of MFE
common stock.
(C) If the Wells Fargo Measurement Price is equal to or greater than
$41.00, the number of shares of Wells Fargo common stock will be determined by
(i) dividing the Merger Value by $41.00, and (ii) dividing the result thereof
by the total number of outstanding shares of MFE common stock.
The Consolidation and the Consolidation Consideration. Following the
Effective Time of the Merger, Wells Fargo will contribute Norwest Interim Bank
to MFE and, immediately thereafter, Norwest Interim Bank will consolidate with
Mercantile Bank under the charter of Mercantile Bank pursuant to the
Consolidation Agreement. In the Consolidation, each share of Mercantile Bank
common stock outstanding immediately prior to the Effective Time of the
Consolidation (other than shares owned by MFE and other than shares as to which
statutory dissenters' appraisal rights have been exercised) will be converted
into and exchanged for a number of shares of Wells Fargo common stock determined
as follows:
(A) If the Wells Fargo Measurement Price is equal to or less than $37.00,
the number of shares of Wells Fargo common stock will be determined by (i)
dividing the Bank Consolidation Value (defined below) by $37.00, and (ii)
dividing the result thereof by the total number of shares of Bank common stock
then outstanding held by shareholders of Mercantile Bank other than MFE.
(B) If the Wells Fargo Measurement Price is between $37.00 and $41.00, the
number of shares of Wells Fargo common stock will be determined by (i)
dividing the Bank Consolidation Value by the Wells Fargo Measurement Price,
and (ii) dividing the result thereof by the total number of shares of Bank
common sock then outstanding held by shareholders of Mercantile Bank other
than MFE.
(C) If the Wells Fargo Measurement Price is equal to or greater than
$41.00, the number of shares of Wells Fargo common stock will be determined by
(i) dividing the Bank Consolidation Value by $41.00, and (ii) dividing the
result thereof by the total number of shares of Mercantile Bank common stock
then outstanding held by shareholders of Mercantile Bank other than MFE.
Definitions of Capitalized Terms. As used in the above paragraphs, the terms
"Effective Time of the Merger," "Effective Time of the Consolidation," "Wells
Fargo Measurement Price," "Merger Value," and "Bank Consolidation Value" and
related terms are defined as follows:
Effective Time of the Consolidation - 12:01 a.m., on the Effective Date of
-----------------------------------
the Consolidation.
Effective Date of the Consolidation - The date occurring immediately after
-----------------------------------
the Effective Date of the Merger on which the OCC issues its Certificate of
Approval for the Consolidation.
Effective Time of the Merger - 11:59 p.m., Wilmington, Delaware time, on
----------------------------
the Effective Date of the Merger, or such other time as may be specified in
the articles of merger for the Merger.
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Effective Date of the Merger - The day on which articles of merger for the
----------------------------
Merger have been filed with and accepted by the Delaware Secretary of State or
such later date as may be specified in the articles of merger.
Merger Value - $174,000,000 minus the Mercantile Bank Consolidation Value.
------------
Nominal Value - The number obtained by adding to $174,000,000 the cash
-------------
liabilities, and then subtracting the cash assets of MFE as of the end of the
month that occurs immediately prior to February 24, 1999, the date of the
special meeting. As of September 30, 1998, the assets and liabilities of MFE
were $138,000 and $14,088,000, respectively.
Bank Consolidation Value - The number obtained by dividing the Nominal
------------------------
Value by 2,739,928, and then multiplying the result of that division by
110,551.
THE PRICE OF WELLS FARGO COMMON STOCK ON THE EFFECTIVE DATE OF THE
TRANSACTIONS MAY BE HIGHER OR LOWER THAN THE WELLS FARGO MEASUREMENT PRICE. NO
ADJUSTMENT WILL BE MADE TO THE NUMBER OF SHARES OF WELLS FARGO COMMON STOCK YOU
WILL RECEIVE TO REFLECT FLUCTUATIONS IN THE PRICE OF WELLS FARGO COMMON STOCK
OCCURRING AFTER THE SPECIAL MEETING. HOWEVER, MFE HAS THE RIGHT TO TERMINATE
THE REORGANIZATION AGREEMENT WITHIN FIVE BUSINESS DAYS OF THE EFFECTIVE DATE OF
THE CONSENT OF MFE'S SHAREHOLDER APPROVING THE REORGANIZATION AGREEMENT AND THE
MERGER, IF THE WELLS FARGO MEASUREMENT PRICE IS LESS THAN $28.00 AND LESS THAN A
NUMBER OBTAINED BY A CALCULATION BASED ON AN INDEX OF STOCK PRICES OF CERTAIN
SPECIFIED BANK HOLDING COMPANIES. THIS TERMINATION RIGHT AND THE FORMULA ON
WHICH IT IS BASED IS DESCRIBED IN MORE DETAIL BELOW UNDER THE HEADING
"TERMINATION OF THE REORGANIZATION AGREEMENT."
Cash in Lieu of Fractional Shares. If the aggregate number of shares of Wells
Fargo common stock you will receive in the Transactions does not equal a whole
number, you will receive cash in lieu of the fractional share. The cash payment
will be equal to the product of the fractional part of the share of Wells Fargo
common stock multiplied by the Wells Fargo Measurement Price. (paragraph 1(c))
Completion of the Transactions. Wells Fargo, MFE, and Mercantile Bank expect
the Transactions to be completed promptly after approval of the Merger by the
MFE shareholder and approval of the Consolidation by Mercantile Bank
shareholders and the satisfaction (or waiver) of the other conditions to
completion contained in the Reorganization Agreement, including the receipt of
all required regulatory approvals. (paragraph 1(d))
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains various representations and warranties
by Wells Fargo, MFE, and Mercantile Bank as to, among other things, (a) their
organization and legal authority to engage in their respective businesses, (b)
their capitalization, (c) their corporate authority to enter into the
Reorganization Agreement and complete the Transactions, (d) the absence of
certain material changes, (e) compliance with laws, (f) material contracts, (g)
absence of certain litigation, and (h) undisclosed liabilities. (paragraphs 2
and 3) Because the representations and warranties do not survive completion of
the Transactions, they function primarily as a due diligence device and a
closing condition (that is, they must continue to be true in all material
respects until the Transactions are completed).
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CERTAIN COVENANTS
The Reorganization Agreement has a number of covenants and agreements that
govern the actions of Wells Fargo, MFE, and Mercantile Bank pending completion
of the Transactions. Some of the covenants and agreements are summarized below.
CONDUCT OF BUSINESS.
MFE and Mercantile Bank. Under the Reorganization Agreement, MFE and
Mercantile Bank are each required to maintain its corporate existence in good
standing, maintain the general character of its business, conduct its business
in the ordinary and usual manner, and extend credit in accordance with existing
lending policies. Subject to certain exceptions, MFE and Mercantile Bank are
each required to obtain the consent of Wells Fargo before it makes any new loan
or modifies, restructures or renews any existing loan if the amount of the
resulting loan, when combined with all other loans to the customer, would exceed
$1,000,000. The Reorganization Agreement places restrictions on the ability of
MFE and Mercantile Bank to take certain actions without Wells Fargo's consent,
including (a) incurring indebtedness, (b) granting rights to acquire shares of
its capital stock, (c) declaring dividends or purchasing its capital stock, (d)
selling its assets, and (e) raising the compensation of its officers and
directors. (paragraphs 4(a) and (b)) Some of these restrictions apply only if
the amount in question exceeds a threshold dollar value.
Wells Fargo. Wells Fargo has agreed to conduct its business and to cause its
significant subsidiaries to conduct their respective businesses in compliance
with all material obligations and duties imposed by laws, regulations, rules and
ordinances or by judicial orders, judgments and decrees applicable to them or to
their businesses or properties.
Competing Transactions. Neither MFE nor Mercantile Bank nor any director,
officer, representative, or agent of either may, directly or indirectly,
solicit, authorize the solicitation of, or enter into any discussions with, any
third party concerning any offer or possible offer to (a) purchase its common
stock, any security convertible into its common stock, or any other equity
security of MFE or Mercantile Bank, (b) make a tender or exchange offer for any
shares of its common stock or other equity security of MFE or Mercantile Bank,
(c) purchase, lease or otherwise acquire the assets of MFE or Mercantile Bank
except in the ordinary course of business, or (d) merge, consolidate, or
otherwise combine with MFE or Mercantile Bank. MFE and Mercantile Bank have
also agreed to promptly inform Wells Fargo if any third party makes an offer or
inquiry concerning any of the foregoing. (paragraph 4(h))
Other Covenants. The Reorganization Agreement contains various other
covenants, including covenants relating to the preparation and distribution of
this proxy statement-prospectus, access to information, and the listing on the
New York Stock Exchange and Chicago Stock Exchange of the shares of Wells Fargo
common stock to be issued in the Transactions. In addition, MFE and Mercantile
Bank have agreed to (a) establish such additional accruals and reserves as are
necessary to conform its accounting and credit loss reserve practices and
methods to those of Wells Fargo and Wells Fargo's plans with respect to the
conduct of MFE's and Mercantile Bank's business after the Transactions, and (b)
use their best efforts to deliver to Wells Fargo prior to completion of the
Transactions signed representations substantially in the form attached as
Exhibit B to the Reorganization Agreement from each executive officer, director
or shareholder of MFE and Mercantile Bank who may reasonably be deemed an
"affiliate" of MFE and Mercantile Bank within the meaning of each term used in
Rule 145 of the Securities Act. (paragraphs 4(l) and 4(m)) and Exhibit B) See
"The Transactions-Resale of Wells Fargo Common Stock."
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CONDITIONS TO THE COMPLETION OF THE TRANSACTIONS
Under the Reorganization Agreement, various conditions are required to be met
before the parties are obligated to complete the Transactions. These conditions
are customary and include such items as the receipt of shareholder, regulatory
and listing approval, and the receipt by MFE and Mercantile Bank of a favorable
tax opinion. (paragraphs 6 and 7) See "The Transactions-Material U.S. Federal
Income Tax Consequences of the Transactions."
The obligations of the parties are also subject to the continued accuracy of
the other party's representations and warranties, the performance by the other
party of its obligations under the Reorganization Agreement, and, subject to
certain exceptions, the absence of any changes that have had or might be
reasonably expected to have an adverse effect on MFE and Mercantile Bank. Some
of the conditions to the Transactions are subject to exceptions and/or a
"materiality" standard. Certain conditions to the Transactions may be waived by
the party seeking to assert the condition. (paragraphs 6 and 7)
TERMINATION OF THE REORGANIZATION AGREEMENT
Termination by Mutual Consent. Wells Fargo and MFE can agree to terminate the
Reorganization Agreement at any time before completion of the Transactions.
(paragraph 9(a)(i))
Termination by Either Wells Fargo or MFE. Either Wells Fargo or MFE can
terminate the Reorganization Agreement if any of the following occurs:
. The Merger has not been completed by April 30, 1999 (provided this right to
terminate will not be available to a party whose failure to perform in all
material respects any obligation under the Reorganization Agreement
resulted in the failure of the Merger to occur on or before that date).
(paragraph 9(a)(iii))
. A court or governmental authority of competent jurisdiction has issued a
final order restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Reorganization Agreement. (paragraph
9(a)(iv))
Termination by MFE. MFE may also terminate the Reorganization Agreement at
any time within five days after the effective date of the MFE shareholder
consent but prior to the Effective Time, if the Wells Fargo Measurement Price is
less than $28.00 per share and the number obtained by dividing the Wells Fargo
Measurement Price by 36.1875 (the closing price of one share of Wells Fargo
common stock on October 27, 1998, the trading day that immediately preceded the
date of the Reorganization Agreement) is less than the number obtained by (i)
dividing the Final Index Price by the Initial Index Price, and then (ii)
subtracting a number equal to 15.0% of the number resulting from that division.
(paragraph 9(a)(v))
As used in the above paragraph, the terms "Final Index Price" and "Initial
Index Price" (and certain related terms) are defined below:
Final Index Price. The sum of the following, calculated for each of the
companies in the Index Group: (i) the Final Price for each such company
multiplied by (ii) the Weighting Factor for each company.
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Initial Index Price. The sum of the following, calculated for each of the
companies in the Index Group: (i) the closing price per share of common stock
of each such company on October 27, 1998 (the trading day immediately preceding
the date of the Reorganization Agreement) multiplied by (ii) the Weighting
Factor for each such company.
Index Group. The companies listed below, each of whom must meet the following
criteria:
. Such company's common stock must be publicly trade, and
. During the Index Measurement Period, with respect to that company
. No publicly-announced proposal to acquire such company may be pending.
. No proposal by such company to acquire another company in exchange for
stock where, if the company to be acquired were to become a subsidiary
of the acquiring company, the company to be acquired would be a
"significant subsidiary" as defined in Rule 1-02 of the SEC's Regulation
S-X has been publicly announced after October 27, 1998 (the day before
the date of the Reorganization Agreement.)
. No program to repurchase 5% or more of the outstanding shares of such
company's common stock has been publicly announced after October 27,
1998.
The companies in the Index Group are: BB&T Corporation, BancOne Corporation,
BankBoston Corporation, Bank of New York Company, Inc., Bankers Trust
Corporation, Chase Manhattan Corporation, Citicorp, Comerica, Inc., Fifth Third
Bancorp, First Union Corporation, Fleet Financial Group, Inc., Huntington
Bancshares, KeyCorp, Mellon Bank Corporation, Mercantile Bancorp, National City
Corporation, BankAmerica Corporation, Northern Trust Corporation, PNC Financial
Corporation, Republic Financial Corporation, Republic New York Corporation,
SouthTrust Corporation, State Street Boston Corporation, Summit Bancorp,
Suntrust Banks, Inc., UnionBanCal Corporation, U.S. Bancorp, Wachovia
Corporation
Index Measurement Period. The period of 20 trading days ending on the day
immediately preceding the effective date of the consent of MFE's shareholder
approving the Reorganization Agreement and the Merger.
Final Price. For any company in the Index Group, the average of the daily
closing prices of a share of common stock for that company, as reported on the
consolidated transaction reporting system for the market or exchange on which
such common stock is principally traded, during the Index Measurement Period.
Weighting Factor. For any company, the Company Market Capitalization for such
company divided by the Total Market Capitalization.
Company Market Capitalization. The price of one share of the common stock of
a given company in the Index Group at the close of the trading day immediately
preceding the date of the Reorganization Agreement multiplied by (ii) the number
of shares of common stock of such company outstanding as of June 30, 1998
(adjusted for any stock dividend, reclassification, recapitalization, exchange
of shares or similar transaction between June 30, 1998 and the close of the
trading day immediately preceding the date of the Reorganization Agreement).
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Total Market Capitalization. The sum of the Company Market Capitalization for
each of the companies in the Index Group.
EFFECT OF TERMINATION
Generally, if either party terminates the Reorganization Agreement, it becomes
void without any liability to either party other than for willful and material
breaches occurring before termination; however, the provisions of the
Reorganization Agreement governing confidential information and expenses
incurred in connection with the Transactions continue in effect after
termination of the Reorganization Agreement. (paragraph 9(b))
If the Reorganization Agreement is terminated, the Consolidation will not
occur.
WAIVER AND AMENDMENT
Any of Wells Fargo, MFE, or Mercantile Bank may waive any inaccuracies in the
representations and warranties of the other party or compliance by the other
party with any of the covenants or conditions contained in the Reorganization
Agreement. (paragraph 16)
Any of Wells Fargo, MFE, or Mercantile Bank can amend the Reorganization
Agreement at any time before the Transactions are completed; however, the
Reorganization Agreement prohibits them from amending the Reorganization
Agreement after the MFE shareholder or Mercantile Bank shareholders approve the
Transactions if the amendment would change in a manner adverse to these
shareholders the consideration to be received by the MFE shareholder and
Mercantile Bank shareholders in the Transactions. (paragraph 17)
EXPENSES
Wells Fargo, MFE, and Mercantile Bank will each pay their own expenses in
connection with the Transactions, including fees and expenses of their
respective independent auditors and counsel. (paragraph 10)
COMPARISON OF RIGHTS OF HOLDERS OF MERCANTILE BANK
COMMON STOCK AND WELLS FARGO COMMON STOCK
Mercantile Bank currently is a national bank. The rights of Mercantile Bank
shareholders are governed by the National Bank Act and Mercantile Bank's
articles of association and bylaws. Wells Fargo is incorporated under the laws
of the state of Delaware. The rights of Wells Fargo stockholders are governed
by the Delaware General Corporation Law ("DGCL") and Wells Fargo's certificate
of incorporation and bylaws. Upon completion of the Consolidation, Bank
shareholders will become stockholders of Wells Fargo. As a result, their rights
will be governed by the DGCL and Wells Fargo's governing documents.
The following discussion compares certain rights of the holders of Mercantile
Bank common stock to the rights of the holders of Wells Fargo common stock. You
can find additional information concerning the rights of Wells Fargo
stockholders in Wells Fargo's restated certificate of incorporation and bylaws,
in Wells Fargo's current report on Form 8-K filed October 13, 1997, containing a
description of Wells
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Fargo common stock, and in Wells Fargo's registration statement on Form 8-A
dated October 21, 1998, containing a description of preferred stock purchase
rights attached to shares of common stock.
To the extent that information in the current report on Form 8-K filed October
13, 1997 is inconsistent with the information below, you should rely on the
information below, as it is as of a more recent date.
Wells Fargo's restated certificate of incorporation and its bylaws, as well as
its current report on Form 8-K filed October 13, 1997 and its Form 8-A
registration statement dated October 21, 1998, have been included along with the
mailing of this proxy statement-prospectus. See "Where You Can Find More
Information."
CAPITAL STOCK
Wells Fargo. Wells Fargo's restated certificate of incorporation currently
authorizes the issuance of 4,000,000,000 shares of Wells Fargo common stock, par
value $1-2/3 per share, 20,000,000 shares of preferred stock, without par value,
and 4,000,000 shares of preference stock, without par value. At December 31,
1998, there were 1,644,057,803 shares of Wells Fargo common stock outstanding,
6,535,362 shares of Wells Fargo preferred stock outstanding, and no shares of
Wells Fargo preference stock outstanding.
Mercantile Bank. Mercantile Bank's amended and restated articles of
association currently authorize the issuance of 30,000,000 shares of common
stock, $1.00 par value. At January 15, 1999, there were 2,739,928 shares of
Mercantile Bank common stock outstanding.
RIGHTS PLAN
Wells Fargo. Each share of Wells Fargo common stock (including shares that
will be issued in the Merger) has attached to it one preferred share purchase
right. Once exercisable, each right allows the holder to purchase a fractional
share of Wells Fargo's Series C Junior Participating Preferred Stock. A right,
by itself, does not confer on its holder any rights of a Wells Fargo
stockholder, including the right to vote or receive dividends, until the right
is exercised. The rights trade automatically with shares of Wells Fargo common
stock. The rights are designed to protect the interests of Wells Fargo and its
stockholders against coercive takeover tactics. The rights are intended to
encourage potential acquirors to negotiate on behalf of all stockholders the
terms of any proposed takeover. Although not their purpose, the rights may
deter takeover proposals.
Mercantile Bank. Mercantile Bank has no comparable rights plan.
DIRECTORS
Wells Fargo. Wells Fargo's bylaws provide for a board of directors consisting
of not less than 10 nor more than 28 persons, each serving a term of one year or
until his or her earlier death, resignation or removal. The number of directors
of Wells Fargo is currently fixed at 24. Directors of Wells Fargo may be
removed with or without cause by the affirmative vote of the holders of a
majority of the shares of Wells Fargo capital stock entitled to vote thereon.
Vacancies on Wells Fargo's board of directors may be filled by majority vote of
the remaining directors or, in the event a vacancy is not so filled or if no
director remains, by the stockholders. Directors of Wells Fargo are elected by
plurality of the votes of shares of Wells Fargo capital stock entitled to vote
thereon present in person or by proxy at the meeting
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at which directors are elected. Wells Fargo's restated certificate of
incorporation does not currently permit cumulative voting in the election of
directors.
Mercantile Bank. Mercantile Bank's bylaws provide for a board of directors of
not less than five nor more than 25 shareholders, each serving a term of one
year or until his or her earlier death, resignation or removal. The exact
number of directors is fixed and determined from time to time by resolution of a
majority of the board of directors or a majority of the shareholders. The
number of directors of Mercantile Bank is currently fixed at 16. The directors
of Mercantile Bank are elected by a majority of the votes of shares of
Mercantile Bank common stock, present in person or by proxy at the meeting at
which shareholders are elected. Shareholders of Mercantile Bank are entitled to
cumulate their votes in the election of directors. Directors of Mercantile Bank
may be removed by the OCC and by shareholders at a meeting called to remove him
unless the number of votes sufficient to elect him under cumulative voting is
voted against his removal. Vacancies on Mercantile Bank's board of directors
may be filled by the affirmative vote of the majority of the remaining directors
or by shareholders at a special meeting.
AMENDMENT OF CHARTER DOCUMENT AND BYLAWS
Wells Fargo. Wells Fargo's restated certificate of incorporation may be
amended only if the proposed amendment is approved by Wells Fargo's board of
directors and thereafter approved by a majority of the outstanding stock
entitled to vote thereon and by a majority of the outstanding stock of each
class entitled to vote thereon as a class. Wells Fargo's bylaws may be amended
by a majority of Wells Fargo's board of directors or by a majority of the
outstanding stock entitled to vote thereon. Shares of Wells Fargo preferred
stock and Wells Fargo preference stock currently authorized in Wells Fargo's
restated certificate of incorporation may be issued by Wells Fargo's board of
directors without amending Wells Fargo's restated certificate of incorporation
or otherwise obtaining the approval of Wells Fargo's stockholders.
Mercantile Bank. Mercantile Bank's amended and restated articles of
association may be amended at any regular or special meeting of the shareholders
by the affirmative vote of the holders of a majority of the stock. Mercantile
Bank's bylaws may be amended at any regular or special meeting of the
shareholders by majority approval, if notice of such amendment is contained in
the notice of the meeting.
APPROVAL OF MERGERS AND ASSET SALES
Wells Fargo. Except as described below, the affirmative vote of a majority of
the outstanding shares of Wells Fargo common stock entitled to vote thereon is
required to approve a Merger or merger involving Wells Fargo or the sale, lease
or exchange of all or substantially all of Wells Fargo's corporate assets. No
vote of the stockholders is required, however, in connection with a Merger in
which Wells Fargo is the surviving corporation and (a) the agreement of Merger
for the Merger does not amend in any respect Wells Fargo's restated certificate
of incorporation, (b) each share of capital stock outstanding immediately before
the Merger is to be an identical outstanding or treasury share of Wells Fargo
after the Merger and (c) the number of shares of capital stock to be issued in
the Merger (or to be issuable upon conversion of any convertible instruments to
be issued in the Merger) does not exceed 20% of the shares of Wells Fargo's
capital stock outstanding immediately before the Merger.
Mercantile Bank. The affirmative vote or the written consent of two-thirds of
the outstanding shares of Mercantile Bank common stock is required to approve a
merger or consolidation involving Mercantile Bank or the sale of all or
substantially all of Mercantile Bank's assets.
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PREEMPTIVE RIGHTS
Wells Fargo. Neither Wells Fargo's restated certificate of incorporation nor
its bylaws grants preemptive rights to its stockholders.
Mercantile Bank. Mercantile Bank's articles of association provide that in
the event of an increase in the number of shares of Mercantile Bank common stock
by the sale of additional shares, each shareholder is entitled to subscribe for
such additional shares in proportion to the number of shares owned by him or her
at the time the increase is authorized by the shareholders.
APPRAISAL RIGHTS
Wells Fargo. Section 262 of the DGCL provides for stockholder appraisal
rights in connection with consolidations and mergers generally; however,
appraisal rights are not available to holders of any class or series of stock
that, at the record date fixed to determine stockholders entitled to receive
notice of and to vote at the meeting to act upon the agreement of consolidation
or merger, were either (a) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (b) held of
record by more than 2,000 stockholders, so long as stockholders receive shares
of the surviving corporation or another corporation whose shares are so listed
or designated or held by more than 2,000 stockholders. Wells Fargo common stock
is listed on the New York Stock Exchange and the Chicago Stock Exchange and
currently held by more than 2,000 stockholders. As a result, assuming that the
other conditions described above are satisfied, holders of Wells Fargo common
stock will not have appraisal rights in connection with consolidations and
mergers involving Wells Fargo.
Mercantile Bank. The National Bank Act provides shareholders with dissenters'
rights in connection with mergers and consolidations. For a specific discussion
of the appraisal rights available to shareholders of Bank, see "The
Transactions-Appraisal Rights."
SPECIAL MEETINGS
Wells Fargo. Under the DGCL, special meetings of stockholders may be called
by the board of directors or by such persons as may be authorized in the
certificate of incorporation or bylaws. Wells Fargo's bylaws provide that a
special meeting of stockholders may be called only by the chairman of the board,
a vice chairman, the president or a majority of Wells Fargo's board of
directors. Holders of Wells Fargo common stock do not have the ability to call
a special meeting of stockholders.
Mercantile Bank. Mercantile Bank's certificate of association and bylaws
provide that special meetings of shareholders may be called by the board of
directors or by one or more shareholders owning not less than 25% of the issued
and outstanding Mercantile Bank common stock.
DIRECTORS' DUTIES
Wells Fargo. The DGCL does not specifically enumerate directors' duties. In
addition, the DGCL does not contain any provision specifying what factors a
director must and may consider in determining a corporation's best interests.
However, judicial decisions in Delaware have established that, in performing
their duties, directors are bound to use that degree of care which ordinarily
prudent persons would use in similar circumstances.
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Mercantile Bank. Although the National Bank Act does not specifically
enumerate directors duties, judicial decisions concerning the issue have
established that in performing their duties, national bank directors are bound
to use that degree of care which ordinarily prudent persons would use in similar
circumstances.
ACTION WITHOUT A MEETING
Wells Fargo. As permitted by Section 228 of the DGCL and Wells Fargo's
restated certificate of incorporation, any action required or permitted to be
taken at a stockholders' meeting may be taken without a meeting pursuant to the
written consent of the holders of the number of shares that would have been
required to effect the action at an actual meeting of the stockholders.
Mercantile Bank. The amended and restated articles of association of
Mercantile Bank provide that any action required or permitted to be taken at a
shareholders' meeting may be taken without a meeting pursuant to the written
consent of the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to take such action at a shareholder
meeting.
LIMITATION OF DIRECTOR LIABILITY
Wells Fargo. Wells Fargo's restated certificate of incorporation provides
that a director (including an officer who is also a director) of Wells Fargo
shall not be liable personally to Wells Fargo or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
out of (a) any breach of the director's duty of loyalty to Wells Fargo or its
stockholders, (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) payment of a dividend
or approval of a stock repurchase in violation of Section 174 of the DGCL or (d)
any transaction from which the director derived an improper personal benefit.
This provision protects Wells Fargo's directors against personal liability for
monetary damages from breaches of their duty of care. It does not eliminate the
director's duty of care and has no effect on the availability of equitable
remedies, such as an injunction or rescission, based upon a director's breach of
his duty of care.
Mercantile Bank. Mercantile Bank's amended and restated articles of
association do not eliminate or limit the liability of a director to Mercantile
Bank or its shareholders for monetary damages for breach of a director's
fiduciary duty.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Wells Fargo. Wells Fargo's restated certificate of incorporation provides
that Wells Fargo must indemnify, to the fullest extent authorized by the DGCL,
each person who was or is made a party to, is threatened to be made a party to,
or is involved in, any action, suit, or proceeding because he is or was a
director or officer of Wells Fargo (or was serving at the request of Wells Fargo
as a director, trustee, officer, employee, or agent of another entity) while
serving in such capacity against all expenses, liabilities, or loss incurred by
such person in connection therewith, provided that indemnification in connection
with a proceeding brought by such person will be permitted only if the
proceeding was authorized by Wells Fargo's board of directors. Wells Fargo's
restated certificate of incorporation also provides that Wells Fargo must pay
expenses incurred in defending the proceedings specified above in advance of
their final disposition, provided that if so required by the DGCL, such advance
payments for expenses incurred by a director or officer may be made only if he
undertakes to repay all amounts so advanced if it is ultimately determined that
the person receiving such payments is not entitled to be
40
<PAGE>
indemnified. Wells Fargo's restated certificate of incorporation authorizes
Wells Fargo to provide similar indemnification to employees or agents of Wells
Fargo.
Pursuant to Wells Fargo's restated certificate of incorporation, Wells Fargo
may maintain insurance, at its expense, to protect itself and any directors,
officers, employees or agents of Wells Fargo or another entity against any
expense, liability or loss, regardless of whether Wells Fargo has the power or
obligation to indemnify that person against such expense, liability or loss
under the DGCL.
The right to indemnification is not exclusive of any other right which any
person may have or acquire under any statute, provision of Wells Fargo's
restated certificate of incorporation or Wells Fargo bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
Mercantile Bank. Mercantile Bank's amended and restated articles of
association provide that Mercantile Bank may indemnify any director, officer,
employee or agent in a proceeding if it is determined by a majority of the
directors not involved in the proceeding or by majority vote of a committee of
the board of directors designated to act in the matter that such person
conducted himself in good faith and reasonably believed that he was acting in
the best interest of Mercantile Bank.
DIVIDENDS
Wells Fargo. Delaware corporations may pay dividends out of surplus or, if
there is no surplus, out of net profits for the fiscal year in which declared
and for the preceding fiscal year. Section 170 of the DGCL also provides that
dividends may not be paid out of net profits if, after the payment of the
dividend, capital is less than the capital represented by the outstanding stock
of all classes having a preference upon the distribution of assets. Wells Fargo
is also subject to Federal Reserve Board policies regarding payment of
dividends, which generally limit dividends to operating earnings. See "Certain
Regulatory and Other Considerations Pertaining to Wells Fargo."
Mercantile Bank. Under the National Bank Act, the prior approval of the OCC
is required if the total of all dividends declared by Mercantile Bank in any
calendar year exceeds the total of Mercantile Bank's net profits of that year
combined with its retained net profits of the preceding two years, less any
required transfers to surplus.
CORPORATE GOVERNANCE PROCEDURES; NOMINATION OF DIRECTORS
Wells Fargo. Wells Fargo's bylaws contain detailed advance notice and
informational procedures which must be complied with in order for a stockholder
to nominate a person to serve as a director. Wells Fargo's bylaws generally
require a stockholder to give notice of a proposed nominee in advance of the
stockholders meeting at which directors will be elected. In addition, Wells
Fargo's bylaws contain detailed advance notice and informational procedures
which must be followed in order for a Wells Fargo stockholder to propose an item
of business for consideration at a meeting of Wells Fargo stockholders.
Mercantile Bank. Mercantile Bank's amended and restated articles of
association provide that nomination for election to the board of directors may
be made by the board of directors or by any shareholder of any outstanding class
of capital stock of Mercantile Bank entitled to vote for the election of
directors.
41
<PAGE>
INFORMATION ABOUT THE ENTITIES TO BE ACQUIRED
GENERAL
MFE. MFE is incorporated in Delaware and is a wholly-owned subsidiary of
Hemisphere Financial Ltd., a privately held British Virgin Islands corporation.
MFE currently holds approximately 96.0% of the outstanding common stock of
Mercantile Bank, which constitutes substantially all of MFE's assets. Other
than holding the common stock of Mercantile Bank, MFE does not actively engage
in any other investment or business activities.
MFE is headquartered at 835 East Levee Street, Brownsville, Texas 78520
(telephone: (956) 548-6248).
Mercantile Bank. Mercantile Bank is a national banking association and one of
the largest independently owned banks in South Texas providing continuous
personal commitment, financial strength and export services to the Rio Grande
Valley, the Coastal bend, and northern Mexico. Mercantile Bank currently
operates a total of 12 offices in South Texas, of which two are located in
Brownsville, seven are located in Corpus Christi, one in Portland, one in
Harlingen, and one in Ingleside. At September 30, 1998, Mercantile Bank had
approximately $841.2 million in total assets and $658.7million in total
deposits.
Mercantile Bank has earned a reputation as a strong, well managed institution.
Mercantile Bank's commitment to customer service and community banking provides
it with a strong base of loyal loan and deposit customers. Mercantile Bank's
primary lending focus is commercial and industrial, commercial real estate
loans, residential real estate loans and consumer loans. At September 30, 1998,
total net loans were $315.8 million or 37.6% of total deposits.
Mercantile Bank's main office is located at 835 East Levee Street,
Brownsville, Texas 78520 (telephone: (956) 548-6248).
LEGAL PROCEEDINGS
Neither MFE nor Mercantile Bank is aware of any pending or threatened legal
proceedings, which, upon resolution, would have a material adverse effect on
MFE's or Mercantile Bank's financial condition, results of operations, or cash
flows.
MARKET PRICE AND DIVIDENDS
There is no active trading market for the common stock of MFE. As of January
15, 1999, there were 1,000 shares of MFE common stock outstanding, all held by
its shareholder, Hemisphere Financial Ltd. MFE has never paid dividends on its
common stock.
There is no active trading market in the common stock of Mercantile Bank. As
of January 15, 1999, there were 2,739,928 shares of Mercantile Bank common stock
outstanding, of which 2,629,377 shares were held by MFE and the remaining by
approximately 23 shareholders. Mercantile Bank paid dividends on its common
stock of $1.00 per share in 1996 and did not pay dividends on its common stock
in 1997 or for the nine month period ending September 30, 1998.
42
<PAGE>
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF MFE AND MERCANTILE BANK
MFE. All of the outstanding common stock of MFE is beneficially owned by
Olegario Vazquez Rana through Hemisphere Financial, Ltd.
Mercantile Bank. The following table lists the only shareholder known by
Mercantile Bank to be the beneficial owner of more than five percent of
outstanding Mercantile Bank common stock.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name and Address Ownership Common Stock
------------------------------ ------------------------- --------------------
<S> <C> <C>
Olegario Vazquez Rana 2,629,377 96.0%
Mercantile Financial Enterprises, Inc.
835 East Levee Street
Brownsville, Texas 78520
</TABLE>
The following table lists the ownership of shares of Mercantile Bank common
stock as of the Mercantile Bank Record Date by each director and executive
officer of Mercantile Bank and by all directors and executive officers as a
group.
<TABLE>
<CAPTION>
Name of Beneficial Owner or No. of Shares % of
No. of Persons in Group Beneficially Owned Common Stock
------------------------------------ ------------------------ -----------------
<S> <C> <C>
Mary Rose Cardenas 1,000 *
David C. Garza 1,000 *
Frank Parker, Jr. 1,000 *
Neal O. Simmons 1,000 *
Bill Wolfe 1,219 *
Sam Pate 1,219 *
A. J. Moser 5,853 *
Marvin Conner 5,910 *
W. W. McManus 5,910 *
C. Fount Ray 5,910 *
David A. Gelfer 5,910 *
James S. Scott 9,390 *
Graciela Gutierrez 9,390 *
Roselle Clegg 9,390 *
Ruben Edelstein 9,390 *
Tol Boswell 9,390 *
All executive officers and directors as a
group (16) persons 82,881 3.02%
</TABLE>
_____________________________
* Immaterial percentage of ownership.
43
<PAGE>
YEAR 2000 COMPLIANCE
Mercantile Bank formally established its Year 2000 project in February, 1997
in an effort to identify and measure the level of risk the Year 2000 problem
would pose on Mercantile Bank's operational and financial systems. Mercantile
Bank, through the auspices of its technology committee, has activated its Year
2000 conversion team which has begun the task of identifying date sensitive
systems. The Year 2000 conversion team uses the Brintech Year 2000 Risk
Assessment System to assist in the orderly implementation of Mercantile Bank's
Year 2000 program, which was approved by the executive committee of the
Mercantile Bank board of directors in August, 1997. Mercantile Bank's board of
directors, executive management and staff are supporting all compliance efforts
and have approved the necessary resources to achieve compliance.
Mercantile Bank's Year 2000 remediation program consists of a five-part
approach which include inventory, risk rating, communicating with third party
vendors and tracking vendor responses, developing a Year 2000 plan that ensures
system certification, guiding the development of contingency plans for each
system, and lowering our overall risk relative to the Year 2000 problem.
Mercantile Bank has completed the first three phases of the Year 2000
remediation program. The pending acquisition of Mercantile Bank by Wells Fargo
has caused Mercantile Bank to delay the process of achieving full compliance
with regulatory requirements. However, if the proposed Consolidation with Wells
Fargo is consummated, additional resources are expected to be directed to allow
Mercantile Bank to achieve full compliance. If the proposed Consolidation does
not occur, a contingency plan which includes increased resources and the use of
technology consultants is in place to address and fully implement Mercantile
Bank's Year 2000 remediation plan. Bank management does not expect the costs of
bringing Mercantile Bank's systems into Year 2000 compliance will have a
material adverse effect on Mercantile Bank's financial conditions, results of
operations or liquidity. Mercantile Bank believes it is in compliance with
regulatory guidelines regarding Year 2000 compliance, including the timetable
for achieving compliance.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents an analysis of the financial condition of Mercantile
Bank at September 30, 1998 and 1997, and December 31, 1997, 1996, and 1995, and
the results of operations for the nine months ended September 30, 1998 and 1997,
and for the years ended December 31, 1997, 1996, and 1995. This analysis should
be read in conjunction with the financial statements and notes thereto and
financial data presented elsewhere in this proxy statement-prospectus.
Because MFE does not conduct any other investment or business activities other
than holding approximately 96.0% of the outstanding Mercantile Bank common
stock, the financial condition and results of operations of MFE are materially
the same as that of Mercantile Bank's. Instead of including a separate
management's discussion and analysis of MFE's financial condition and results of
operations, reference is hereby made to the management's discussion and analysis
of financial condition and results of operation of Mercantile Bank below.
At September 30, 1998, assets of MFE other than its investment in Mercantile
Bank totaled $230,000, including cash assets of $138,000. MFE had total
liabilities of $14,090,000, consisting substantially of cash advances to MFE in
the amount of $2,940,000 from a party related to MFE's shareholder, and a note
payable of $11,148,000 to Mercantile Bank.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Generally. Net income for the nine months ended September 30, 1998 was
$5,884,000 ($2.15 per share) compared to $5,543,000 ($2.02 per share) for the
nine months ended September 30, 1997.
The primary market area for Mercantile Bank was negatively affected by a
devaluation of the Mexican Peso in December 1994. As a result, beginning in
1995 and continuing into 1997, Mercantile Bank's charge-offs of installment and
consumer loans increased significantly. Charge-offs for the nine months ended
September 30, 1998 and 1997 totaled $944,000 and $757,000, respectively, of
which 88% and 99%, respectively, were installment and consumer loans.
Provisions for loan losses included in the statement of earnings for the nine
months ended September 30, 1998 and 1997 totaled $575, 000 and $525,000,
respectively.
A discussion of changes in the major components of net income for the nine
months ended September 30, 1998 and 1997 are as follows:
Net Interest Income. Net interest income is the principal source of
Mercantile Bank's net income and represents the difference between interest
income and interest expense. Net interest income increased approximately
$316,000 in 1998 compared to 1997 as a result of an increase in average
interest-earning assets of $33,751,000 offset by an increase in average
interest-bearing liabilities of $18,272,000. Annualized interest rate spread
was 3.03% and 3.21%, and net interest margin was 3.59% and 3.70% for 1998 and
1997, respectively.
The following schedules provide a summary of net interest income, average
interest-earning asset balances and the related interest rates/yields for the
nine-month periods indicated. Non-accruing loans are included in the interest-
earning assets; interest income on such loans is recorded when received.
45
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------------------
AVERAGE PERCENT OF INTEREST AVERAGE
BALANCE ASSETS TOTAL INCOME/EXPENSE YIELD/RATES(1)
------------- ------------- ---------------- --------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans $ 327,291 38.94% $ 22,463 9.15%
Taxable investment securities 322,524 38.37% 14,735 6.09%
Nontaxable investment securities 14,559 1.73% 543 4.97%
Interest bearing deposits in other banks 146 0.02% 7 6.39%
Federal funds sold and securities purchased
under agreements to resell 92,801 11.04% 3,855 5.54%
----------- ----------- -----------
TOTAL INTEREST-EARNING ASSETS 757,321 90.10% 41,603 7.32%
NON INTEREST-BEARING ASSETS:
Cash and due from banks 33,037 3.93%
Bank premises and equipment - net 39,429 4.69%
Accrued interest receivable 5,800 0.69%
Other real estate owned 944 0.11%
Other assets 3,654 0.43%
Goodwill 3,004 0.36%
Reserve for loan losses (2,627) (0.31)%
----------- -----------
Total assets $ 840,562 100.00%
=========== ===========
INTEREST-BEARING LIABILITIES:
Savings deposits $ 78,160 9.30% 3,714 6.34%
Other time deposits 500,689 59.56% 14,477 3.86%
Short-term debt 80,243 9.55% 2,996 4.98%
Long-term debt - - - -
----------- ----------- -----------
TOTAL INTEREST-BEARING LIABILITIES 659,092 78.41% 21,187 4.29%
NON INTEREST-BEARING LIABILITIES:
Demand deposits 91,460 10.88%
Other liabilities 1,654 0.20%
Accrued interest payable 2,424 0.29%
----------- -----------
Total liabilities 754,630 89.78%
STOCKHOLDERS' EQUITY 85,932 10.22%
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 840,562 100.00%
=========== ===========
NET INTEREST INCOME $ 20,416
===========
Interest rate spread 3.03%
===========
NET INTEREST MARGIN 3.59%
===========
</TABLE>
(1) Annualized
46
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------
AVERAGE PERCENT OF INTEREST AVERAGE
BALANCE ASETS TOTAL INCOME/EXPENSE YIELD/RATES(1)
----------- ----------- --------------- --------------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans $ 316,661 39.20% $ 22,400 9.43%
Taxable investment securities 332,463 41.16% 15,244 6.11%
Nontaxable investment securities 14,890 1.85% 556 4.98%
Interest bearing deposits in other banks 101 0.01% 4 5.28%
Federal funds sold and securities purchased
under agreements to resell 59,455 7.36% 2,444 5.48%
---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS 723,570 89.58% 40,648 7.49%
NON INTEREST-BEARING ASSETS:
Cash and due from banks 30,789 3.81%
Bank premises and equipment - net 40,662 5.03%
Accrued interest receivable 5,922 0.73%
Other real estate owned 567 0.07%
Other assets 5,623 0.70%
Goodwill 3,332 0.41%
Reserve for loan losses (2,722) (0.33)%
---------- ----------
TOTAL ASSETS 807,743 100.00%
========== ==========
INTEREST-BEARING LIABILITIES:
Savings deposits 80,291 9.94% 3,503 5.82%
Other time deposits 484,630 60.00% 14,248 3.92%
Short-term debt 75,899 9.40% 2,797 4.91%
Long-term debt - - - -
---------- ---------- ----------
TOTAL INTEREST-BEARING LIABILITIES 640,820 79.34% 20,548 4.28%
NON INTEREST-BEARING LIABILITIES:
Demand deposits 87,636 10.85%
Other liabilities 1,132 0.14%
Accrued interest payable 2,833 0.35%
---------- ----------
TOTAL LIABILITIES 732,421 90.68%
STOCKHOLDERS' EQUITY 75,322 9.32%
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 807,743 100.00%
========== ==========
NET INTEREST INCOME $ 20,100
==========
INTEREST RATE SPREAD 3.21%
==========
NET INTEREST MARGIN 3.70%
==========
</TABLE>
(1) Annualized
47
<PAGE>
Net interest income is affected both by the interest rate earned and paid and
by changes in volume, principally in loans, investment securities, deposits and
borrowed funds. The following table depicts the dollar effect and rate changes
for interest-earning assets and interest-bearing liabilities and the resulting
change in interest income and interest expense:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 COMPARED TO
SEPTEMBER 30, 1997
INCREASE (DECREASE) DUE TO
---------------------------------------------
VOLUME RATE(1) NET
-------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST EARNED ON:
Loans $ 1,002 $ (939) $ 63
Taxable investment securities (607) 98 (509)
Nontaxable investment securities (16) 3 (13)
Interest bearing deposits in other banks 2 1 3
Federal funds sold and securities purchased
under agreements to resell 1,827 (416) 1,411
-------------- ------------- -------------
TOTAL INTEREST-EARNING ASSETS 2,208 (1,253) 955
INTEREST PAID ON:
Savings deposits (124) 335 211
Other time deposits 630 (401) 229
Short-term debt 213 (14) 199
Long-term debt - - -
-------------- ------------- -------------
TOTAL INTEREST-BEARING LIABILITIES 719 (80) 639
NET INTEREST INCOME $ 1,489 $ (1,173) $ 316
============= ============= =============
</TABLE>
_______________
(1) Changes in interest income and interest expense due to both rate and
volume are included in rate variances.
Noninterest Income. Noninterest income increased by $27,000 for the nine
months ended September 30, 1998 compared with the nine months ended September
30, 1997. This included an increase of $60,000 in other income and a decrease
of $33,000 in service charge income.
Noninterest Expense. Noninterest expense decreased by $370,000 for the nine
months ended September 30, 1998 compared with the nine months ended September
30, 1997. This included a decrease of $342,000 in salaries and employee
benefits due to attrition.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Generally. Net income was $7,801,000 ($2.85 per share), $8,071,000 ($2.95 per
share), and $8,280,000 ($3.03 per share) for the years ended December 31, 1997,
1996, and 1995, respectively.
The decrease in net income for 1997 compared to 1996 is attributable to a
substantial increase in the provision for loan losses of $845,000 for the year
ended December 31, 1997 compared to $263,000 for the year ended December 31,
1996. The substantial increase was due to replenishing the allowance for loan
losses due to significant charge-offs during 1996.
48
<PAGE>
The decrease in net income for 1996 compared to 1995 is attributable to a
realized loss on the sale of securities of $1,278,000 for the year ended
December 31, 1996 compared to a realized gain of $6,000 for the year ended
December 31, 1995.
Mercantile Bank's primary market area was negatively affected by a devaluation
of the Mexican Peso in December 1994. As a result, beginning in 1995 and
continuing into 1997, Mercantile Bank's charge-offs of installment and consumer
loans increased significantly. Charge-offs for the year ended December 31,
1997, 1996, and 1995 totaled $1,118,000, $2,709,000 and $797,000 of which 89%,
33% and 86% were installment and consumer loans, respectively and 67% were
commercial, financial, and agricultural loans for 1996. Provisions for loan
losses included in the statement of earnings for the years ended December 31,
1997, 1996, and 1995, totaled $845,000, $263,000 and $100,000, respectively.
A discussion of changes in the major components of net income for the years
ending December 31, 1997, 1996, and 1995 are as follows:
Net Interest Income. Net interest income is the principal source of
Mercantile Bank's net income and represents the difference between interest
income and interest expense. Net interest income increased approximately $3,000
in 1997 compared to 1996 as a result of an increase in interest-earning assets
of $5,327,000 offset by an increase in interest-bearing liabilities of
$2,438,000. Interest rate spread was 3.29% and 3.34%, and net interest margin
was 3.78% and 3.81% for 1997 and 1996, respectively.
Net interest income decreased approximately $534,000 in 1996 compared to 1995
as a result of an increase in interest-earning assets of $37,014,000 offset by
an increase in interest-bearing liabilities of $34,221,000. Interest rate
spread was 3.34% and 3.60%, and net interest margin was 3.81% and 4.09% for 1996
and 1995, respectively.
The following schedules provide a summary of net interest income, average
interest-earning asset balances and the related interest rates/yields for the
periods indicated. Non-accruing loans are included in the interest-earning
assets; interest income on such loans is recorded when received.
49
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------
AVERAGE PERCENT OF INTEREST AVERAGE
BALANCE ASSETS TOTAL INCOME/EXPENSE YIELD/RATES
------------ ------------ ---------------- -------------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans $ 321,394 39.50% $ 30,940 9.63%
Taxable investment securities 327,746 40.29% 20,029 6.11%
Nontaxable investment securities 14,897 1.83% 741 4.97%
Interest bearing deposits in other banks 99 0.01% 6 6.06%
Federal funds sold and securities purchased
under agreements to resell 64,583 7.94% 3,572 5.53%
------------ ---------- ------------
TOTAL INTEREST-BEARING ASSETS 728,719 89.57% 55,288 7.59%
NON INTEREST-BEARING ASSETS:
Cash and due from banks 31,783 3.91%
Bank premises and equipment - net 40,534 4.98%
Accrued interest receivable 5,975 0.73%
Other real estate owned 653 0.08%
Other assets 5,399 0.66%
Goodwill 3,290 0.40%
Reserve for loan losses (2,740) (0.33)%
------------ ----------
TOTAL ASSETS $ 813,613 100.00%
============ ==========
INTEREST-BEARING LIABILITIES:
Savings deposits $ 185,721 22.83% 4,719 2.54%
Other time deposits 382,692 47.03% 19,236 5.03%
Short-term debt 75,818 9.32% 3,765 4.97%
Long-term debt - - - -
------------ ---------- ------------
TOTAL INTEREST-EARNING LIABILITIES 644,231 79.18% 27,720 4.30%
NON INTEREST-BEARING LIABILITIES:
Demand deposits 88,657 10.90%
Other liabilities 1,151 0.14%
Accrued interest payable 2,853 0.35%
------------ ----------
TOTAL LIABILITIES 736,892 90.57%
STOCKHOLDERS' EQUITY 76,721 9.43%
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 813,613 100.00%
============ ==========
NET INTEREST INCOME $ 27,568
============
INTEREST RATE SPREAD 3.29%
============
NET INTEREST MARGIN 3.78%
============
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
AVERAGE PERCENT OF INTEREST AVERAGE
BALANCE TOTAL INCOME/EXPENSE YIELD/RATES
ASSETS
----------- -------------- ---------------- -------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans $ 310,129 38.41% $ 29,101 9.38%
Taxable investment securities 344,321 42.64% 21,494 6.24%
Nontaxable investment securities 14,762 1.83% 733 4.97%
Interest bearing deposits in other banks 1,507 0.19% 142 9.42%
Federal funds sold and securities purchased
under agreements to resell 52,673 6.53% 2,848 5.41%
------------ -------------- ----------------
TOTAL INTEREST-EARNING ASSETS 723,392 89.58% 54,318 7.51%
NON INTEREST-BEARING ASSETS:
Cash and due from banks 32,452 4.02%
Bank premises and equipment - net 41,048 5.08%
Accrued interest receivable 5,412 0.67%
Other real estate owned 272 0.03%
Other assets 5,879 0.73%
Goodwill 3,620 0.45%
Reserve for loan losses (4,554) (0.56)%
------------ --------------
TOTAL ASSETS $ 807,521 100.00%
============ ==============
INTEREST-BEARING LIABILITIES:
Savings deposits $ 187,778 23.25% 4,684 2.49%
Other time deposits 397,950 49.28% 19,615 4.93%
Short-term debt 55,902 6.92% 2,454 4.39%
Long-term debt 163 0.02% - -
------------ -------------- ----------------
TOTAL INTEREST-BEARING LIABILITIES 641,793 79.47% 26,753 4.17%
NON INTEREST-BEARING LIABILITIES:
Demand deposits 93,199 11.54%
Other liabilities 1,335 0.17%
Accrued interest payable 2,889 0.36%
------------ --------------
TOTAL LIABILITIES 739,216 91.54%
STOCKHOLDERS' EQUITY 68,305 8.46%
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 807,521 100.00%
============ ==============
NET INTEREST INCOME $ 27,565
================
INTEREST RATE SPREAD 3.34%
=========
NET INTEREST MARGIN 3.81%
=========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------
AVERAGE PERCENT OF INTEREST AVERAGE
BALANCE TOTAL INCOME/EXPENSE YIELD/RATES
ASSETS
----------- -------------- ---------------- -------------
Interest-earning assets: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans $ 325,533 42.43% $ 31,163 9.57%
Taxable investment securities 321,148 41.85% 20,040 6.24%
Nontaxable investment securities 11,685 1.52% 571 4.89%
Interest bearing deposits in other banks 12 0.00% 16 133.33%
Federal funds sold and securities purchased
under agreements to resell 28,000 3.65% 2,624 9.37%
----------- -------------- ----------------
TOTAL INTEREST-EARNING ASSETS 686,378 89.45% 54,414 7.93%
NON INTEREST-BEARING ASSETS:
Cash and due from banks 32,402 4.22%
Bank premises and equipment - net 38,385 5.00%
Accrued interest receivable 5,472 0.71%
Other real estate owned 365 0.05%
Other assets 5,340 0.70%
Goodwill 3,946 0.52%
Reserve for loan losses (4,991) (0.65)%
------------ --------------
TOTAL ASSETS $ 767,297 100.00%
============ ==============
INTEREST-BEARING LIABILITIES:
Savings deposits $ 194,680 25.37% 5,831 3.00%
Other time deposits 383,780 50.02% 18,089 4.71%
Short-term debt 29,112 3.80% 2,395 8.23%
Long-term debt - - - -
----------- -------------- ----------------
TOTAL INTEREST-BEARING LIABILITIES 607,572 79.19% 26,315 4.33%
NON INTEREST-BEARING LIABILITIES:
Demand deposits 95,789 12.48%
Other liabilities 2,010 0.26%
Accrued interest payable 2,150 0.28%
----------- --------------
TOTAL LIABILITIES 707,521 92.21%
STOCKHOLDERS' EQUITY 59,776 7.79%
----------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 767,297 100.00%
=========== ==============
NET INTEREST INCOME $ 28,099
================
INTEREST RATE SPREAD 3.60%
=============
NET INTEREST MARGIN 4.09%
=============
</TABLE>
52
<PAGE>
Net interest income is affected both by the interest rate earned and paid and
by changes in volume, principally in loans, investment securities, deposits and
borrowed funds. The following table depicts the dollar effect and rate changes
for interest-earning assets and interest-bearing liabilities and the resulting
change in interest income and interest expense:
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------- -----------------------------------
VOLUME RATE(1) NET VOLUME RATE(1) NET
---------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans $ 1,409 $ 430 $ 1,839 $ (1,966) $ (96) $ (2,062)
Taxable investment securities (1,379) (86) (1,465) 1,928 (474) 1,454
Nontaxable investment securities 9 (1) 8 201 (39) 162
Interest bearing deposits in other banks (177) 41 (136) 2,658 (2,532) 126
Federal funds sold and securities purchased
under agreements to resell 859 (135) 724 3,095 (2,871) 224
---------- -------- --------- -------- -------- ---------
TOTAL INTEREST-EARNING ASSETS 721 249 970 5,916 (6,012) (96)
INTEREST PAID ON:
Savings deposits (68) 103 35 (275) (872) (1,147)
Other time deposits (1,002) 623 (379) 890 636 1,526
Short-term debt 1,165 146 1,311 2,939 (2,880) 59
Long-term debt - - - - - -
---------- ------ -------- -------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES 95 872 967 3,554 (3,116) 438
---------- ------ -------- -------- -------- ---------
NET INTEREST INCOME $ 626 $ (623) $ 3 $ 2,362 $ (2,896) $ (534)
========== ====== ======== ======== ======== =========
</TABLE>
______________
(1) Changes in interest income and interest expense due to both rate and volume
are included in rate variances.
Noninterest Income. Noninterest income increased by $1,113,000 for the year
ended December 31, 1997 compared with the year ended December 31, 1996. This
included an increase of $115,000 in service charge income, a reduction in
security losses from $1,278,000 in 1996 to no losses in 1997, and a decrease in
other income of $280,000.
Noninterest income decreased by $1,744,000 for the year ended December 31,
1996 compared with the year ended December 31, 1995. This included a decrease
of $131,000 in service charge income, a reduction in security gains from $6,000
in 1995 to a loss of $1,278,000 in 1996, and a decrease in other income of
$329,000.
Noninterest Expense. Noninterest expense decreased by $23,000 for the year
ended December 31, 1997 compared with the year ended December 31, 1996. This
included a decrease of $283,000 in salaries and employees benefits, a decrease
in other operating expenses of $111,000, an increase in occupancy expenses of
$266,000, and an increase in furniture and equipment expense of $105,000.
Noninterest expense decreased by $991,000 for the year ended December 31, 1996
compared with the year ended December 31, 1995. This included a decrease of
$660,000 in furniture and equipment expense, a decrease of $639,000 in other
operating expenses, an increase of $236,000 in salaries and employee benefits,
and an increase of $72,000 in occupancy expenses.
53
<PAGE>
FINANCIAL CONDITION
Loans. Mercantile Bank's loan portfolio has increased by $23,916,000 from
December 31, 1993 to December 31, 1997. Mercantile Bank's primary market area
was negatively affected by a devaluation in the Mexican Peso in December 1994.
Mercantile Bank's charge-offs of installment and consumer loans significantly
increased. As a result, Mercantile Bank concentrated its lending efforts in the
area of commercial and real estate loans, while focusing less on indirect
consumer loans. All of the loan growth from December 31, 1993 to December 31,
1997, was from domestic commercial and real estate loans.
The following table sets forth the composition of the loan portfolio for the
periods presented:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT
----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
------------------------ -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ --------- ----------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Type of loan:
Domestic:
Commercial, financial and $ 84,027 $ 83,013 $ 92,987 $ 70,825 $ 78,832 $ 80,607 $ 65,064
agricultural
Interim real estate 21,916 18,329 12,655 10,766 7,549 4,703 15,250
Permanent real estate 143,383 139,661 152,128 138,992 113,535 106,850 95,441
Consumer loans 40,674 52,419 50,299 60,136 79,477 86,187 99,300
FOREIGN:
Commercial and industrial 28,822 33,947 34,139 36,186 41,208 44,565 43,237
------------ --------- ----------- --------- --------- --------- ---------
$ 318,822 $ 327,369 $ 342,208 $ 316,905 $ 320,601 $ 322,912 $ 318,292
============ ========= =========== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF LOAN PORTFOLIO
---------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- --------- ---------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and 26.36% 25.36% 27.17% 22.34% 24.60% 24.96% 20.44%
agricultural
Interim real estate 6.87% 5.60% 3.70% 3.40% 2.35% 1.46% 4.79%
Permanent real estate 44.97% 42.66% 44.45% 43.86% 35.41% 33.09% 29.99%
Consumer loans 12.76% 16.01% 14.70% 18.98% 24.79% 26.69% 31.20%
FOREIGN:
Commercial and industrial 9.04% 10.37% 9.98% 11.42% 12.85% 13.80% 13.58%
----------- --------- ----------- ----------- ----------- ----------- ---------
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
----------- --------- ----------- ----------- ----------- ----------- ---------
</TABLE>
54
<PAGE>
The following table sets forth the maturity composition and interest
sensitivity of total loans at December 31, 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 2,829 $ 2,685 $ 2,685 $ 4,894 $ 5,289 $ 5,626 $ 3,912
CHARGE-OFFS:
DOMESTIC:
Commercial, financial and agricultural 81 8 120 1,812 108 201 201
Interim real estate - - - - - 6 18
Permanent real estate 32 - - 1 - 9 -
Consumer loans 831 749 998 896 689 515 474
FOREIGN:
Commercial and industrial - - - - - - 13
-------- ------- -------- --------- ------- ------- --------
944 757 1,118 2,709 797 731 706
RECOVERIES:
DOMESTIC:
Commercial, financial and agricultural 20 188 204 32 163 79 256
Interim real estate - - - - - 4
Permanent real estate 6 7 11 3 1 - 11
Consumer loans 165 183 202 202 138 50 231
FOREIGN:
Commercial and industrial - - - - - 123
-------- ------- -------- --------- ------- ------- --------
191 378 417 237 302 129 625
-------- ------- -------- --------- ------- ------- --------
NET CHARGE-OFFS 753 379 701 2,472 495 602 81
Additions charged to operations 575 525 845 263 100 265 (1,285)
Reserves established for New First City loans - - - - - - 3,080
acquired -------- ------- -------- --------- ------- ------- --------
-------- ------- ------- --------- ------- ------- --------
BALANCE AT END OF PERIOD $ 2,651 $ 2,831 $ 2,829 $ 2,685 $ 4,894 $ 5,289 $ 5,626
======== ======= ======= ========= ======= ======= ========
RATIO OF NET CHARGE-OFFS DURING THE PERIOD TO
AVERAGE LOANS OUTSTANDING DURING THE PERIOD 0.23% 0.12% 0.22% 0.80% 0.15% 0.19% 0.03%
======== ======= ======= ========= ======= ======= ========
</TABLE>
The allowance for loan losses is not allocated to specific categories of
loans. However, based on Mercantile Bank's review of remaining collateral
and/or financial condition of identified loans with characteristically more than
a normal degree of risk, historical loan loss percentages, and economic
conditions; management believes the allowance for loan loss at September 30,
1998, is adequate to cover losses inherent in the portfolio.
The reserve for loan losses is established through a provision for loan losses
charged to operations. Loans are charged against the reserve for loan losses
when management believes that the collectibility of the principal is unlikely.
The reserve is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into considerations such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay.
55
<PAGE>
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
Non-performing Assets. Non-performing assets are defined as loans delinquent
90 or more days, non-accrual loans, restructured loans, and foreclosed assets.
Such assets do not necessarily represent future losses to Mercantile Bank since
underlying collateral can be sold and the financial condition of the borrowers
may improve. The following table sets forth the detail of non-performing loans.
Mercantile Bank had no restructured loans at any of the dates listed herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------ -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OUTSTANDING LOAN BALANCES:
DOMESTIC:
Non-accrual loans $4,891 $3,194 $3,030 $2,956 $4,640 $2,410 $6,295
Loans past due 90 days or more 286 438 181 351 272 251 1,720
Troubled debt restructuring - - - - - - -
FOREIGN:
Non-accrual loans - - - - - - -
Loans past due 90 days or more - - - - - - -
Troubled debt restructuring - - - - - - -
TOTAL NONPERFORMING LOANS $5,177 $3,632 $3,211 $3,307 $4,912 $2,661 $8,015
====== ====== ====== ====== ====== ====== ======
</TABLE>
Total non-performing loans as a percentage of total loans was 1.6% and 1.1%
for the nine months ended September 30, 1998 and 1997, respectively, and .6%,
1.0% and 1.5% for the years ended December 31, 1997, 1996, and 1995,
respectively.
At December 31, 1997, there were no significant commitments to lend additional
funds to borrowers whose loans were considered non-performing.
Management is not aware of any loans which were not included as non-performing
loans where known information about possible credit problems causes serious
doubt as to the borrower's ability to comply with repayment terms which may
result in such loans becoming non-performing.
The loan portfolio includes loans to customers in Mexico of $28,822 as of
September 30, 1998 and $34,139, $36,186, and $41,208 as of December 31, 1997,
1996, and 1995, respectively. The loan portfolio does not include any highly
leveraged transaction loans. Senior management closely monitors concentrations
to individual customers and actively participates within their lending areas.
Mercantile Bank has written policies that require security for loans including
liens on residential mortgage loans and certain of the other loans secured by
real estate. In addition, policies and procedures are in place to assess the
creditworthiness of borrowers for all loans and commitments. A borrower's
ability to honor loan contracts can be largely dependent upon economic
conditions within Mercantile Bank's market areas, on a national level and within
Mexico.
Investments. Mercantile Bank accounts for investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, each
security is classified as either trading, available-for-sale, or held-to-
maturity. Mercantile Bank has no securities held in a trading account.
Investments classified as held-
56
<PAGE>
to-maturity are recorded at amortized cost. The securities classified as
available-for-sale are recorded at their fair value. The after-tax difference
between amortized cost and fair value of securities available for sale is
recorded as "unrealized gain (loss) on securities" in the equity section of the
balance sheet. The tax impact is recorded as an adjustment to the deferred tax
liability.
The following table presents the composition of investments securities for the
periods presented:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY:
Obligations of states and political $ 9,756 $ 10,454 $ 10,453 $ 10,659 $ 10,286
subdivisions
AVAILABLE FOR SALE:
Equity securities 3,260 3,176 3,176 3,112 2,943
U.S. Treasury securities 76,632 115,376 82,158 96,135 62,024
Obligations of U.S. government agencies 85,783 71,171 111,553 76,942 89,929
Obligations of states and political 4,549 4,484 4,504 4,407 3,269
subdivisions
Mortgage-backed securities 46,504 60,784 58,230 66,247 101,056
Collateral-mortgage obligations 70,534 73,689 73,270 75,824 113,838
Other 679 678 678 676 2,669
----------- ---------- ---------- ---------- ----------
287,941 329,358 333,569 323,343 375,728
----------- ---------- ---------- ---------- ----------
TOTAL $ 297,697 $ 339,812 $ 344,022 $ 334,002 $ 386,014
</TABLE>
Investment Securities-Maturities and Yields. The following tables show the
maturities and yields for the various forms of investment securities at
September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------------------------------------
IN ONE AFTER ONE AFTER FIVE AFTER
YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
------------------ ------------------- ------------------ -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- --------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities $ - - $ - - $ - - $ 3,259 6.01%
U.S. Treasury securities 27,197 6.23% 49,434 6.40% - - - -
Obligations of U.S. government agencies 5,000 4.78% 78,790 6.12% - - 1,993 7.00%
Obligations of states and political
subdivisions(1) 1,241 6.73% 4,911 7.01% 7,204 7.54% 953 8.06%
Mortgage-backed securities(2) - - 8,348 6.39% 8,705 6.32% 29,450 7.13%
Collateral-mortgage securities 84 6.50% - - 17,322 5.83% 53,128 6.05%
Other - - 550 7.95% 131 8.76% - -
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------
IN ONE AFTER ONE AFTER FIVE AFTER
YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
------------------ ------------------- ------------------ -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ------- --------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities $ - - $ - - $ - - $ 3,176 5.83%
U.S. Treasury securities 7,967 5.38% 74,191 6.34% - - - -
Obligations of U.S. government agencies 64,660 5.38% 44,916 6.25% - - 1,977 7.00%
Obligations of states and political
Subdivisions(1) 695 6.31% 4,486 7.10% 7,960 7.83% 1,816 8.19%
Mortgage-backed securities(2) - - 7,197 6.66% 11,705 6.22% 39,328 7.14%
Collateral-mortgage securities 2,439 7.29% - - 13,664 5.79% 57,167 6.06%
Other - - 550 7.95% 128 8.75% - -
</TABLE>
________________
(1) Yield presented on a tax-equivalent basis assuming a tax rate of 34%
(2) Included in maturity table based on their average remaining life or call
date, if applicable
Deposits. The deposit base provides the major funding source for Mercantile
Bank's interest-earning assets. Mercantile Bank's deposits have decreased
slightly during the period from December 31, 1994 to December 31, 1997, due to a
migration of deposits to repurchase agreements. Management believes that
demand, savings and certificates of deposit less than $100,000 represent a core
of base deposits while certificates of deposits in excess of $100,000 and public
funds are more interest rate sensitive and, thus, are not viewed as part of the
core deposit base.
The following table reflects the average balance and average interest rate
paid on deposits for the period presented:
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE PAID
--------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SEPTEMBER 30, 1998
- ------------------
Demand deposits $ 91,460 0.00%
NOW and super NOW accounts 75,912 1.65%
Money market accounts 76,609 2.11%
Savings deposits 41,897 2.01%
Certificates of deposit less than $100,000 138,789 3.67%
Certificates of deposits and state time
deposits of $100,000 or more 228,342 3.82%
Individual retirement accounts 17,300 3.90%
----------------------
$ 670,309
======================
SEPTEMBER 30, 1997
- ------------------
Demand deposits $ 87,636 0.00%
NOW and super NOW accounts 70,482 1.62%
Money market accounts 70,750 2.07%
Savings deposits 43,526 2.06%
Certificates of deposit less than $100,000 134,672 3.62%
Certificates of deposits and state time
deposits of $100,000 or more 227,135 3.80%
Individual retirement accounts 18,356 4.11%
----------------------
$ 652,557
======================
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- -----------------
<S> <C> <C>
Demand deposits $ 88,657 0.00%
NOW and super NOW accounts 71,485 2.15%
Money market accounts 71,594 2.79%
Savings deposits 43,198 2.74%
Certificates of deposit less than $100,000 135,196 4.75%
Certificates of deposits and state time
deposits of $100,000 or more 228,685 5.16%
Individual retirement accounts 18,255 5.48%
----------------------
$ 657,070
======================
DECEMBER 31, 1996
- ------------------
Demand deposits $ 93,199 0.00%
NOW and super NOW accounts 74,915 2.17%
Money market accounts 68,376 2.64%
Savings deposits 45,671 2.75%
Certificates of deposit less than $100,000 132,023 4.58%
Certificates of deposits and state time
deposits of $100,000 or more 245,099 5.08%
Individual retirement accounts 19,644 5.70%
----------------------
$ 678,927
======================
DECEMBER 31, 1995
- -----------------
Demand deposits $ 95,789 0.00%
NOW and super NOW accounts 88,975 2.78%
Money market accounts 76,692 2.53%
Savings deposits 48,610 2.91%
Certificates of deposit less than $100,000 126,668 4.59%
Certificates of deposits and state time
deposits of $100,000 or more 216,409 5.11%
Individual retirement accounts 21,106 5.72%
----------------------
$ 674,249
======================
</TABLE>
The following tables reflect the maturities of certificates and other time
deposits of $100,000 or more as of September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------
3 MONTHS 3 TO 12 OVER 12
OR LESS MONTHS MONTHS TOTAL
--------------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of deposit, includes other time
deposits of $0 $ 136,549 $ 89,472 $ 1,009 $ 227,030
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
3 MONTHS 3 TO 12 OVER 12
OR LESS MONTHS MONTHS TOTAL
--------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of deposit, includes other time
deposits of $970 $ 143,859 $ 109,019 $ 2,646 $ 255,525
</TABLE>
59
<PAGE>
Return on Equity and Assets. The following table sets forth MFE's ratios for
the periods indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------
1998 1997 1997 1996 1995
--------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.93% (1) 0.91% (1) 0.96% 1.00% 1.08%
Return on average equity 9.13% (1) 9.81% (1) 10.17% 11.82% 13.85%
Dividend pay-out ratio on common shares 0.00% 0.00% 0.00% 33.90% 0.00%
Equity to assets ratio 10.22% 9.32% 9.43% 8.46% 7.79%
</TABLE>
_______________
(1) Annualized
Short-term borrowings. The amount and interest rates related to short-term
borrowings for the periods presented are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------
1998 1997 1997 1996 1995
--------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FEDERAL FUNDS PURCHASED:
Outstanding balance at period-end $ 2,600 $ 2,545 $ 1,900 $ 1,100 $ 897
Weighted average interest rate at period-end 4.39% 4.87% 5.52% 5.68% 5.07%
Highest outstanding balance at any month end $ 2,600 $ 1,900 $ 2,500 $ 2,600 $ 3,000
Average balance outstanding during period $ 1,526 $ 744 $ 1,181 $ 1,990 $ 1,507
Weighted average interest rate during period 5.07% 5.15% 5.33% 5.14% 5.62%
SECURITIES:
Outstanding balance at period-end $ 74,794 $ 68,198 $ 72,246 $ 84,897 $ 41,879
Weighted average interest rate at period-end 4.81% 5.00% 5.08% 4.54% 4.77%
Highest outstanding balance at any month end $ 80,650 $ 74,267 $ 74,267 $ 89,179 $ 41,879
Average balance outstanding during period $ 78,717 $ 75,155 $ 74,637 $ 53,912 $ 27,605
Weighted average interest rate during period 4.55% 4.92% 4.96% 4.41% 4.91%
</TABLE>
Liquidity. Mercantile Bank's principal source of funds consists of deposits,
interest and principal payments on loans and investment securities, sales of
investment securities and borrowings. For the year ended December 31, 1997,
Mercantile Bank realized proceeds from sales and maturities of investment
securities of $103,253,000, a net increase in deposits of $30,746,000 and net
cash provided by operating activities of $10,502,000. Funds were used to
acquire investment securities of $109,810,000 and fund a net increase in loans
to customers of $27,388,000. For the year ended December 31, 1996, Mercantile
Bank realized proceeds from sales and maturities of investment securities of
$129,601,000 and net cash provided by operating activities of $13,141,000.
Funds were used to acquire investment securities of $82,077,000.
Asset liquidity is provided by cash and readily marketable assets, which can
be pledged or which will mature in the near future. These include cash, federal
funds sold, and U.S. Government-backed securities. Mercantile Bank's liquidity
ratio, defined as cash, U.S. Government-backed securities and federal funds sold
as a percentage of total deposits, was 64.5% and 66.8% as of December 31, 1997
and 1996, respectively. Liability liquidity is provided by access to core
funding sources, principally various customers' interest-bearing accounts in
Mercantile Bank's market areas. Mercantile Bank does not have and does not
solicit brokered deposits.
60
<PAGE>
Federal funds purchased and short-term borrowings by Mercantile Bank are
additional sources of liquidity. These sources of liquidity are short-term in
nature and are used by Mercantile Bank as necessary to fund asset growth and
meet short-term liquidity needs. As of December 31, 1997, 1996, and 1995,
Mercantile Bank had federal funds purchased of $1,900,00, $1,100,000, and
$900,000, respectively. As of December 31, 1997, 1996, and 1995, Mercantile
Bank had borrowings on securities sold under repurchase agreements of
$72,246,000, $84,897,000, and $41,879,000, respectively.
Capital. Mercantile Bank's total shareholders' equity as of September 30,
1998 was $90,464,000, an increase of $8,002,000 or 9.7% compared with
stockholders' equity of $82,462,000 as of December 31, 1997. Included in the
increase was $5,884,000 from earnings.
Total shareholders' equity as of December 31, 1997 was $82,462,000, an
increase of $10,087,000 or 13.94% compared with stockholders' equity of
$72,375,000 as of December 31, 1996. Included in the increase was $7,801,000
from earnings and $2,286,000 in unrealized gains from investment securities.
Total shareholders' equity as of December 31, 1996 was $72,375,000, an
increase of $3,310,000 or 4.79% compared with stockholders' equity of
$69,065,000 as of December 31, 1995. Included in the increase was $8,071,000
from earnings and $97,000 from the issuance of new common stock. Shareholders'
equity was decreased by $2,740,000 by payment of dividends and $2,118,000 in
unrealized losses from investment securities.
Mercantile Bank 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 Mercantile Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action.
Mercantile Bank must meet specific capital guidelines that involve quantitative
measures of Mercantile Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Mercantile Bank'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 Mercantile Bank to maintain minimum amounts and ratios (set forth in the
table below) of total Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined in the regulations) and of Tier I capital (as
defined in the regulations) to average assets (as defined in the regulations).
Management believes that Mercantile Bank meets all capital adequacy
requirements, as of September 30, 1998, to which it is subject.
As of December 31, 1997, the most recent notification from the OCC categorized
Mercantile Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Mercantile Bank must
maintain minimum total risk-based, Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the category.
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Mercantile Bank's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
---------------------- -------------------- ---------------------
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ----------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998:
Total Capital (to Risk Weighted Assets) 87,913 21.8% $ 32,242 8.0% $ 40,302 10.0%
Tier 1 Capital (to Risk Weighted Assets) 85,262 21.2% $ 16,121 4.0% $ 24,181 6.0%
Tier 1 Capital (to Average Assets) 85,262 10.2% $ 33,388 4.0% $ 41,735 5.0%
AS OF SEPTEMBER 30, 1997:
Total Capital (to Risk Weighted Assets) 79,622 20.1% $ 31,760 8.0% $ 39,700 10.0%
Tier 1 Capital (to Risk Weighted Assets) 76,791 19.3% $ 15,880 4.0% $ 23,820 6.0%
Tier 1 Capital (to Average Assets) 76,791 9.6% $ 32,037 4.0% $ 40,046 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets) 81,960 19.3% $ 34,004 8.0% $ 42,505 10.0%
Tier 1 Capital (to Risk Weighted Assets) 79,131 18.6% $ 17,002 4.0% $ 25,503 6.0%
Tier 1 Capital (to Average Assets) 79,131 9.6% $ 33,115 4.0% $ 41,394 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets) 73,687 18.6% $ 31,651 8.0% $ 39,564 10.0%
Tier 1 Capital (to Risk Weighted Assets) 71,002 17.9% $ 15,826 4.0% $ 23,739 6.0%
Tier 1 Capital (to Average Assets) 71,002 8.8% $ 32,439 4.0% $ 40,548 5.0%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets) 70,141 18.0% $ 31,178 8.0% $ 38,792 10.0%
Tier 1 Capital (to Risk Weighted Assets) 65,247 16.7% $ 15,589 4.0% $ 23,384 6.0%
Tier 1 Capital (to Average Assets) 65,247 8.2% $ 31,784 4.0% $ 39,730 5.0%
</TABLE>
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning Mercantile Bank
presented in this proxy statement-prospectus have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary effect of inflation on the operation of Mercantile Bank
is reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of Mercantile Bank,
including the influence of domestic and foreign economic conditions and the
monetary and fiscal policies of the United States government and federal
agencies, particularly the Federal Reserve Board. The Federal Reserve Board
implements national monetary policy such as seeking to curb inflation and combat
recession by its open market operations in United States government securities,
control of the discount rate applicable to borrowing by banks and establishment
of reserve requirements against bank deposits. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits, and affect the interest rates
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charged on loans and paid on deposits. The nature, timing and impact of any
future changes in federal monetary and fiscal policies on Mercantile Bank and
their results of operations are not predictable.
CERTAIN REGULATORY AND OTHER
CONSIDERATIONS PERTAINING TO WELLS FARGO
Wells Fargo and its banking subsidiaries are subject to extensive regulation
by federal and state agencies. The regulation of bank holding companies and
their subsidiaries is intended primarily for the protection of depositors,
federal deposit insurance funds and the banking system as a whole and is not in
place to protect stockholders or other investors.
As discussed in more detail below, this regulatory environment, among other
things, may (a) restrict Wells Fargo's ability to pay dividends on Wells Fargo
common stock, (b) require Wells Fargo to provide financial support to one or
more of its banking subsidiaries, (c) require Wells Fargo and its banking
subsidiaries to maintain capital balances in excess of those desired by
management, and/or (d) require Wells Fargo to pay higher deposit insurance
premiums as a result of the deterioration in the financial condition of
depository institutions in general.
BANK REGULATORY AGENCIES
Wells Fargo Corporation, as a bank holding company, is subject to regulation
by the Federal Reserve Board under the Bank Holding Company Act.
Wells Fargo's national banking subsidiaries are regulated by the OCC. Its
state-chartered banking subsidiaries are regulated primarily by the FDIC or the
Federal Reserve Board and applicable state banking agencies. Wells Fargo's
federally insured banking subsidiaries are also subject to regulation by the
FDIC.
Wells Fargo has other financial services subsidiaries that are subject to
regulation by the Federal Reserve Board and other applicable federal and state
agencies. For example, Wells Fargo's brokerage subsidiary is subject to
regulation by the SEC, the National Association of Securities Dealers, Inc. and
state securities regulators. Wells Fargo's insurance subsidiaries are subject
to regulation by applicable state insurance regulatory agencies. Other nonbank
subsidiaries of Wells Fargo are subject to the laws and regulations of both the
federal government and the various states in which they conduct business.
BANK HOLDING COMPANY ACTIVITIES; INTERSTATE BANKING
A bank holding company is generally prohibited under the Bank Holding Company
Act from engaging in nonbanking (i.e., commercial or industrial) activities,
subject to certain exceptions. Specifically, the activities of a bank holding
company, and those companies that it controls or in which it holds more than 5%
of the voting stock, are limited to banking or managing or controlling banks,
furnishing services to its subsidiaries and such other activities that the
Federal Reserve Board determines to be so closely related to banking as to be a
"proper incident thereto." In determining whether an activity is sufficiently
related to banking, the Federal Reserve Board will consider whether the
performance of such activity by the bank holding company can reasonably be
expected to produce benefits to the public (e.g., greater convenience, increased
competition or gains in efficiency) that outweigh possible adverse effects
(e.g., undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices).
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Under the Riegle-Neal Interstate Banking and Branching Act (the "Interstate
Banking Act"), which became effective on September 29, 1995, a bank holding
company may acquire banks in states other than its home state, subject to any
state requirement that the bank has been organized and operating for a minimum
period of time, not to exceed five years, and the requirement that the bank
holding company not control, prior to or following the proposed acquisition,
more than 10% of the total amount of deposits of insured depository institutions
nationwide or, unless the acquisition is the bank holding company's initial
entry into the state, more than 30% of such deposits in the state (or such
lesser or greater amount set by the state).
The Interstate Banking Act also authorizes banks to merge across state lines
(thereby creating interstate branches) effective June 1, 1997. States may opt
out of the Interstate Banking Act (thereby prohibiting interstate Mergers in the
state) or opt in early (thereby allowing interstate Mergers prior to June 1,
1997). Wells Fargo will be unable to consolidate its banking operations in one
state with those of another state if either state in question has opted out of
the Interstate Banking Act. The state of Montana has opted out until at least
the year 2001.
Wells Fargo's acquisitions of banking institutions and other companies
generally are subject to the prior approval of the Federal Reserve Board and
other applicable federal or state regulatory authorities. In determining
whether to approve a proposed bank acquisition, federal banking regulators will
consider, among other factors, the effect of the acquisition on competition, the
public benefits expected to be received from the consummation of the
acquisition, the projected capital ratios and levels on a post-acquisition
basis, and the acquiring institution's record of addressing the credit needs of
the communities it serves, including the needs of low and moderate income
neighborhoods, consistent with the safe and sound operation of the bank, under
the Community Reinvestment Act of 1977, as amended.
DIVIDEND RESTRICTIONS
Wells Fargo is a legal entity separate and distinct from its banking and other
subsidiaries. Its principal source of funds to pay dividends on its common and
preferred stock and debt service on its debt is dividends from its subsidiaries.
Various federal and state statutes and regulations limit the amount of dividends
that may be paid to Wells Fargo by its banking subsidiaries without regulatory
approval.
Most of Wells Fargo's banking subsidiaries are national banks. A national
bank must obtain the prior approval of the OCC to pay a dividend if the total of
all dividends declared by the bank in any calendar year would exceed the bank's
net income for that year combined with its retained net income for the preceding
two calendar years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
Wells Fargo's state-chartered banking subsidiaries also are subject to
dividend restrictions under applicable state law.
If, in the opinion of the applicable federal regulatory agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank, could include the payment of dividends), the regulator may require, after
notice and hearing, that such bank cease and desist from such practice. The OCC
has indicated that the payment of dividends would constitute an unsafe and
unsound practice if the payment would deplete a depository institution's capital
base to an inadequate level. Under the Federal Deposit Insurance Act, an
insured depository institution may not pay any dividend if the institution is
undercapitalized or if the
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payment of the dividend would cause the institution to become undercapitalized.
In addition, federal bank regulatory agencies have issued policy statements
which provide that depository institutions and their holding companies should
generally pay dividends only out of current operating earnings.
The ability of Wells Fargo's banking subsidiaries to pay dividends to Wells
Fargo may also be affected by various minimum capital requirements for banking
organizations, as described below. In addition, the right of Wells Fargo to
participate in the assets or earnings of a subsidiary is subject to the prior
claims of creditors of the subsidiary.
Wells Fargo Bank, N.A., with the express approval of the OCC, declared
dividends in 1997 and 1996 of $1.5 billion in excess of its net income of $2.0
billion for those years. As a result, before Wells Fargo Bank, N.A. may declare
dividends in 1998 without the prior approval of the OCC, it must have net income
of $1.5 billion plus an amount equal to or greater than the dividends desired to
be declared in 1998. Because it is not expected to have net income of $1.5
billion plus an amount equal to or greater than the dividends expected to be
declared in 1998, Wells Fargo Bank, N.A. must obtain the approval of the OCC
before any dividends are declared in 1998.
HOLDING COMPANY STRUCTURE
Transfer of Funds from Banking Subsidiaries. Wells Fargo's banking
subsidiaries are subject to restrictions under federal law that limit the
transfer of funds or other items of value from such subsidiaries to Wells Fargo
and its nonbanking subsidiaries (including Wells Fargo, "affiliates") in so-
called "covered transactions." In general, covered transactions include loans
and other extensions of credit, investments and asset purchases, as well as
other transactions involving the transfer of value from a banking subsidiary to
an affiliate or for the benefit of an affiliate. Unless an exemption applies,
covered transactions by a banking subsidiary with a single affiliate are limited
to 10% of the banking subsidiary's capital and surplus and, with respect to all
covered transactions with affiliates in the aggregate, to 20% of the banking
subsidiary's capital and surplus. Also, loans and extensions of credit to
affiliates generally are required to be secured in specified amounts.
Source of Strength Doctrine. The Federal Reserve Board has a policy that a
bank holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and, under appropriate circumstances,
to commit resources to support each such subsidiary bank. This support may be
required at times when the bank holding company may not have the resources to
provide it. Capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and certain other
indebtedness of the subsidiary bank. In addition, in the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Depositor Preference. The Federal Deposit Insurance Act (the "FDI Act")
provides that, in the event of the "liquidation or other resolution" of an
insured depository institution, the claims of depositors of the institution
(including the claims of the FDIC as subrogee of insured depositors) and certain
claims for administrative expenses of the FDIC as a receiver will have priority
over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the
FDIC, will have priority in payment ahead of unsecured, nondeposit creditors,
including the institution's parent holding company.
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Liability of Commonly Controlled Institutions. Under the FDI Act, an insured
depository institution is generally liable for any loss incurred, or reasonably
expected to be incurred, by the FDIC in connection with (a) the default of a
commonly controlled insured depository institution or (b) any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
REGULATORY CAPITAL STANDARDS AND RELATED MATTERS
Risk-Based Capital. The Federal Reserve Board, the OCC and the FDIC have
adopted substantially similar risk-based and leverage capital guidelines for
banking organizations. The guidelines are intended to ensure that banking
organizations have adequate capital given the risk levels of their assets and
off-balance sheet commitments.
The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher
levels of capital being required for those categories perceived as representing
greater risk. Under the capital guidelines, a banking organization's total
capital is divided into tiers. "Tier 1 capital" consists of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets. The remainder (Tier 2 and Tier 3
capital) consists of hybrid capital instruments, perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, preferred
stock that does not qualify as Tier 1 capital, and a limited amount of the
allowance for credit losses.
Under the Federal Reserve Board's risk-based capital guidelines for bank
holding companies, the minimum ratio of total capital (the sum of Tier 1, Tier 2
and Tier 3) to risk-adjusted assets (including certain off-balance sheet items,
such as stand-by letters of credit) is currently 8%. The minimum Tier 1 capital
to risk-adjusted assets is 4%. At December 31, 1998, Wells Fargo's total
capital and Tier 1 capital to risk-adjusted assets ratios were 10.9% and 8.1%,
respectively.
The Federal Reserve Board also requires bank holding companies to comply with
minimum leverage ratio guidelines. The leverage ratio is the ratio of a bank
holding company's Tier 1 capital to its total consolidated quarterly average
assets, less goodwill and certain other intangible assets. The guidelines
require a minimum leverage ratio of 3% for bank holding companies that meet
certain specified criteria, including having the highest supervisory rating.
All other bank holding companies are required to maintain a minimum leverage
ratio of 4% to 5%. The Federal Reserve Board has not advised Wells Fargo of any
specific leverage ratio applicable to it. At December 31, 1998, Wells Fargo's
leverage ratio was 6.6%.
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Also, the guidelines
indicate that the Federal Reserve Board will consider a "tangible Tier 1
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1
capital (excluding intangibles) to total assets (excluding intangibles).
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Wells Fargo's banking subsidiaries are subject to risk-based and leverage
capital guidelines substantially similar to those imposed by the Federal Reserve
Board on bank holding companies.
Other Measures of Capital Adequacy and Safety and Soundness. In assessing a
banking organization's capital adequacy, federal bank regulatory agencies will
also consider the organization's credit concentration risk and risks associated
with nontraditional activities, as well as the organization's ability to manage
those risks. This evaluation will be performed as part of the organization's
regular safety and soundness examination.
Federal bank regulatory agencies require banking organizations that engage in
significant trading activity to calculate a capital charge for market risk.
Significant trading activity means trading activity of at least 10% of total
assets or $1 billion, whichever is smaller, calculated on a consolidated basis
for bank holding companies. Federal bank regulators may apply the market risk
measure to other banks and bank holding companies as the agency deems necessary
or appropriate for safe and sound banking practices. Each agency may exclude
organizations that it supervises that otherwise meet the criteria under certain
circumstances. The market risk charge will be included in the calculation of an
organization's risk-based capital ratios.
As an additional means to identify problems in the financial management of
depository institutions, the FDI Act requires federal bank regulatory agencies
to establish certain non-capital safety and soundness standards for institutions
for which they are the primary federal regulator. The standards relate
generally to operations and management, asset quality, interest rate exposure
and executive compensation. The agencies are authorized to take action against
institutions that fail to meet such standards.
Prompt Corrective Action. The FDI Act requires federal bank regulatory
agencies to take "prompt corrective action" with respect to FDIC-insured
depository institutions that do not meet minimum capital requirements. A
depository institution's treatment for purposes of the prompt corrective action
provisions will depend upon how its capital levels compare to various capital
measures and certain other factors, as established by regulation.
Federal bank regulatory agencies have adopted regulations that classify
insured depository institutions into one of five capital-based categories. The
regulations use the total capital ratio, the Tier 1 capital ratio and the
leverage ratio as the relevant measures of capital. A depository institution is
(a) "well capitalized" if it has a risk-adjusted total capital ratio of at least
10%, a Tier 1 capital ratio of at least 6% and a leverage ratio of at least 5%
and is not subject to any order or written directive to maintain a specific
capital level; (b) "adequately capitalized" if it has a risk-adjusted total
capital ratio of at least 8%, a Tier 1 capital ratio of at least 4% and a
leverage ratio of at least 4% (3% in some cases) and is not well capitalized;
(c) "undercapitalized" if it fails to meet any of the required minimums for an
adequately capitalized institution; (d) "significantly undercapitalized" if it
has a risk-adjusted total capital ratio of less than 6%, a Tier 1 capital ratio
of less than 3% or a leverage ratio of less than 3%; and (e) "critically
undercapitalized" if its tangible equity is less than 2% of total assets. At
December 31, 1998, all of Wells Fargo's insured depository institutions met the
criteria for well capitalized institutions as set forth above.
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A depository institution's primary federal bank regulator is authorized to
downgrade the institution's capital category to the next lower category upon a
determination that the institution is engaged in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice. An unsafe or unsound practice
can include receipt by the institution of a less than satisfactory rating on its
most recent examination with respect to its asset quality, management, earnings
or liquidity.
The FDI Act generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would as a result be
undercapitalized. Undercapitalized depository institutions are subject to a
wide range of limitations on operations and activities (including asset growth)
and are required to submit a capital restoration plan. The federal banking
agencies may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with the plan. The
aggregate liability of the parent holding company is limited to the lesser of
(a) 5% of the depository institution's total assets at the time it became
undercapitalized or (b) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to the institution as of the time it fails to comply
with the plan. If an undercapitalized depository institution fails to submit an
acceptable plan, it is treated as if it were significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
Under FDI Act regulations, a bank may not accept brokered deposits (that is,
deposits obtained through a person engaged in the business of placing deposits
with insured depository institutions or with interest rates significantly higher
than prevailing market rates) unless (a) it is well capitalized or (b) it is
adequately capitalized and receives a waiver from the FDIC. A bank that may not
receive brokered deposits also may not offer "pass-through" insurance on certain
employee benefit accounts, unless it provides certain notices to affected
depositors. Also, a bank that is adequately capitalized and that has not
received a waiver from the FDIC may not pay an interest rate on any deposits in
excess of 75 basis points over certain prevailing market rates. There are no
such restrictions on a bank that is well capitalized. At December 31, 1998, all
of Wells Fargo's subsidiary banks were well capitalized.
FDIC INSURANCE
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of Wells
Fargo's depository institution subsidiaries up to prescribed per depositor
limits. The amount of FDIC assessments paid by each BIF member institution is
based on its relative risk of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on the
institution's capitalization risk category and supervisory subgroup category.
An institution's capitalization risk category is based on the FDIC's
determination of whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. An institution's supervisory
subgroup category is based on the FDIC's assessment of the financial condition
of the institution and the probability that FDIC intervention or other
corrective action will be required. Subgroup A institutions are financially
sound institutions with few minor weaknesses; Subgroup B institutions are
institutions that demonstrate weaknesses which, if not corrected, could result
in significant deterioration; and Subgroup C institutions are institutions for
which
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there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits, with Subgroup A institutions assessed at a rate of zero and
Subgroup C institutions assessed at a rate of 27 cents. The FDIC may increase
or decrease the assessment rate schedule on a semiannual basis. An increase in
the BIF assessment rate could have a material adverse effect on Wells Fargo's
earnings, depending on the amount of the increase. The FDIC is authorized to
terminate a depository institution's deposit insurance upon a finding by the
FDIC that the institution's financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices or has violated any
applicable rule, regulation, order or condition enacted or imposed by the
institution's regulatory agency. The termination of deposit insurance with
respect to one or more of Wells Fargo's subsidiary depository institutions could
have a material adverse effect on Wells Fargo's earnings, depending on the
collective size of the particular institutions involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds (commonly referred to as FICO bonds) were
issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-
insured depository institutions will continue to pay approximately 1.3 cents per
$100 of BIF-assessable deposits until the earlier of December 31, 1999 or the
last savings and loan association ceases to exist.
FISCAL AND MONETARY POLICIES
Wells Fargo's business and earnings are affected significantly by the fiscal
and monetary policies of the federal government and its agencies. Wells Fargo
is particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. Among the
instruments of monetary policy available to the Federal Reserve are (a)
conducting open market operations in United States government securities, (b)
changing the discount rates of borrowings of depository institutions, (c)
imposing or changing reserve requirements against depository institutions'
deposits, and (d) imposing or changing reserve requirements against certain
borrowing by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits.
For that reason alone, the policies of the Federal Reserve Board have a material
effect on the earnings of Wells Fargo's banking subsidiaries and, thus, those of
Wells Fargo.
COMPETITION
The financial services industry is highly competitive. Wells Fargo's
subsidiaries compete with financial services providers, such as banks, savings
and loan associations, credit unions, finance companies, mortgage banking
companies, insurance companies, and money market and mutual fund companies.
They also face increased competition from non-banking institutions such as
brokerage houses and insurance companies, as well as from financial services
subsidiaries of commercial and manufacturing companies. Many of these
competitors enjoy the benefits of advanced technology, fewer regulatory
constraints and lower cost structures.
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The financial services industry is likely to become even more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
EXPERTS
The supplemental consolidated financial statements of Wells Fargo and
subsidiaries as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, incorporated by reference herein,
have been incorporated herein in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing. KPMG's
report contains an explanatory paragraph that states that the supplemental
consolidated financial statements give retroactive effect to the merger of Wells
Fargo and Norwest Corporation on November 2, 1998, which has been accounted for
as a pooling of interests as described in Note 1 to the supplemental
consolidated financial statements.
The financial statements of Mercantile Bank as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 included
in this proxy statement-prospectus have been audited by Burton, McCumber &
Cortez, L.L.P., independent auditors, as stated in their report appearing
herein, have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
LEGAL MATTERS
Stanley S. Stroup, Executive Vice President and General Counsel of Wells
Fargo, has rendered a legal opinion that the shares of Wells Fargo common stock
offered hereby, when issued in accordance with the Reorganization Agreement,
will be validly issued, fully paid and nonassessable. Mr. Stroup beneficially
owns shares of Wells Fargo common stock and options to purchase additional
shares of Wells Fargo common stock. As of the date of this proxy statement-
prospectus, the number of shares Mr. Stroup owns or has the right to acquire
upon exercise of his options is, in the aggregate, less than 0.1% of the
outstanding shares of Wells Fargo common stock.
The material U.S. Federal income tax consequences of the Consolidation to
Mercantile Bank's shareholders and certain other legal matters will be passed
upon for Mercantile Bank by Kilpatrick Stockton LLP.
INFORMATION CONCERNING WELLS FARGO MANAGEMENT
Information concerning executive compensation, the principal holders of voting
securities, certain relationships and related transactions, and other related
matters concerning Wells Fargo is included or incorporated by reference in its
annual report on Form 10-K for the year ended December 31, 1997. Wells Fargo's
annual report has been delivered with this proxy statement-prospectus and is
incorporated by reference into this proxy statement-prospectus."
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WHERE YOU CAN FIND MORE INFORMATION
Wells Fargo files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information filed by Wells Fargo at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Wells Fargo's SEC filings are also available to the
public from commercial document retrieval services and on the SEC Internet site
(http://www.sec.gov).
Wells Fargo filed a registration statement on Form S-4 to register with the
SEC the Wells Fargo common stock to be issued to MFE and Bank shareholders in
the Transactions. This proxy statement-prospectus is part of that registration
statement. As allowed by SEC rules, this proxy statement-prospectus does not
contain all of the information you can find in the registration statement or the
exhibits to the registration statement.
Some of the information you may want to consider in deciding how to vote on
the Consolidation is not physically included in this proxy statement-prospectus.
Instead, the information is "incorporated by reference" to documents filed as
appendixes to this proxy statement-prospectus or to documents that have been
filed by Wells Fargo with the SEC under SEC File No. 1-2979. Wells Fargo has
delivered with this proxy statement-prospectus copies of all reports
incorporated by reference into this proxy statement-prospectus, excluding
exhibits other than those that are specifically incorporated by reference to an
exhibit in this proxy statement-prospectus.
The Wells Fargo documents that have been incorporated by reference, copies of
which are being delivered to Bank shareholders with this proxy statement-
prospectus, consist of:
. Wells Fargo's annual report on Form 10-K for the year ended December 31,
1997;
. Wells Fargo's quarterly reports on Form 10-Q for the quarters ended March
31, 1998, June 30, 1998 and September 30, 1998;
. Wells Fargo's current reports on Form 8-K filed January 22, 1998, April 20,
1998, April 22, 1998, June 8, 1998, June 9, 1998, June 12, 1998, July 22,
1998, August 5, 1998, October 21, 1998, October 22,1998, November 16, 1998,
and January 29, 1999;
. Wells Fargo's registration statement on Form S-4 filed September 11, 1998
(Reg. No. 333-63247) containing the joint proxy statement-prospectus of
Norwest Corporation (now Wells Fargo) and old Wells Fargo;
. Wells Fargo's current report on Form 8-K filed October 13, 1997, containing
a description of the Wells Fargo common stock;
. Wells Fargo's registration statement on Form 8-A dated October 21, 1998,
containing a description of preferred stock purchase rights attached to
shares of Wells Fargo common stock; and
71
<PAGE>
. Wells Fargo's current report on Form 8-K filed January 19, 1999
supplementing the Form 10-K for the year ended December 31, 1997 and the
Form 10-Q for the quarter ended September 30, 1998 filed by Norwest
Corporation with, among other information, restated financial statements
reflecting the combination of Norwest Corporation and old Wells Fargo.
All reports and proxy statements filed by Wells Fargo after the date of this
proxy statement-prospectus and before the special meeting are automatically
incorporated by reference into this proxy statement-prospectus.
This proxy statement-prospectus may contain information that updates, modifies
or is contrary to information in one or more of the documents incorporated by
reference. Reports filed by Wells Fargo with the SEC after the date of this
----------------------
proxy statement-prospectus may also contain information that updates, modifies
- ---------------------------
or is contrary to information in the documents incorporated by reference. You
should review these reports, as they may disclose a change in the business
prospects, financial condition or other affairs of Wells Fargo since the date of
this proxy statement-prospectus. As explained above, you may also read and copy
any such reports filed with the SEC at the SEC's public reference rooms, or
obtain them from commercial document retrieval services and on the SEC Internet
site.
- --------------------------------------------------------------------------------
In deciding how to vote on the Consolidation, you should rely only on the
information contained or incorporated by reference in this proxy statement-
prospectus. Neither Wells Fargo nor Mercantile Bank has authorized any person
to provide you with any information that is different from what is contained in
this proxy statement-prospectus. This proxy statement-prospectus is dated
February 11, 1999. You should not assume that the information contained in this
proxy statement-prospectus is accurate as of any date other than such date, and
neither the mailing to you of this proxy statement-prospectus nor the issuance
to you of shares of Wells Fargo common stock will create any implication to the
contrary. This proxy statement-prospectus does not constitute an offer to sell
or a solicitation of any offer to buy any securities, or the solicitation of a
proxy, in any jurisdiction in which, or to any person to whom, it is unlawful to
make any such offer or solicitation.
- --------------------------------------------------------------------------------
72
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Mercantile Bank, National Association
We have audited the accompanying balance sheets of Mercantile Bank, National
Association as of December 31, 1997 and 1996, and the related statements of
earnings, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercantile Bank, National
Association as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Burton McCumber & Cortez, L.L.P.
Brownsville, Texas
February 25, 1998
F-1
<PAGE>
Mercantile Bank, National Association
BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS
September 30, December 31, December 31,
1998 1997 1996
-------- -------- --------
(Unaudited)
Cash and due from banks $ 31,456 $ 39,664 $ 37,478
Federal funds sold 146,140 87,195 94,985
-------- -------- --------
Cash and cash equivalents 177,596 126,859 132,463
Investment securities (notes A1 and B)
Available-for-sale 287,941 333,569 323,343
Held-to-maturity 9,756 10,453 10,659
-------- -------- --------
Total investment securities 297,697 344,022 334,002
Loans - net (notes A2, A3, C and D) 315,766 338,815 312,898
Bank premises and equipment - net
(notes A4 and E) 38,590 40,023 41,103
Accrued interest receivable 5,988 5,707 5,744
Other real estate owned (note F) 901 954 251
Other assets (note A7 and G) 4,636 6,056 7,820
-------- -------- --------
Total assets $841,174 $862,436 $834,281
======== ======== ========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Mercantile Bank, National Association
BALANCE SHEETS - CONTINUED
(amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1998 1997 1996
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Deposits
Non interest-bearing $ 91,384 $ 95,623 $ 96,764
Interest-bearing (note M) 567,358 604,939 573,052
--------- --------- ---------
Total deposits 658,742 700,562 669,816
Federal funds purchased and securities
sold under repurchase agreements
(note O) 87,394 74,146 85,997
Accrued interest payable 2,330 3,335 3,263
Other liabilities (note G) 2,244 1,931 2,830
--------- --------- ---------
Total liabilities 750,710 779,974 761,906
--------- --------- ---------
Commitments and contingencies
(note H and L) -- -- --
Stockholders' Equity
Common stock - $1 par value;
30,000,000 shares authorized;
2,739,928 issued and outstanding
in 1997 and 1996 2,740 2,740 2,740
Capital in excess of par value 19,674 19,674 19,674
Retained earnings 65,720 59,836 52,035
Net unrealized gain (loss) on
securities available-for-sale, net of
tax expense (benefit) of $108 and
$(1,068) in 1997 and 1996,
respectively 2,330 212 (2,074)
--------- --------- ---------
Total stockholders' equity 90,464 82,462 72,375
--------- --------- ---------
Total liabilities and stockholders' equity $ 841,174 $ 862,436 $ 834,281
========= ========= =========
</TABLE>
F-3
<PAGE>
Mercantile Bank, National Association
STATEMENTS OF EARNINGS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- -----------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income
(notes A2 and K) $ 41,603 $ 40,648 $ 55,288 $ 54,318 $ 54,414
Interest expense (note N) 21,187 20,548 27,720 26,753 26,315
----------- ----------- ----------- ----------- -----------
Net interest income
before provision for loan
losses 20,416 20,100 27,568 27,565 28,099
Provision for loan losses
(notes A3 and D) (575) (525) (845) (263) (100)
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan
losses 19,841 19,575 26,723 27,302 27,999
Other income
Service charges on deposit accounts 2,734 2,767 3,651 3,536 3,667
Net realized (loss) on sales of
securities (note B) -- -- -- (1,278) 6
Other income (note K) 2,286 2,226 2,796 3,076 3,405
----------- ----------- ----------- ----------- -----------
Total other income-net 5,020 4,993 6,447 5,334 7,078
----------- ----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits 8,266 8,608 11,347 11,630 11,394
Occupancy expense (notes A9, E and H) 2,744 2,736 1,831 1,565 1,493
Furniture and equipment expense -- -- 3,413 3,308 3,968
Other operating expenses 5,242 5,278 5,414 5,525 6,164
----------- ----------- ----------- ----------- -----------
Total other expenses 16,252 16,622 22,005 22,028 23,019
----------- ----------- ----------- ----------- -----------
Income before income tax expense 8,609 7,946 11,165 10,608 12,058
Income tax expense (benefit)
(notes A5 and G)
Currently payable 2,995 1,926 3,103 3,436 3,895
Deferred (270) 477 261 (899) (117)
----------- ----------- ----------- ----------- -----------
2,725 2,403 3,364 2,537 3,778
----------- ----------- ----------- ----------- -----------
NET INCOME $ 5,884 $ 5,543 $ 7,801 $ 8,071 $ 8,280
=========== =========== =========== =========== ===========
Basic Earnings Per Share:
Net Income $ 2.15 $ 2.02 $ 2.85 $ 2.95 $ 3.03
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding 2,739,928 2,739,928 2,739,928 2,739,332 2,735,886
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Mercantile Bank, National Association
STATEMENT OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Net
unrealized
gain (loss) on
Number of Capital Available-for- Total
Common Common In Excess of Retained Sale Stockholders'
Shares Stock Par Value Earnings Securities Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 2,735,886 $ 2,736 $ 19,581 $ 46,704 $ 44 $ 69,065
Sale of 4,042 shares of stock 4,042 4 93 -- -- 97
Net earnings for the year -- -- -- 8,071 -- 8,071
Cash dividend paid - $1.00 per share -- -- -- (2,740) -- (2,740)
Unrealized loss on available-
for-sale securities, net of
taxes of $1,092 -- -- -- -- (2,118) (2,118)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 2,739,928 2,740 19,674 52,035 (2,074) 72,375
Net earnings for the year -- -- -- 7,801 -- 7,801
Unrealized gain on available-
for-sale securities,net of tax
benefit of $1,177 -- -- -- -- 2,286 2,286
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 2,739,928 2,740 19,674 59,836 212 82,462
Net earnings for nine months -- -- -- 5,884 -- 5,884
Unrealized gain on available-
for-sale securities, netof tax
benefit of $1,092 -- -- -- -- 2,118 2,118
--------- --------- --------- --------- --------- ---------
Balance at September 30,
1998 (unaudited) 2,739,928 $ 2,740 $ 19,674 $ 65,720 $ 2,330 $ 90,464
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Mercantile Bank, National Association
STATEMENTS OF CASH FLOWS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
(Decrease) increase in cash and
cash equivalents
Cash flows from operating activities:
Net income $ 5,884 $ 5,543 $ 7,801 $ 8,071 $ 8,280
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for loan loss 575 525 845 263 100
Loan origination costs -- -- -- 685 612
Loan purchase discount
amortization -- (430) (573) (632) (633)
Provision for depreciation and
amortization 2,337 2,209 2,981 2,676 2,932
Net loss on sale of securities -- -- -- 1,278 (6)
Net gain on sale of bank premises and
equipment (6) (17) (15) (36) --
(Gain) loss on sale of other real estate (115) 9 (8) (54) --
Decrease (increase) in deferred
income taxes (270) 477 261 (899) (117)
Decrease (increase) in accrued interest
receivable (281) (1,120) 37 810 (1,193)
(Decrease) Increase in accrued
interest payable (1,005) (613) 72 322 1,446
(Decrease) increase in other
liabilities 187 (1,125) (899) 657 (1,425)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities 7,306 5,458 10,502 13,141 9,996
Cash flows from investing activities:
Purchase of securities available-for-
sale (56,650) (60,000) (109,810) (81,128) (170,065)
Proceeds from sale and maturities of
securities available-for-sale 106,184 56,808 103,053 127,154 104,351
Purchases of securities to be held-to-
maturity -- -- -- (949) --
Proceeds from maturities of
securities held-to-maturity -- -- 200 2,447 13,060
Increase (decrease) in other assets 49 237 (27) (666) (1,312)
Purchase of bank premises and
equipment (668) (1,000) (1,472) (2,056) (5,314)
Proceeds from sale of bank premises
and equipment 497 195 26 51 4
Recoveries of loans charged-off 191 378 417 237 302
Net (increase) decrease in loans 22,400 (10,872) (27,388) 450 (998)
--------- --------- --------- --------- ---------
Net cash (used) provided by
investing activities 72,003 (14,254) (35,001) 45,540 (59,972)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Mercantile Bank, National Association
STATEMENTS OF CASH FLOWS - CONTINUED
(amounts in thousands, except share data)
<TABLE>
<CAPTION> Nine Months Ended
September 30, Year Ended December 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Net decrease in non interest-bearing
deposits $ (4,239) $ (6,956) $ (1,141) $ (356) $ (9,820)
Net increase (decrease) in interest-
bearing deposits (15,062) (22,410) 26,492 (19,310) (21,723)
Net increase (decrease) in
certificates of deposit (22,519) 12,479 5,395 (6,466) 49,259
Net increase (decrease) in federal
funds purchased and securities sold
under agreements to repurchase 13,248 (15,254) (11,851) 43,221 18,018
Proceeds from sale of common stock -- -- -- 97 --
Dividends paid -- -- -- (2,740) --
--------- --------- --------- --------- ---------
Net cash (used) provided
by financing activities (28,572) (32,141) 18,895 14,446 35,734
--------- --------- --------- --------- ---------
NET (DECREASE)
INCREASE IN CASH 50,737 (40,937) (5,604) 73,127 (14,242)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 126,859 132,463 132,463 59,336 73,578
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 177,596 $ 91,526 $ 126,859 $ 132,463 $ 59,336
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except share data)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
During 1995, the majority stockholder of Mercantile Bank, National
Association (Bank) contributed all of his shares in the Bank (representing
95.85% of all issued and outstanding shares) to Hemisphere Financial, Ltd.
(HFL), a British Virgin Island corporation wholly owned by that stockholder.
HFL contributed those shares to Mercantile Financial Enterprises, Inc.
(MFE), a wholly owned subsidiary of HFL. As a result of the transactions,
both MFE and HFL became bank holding companies.
The Bank provides a variety of banking services to individuals and
businesses in the South Texas and Northern Mexico area. The accounting
policies of the Bank conform to practices within the banking industry and
are based on generally accepted accounting principles. A summary of the
significant accounting and reporting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Investment Securities
---------------------
In accordance with Statement of Financial Accounting Standards Board No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (FASB
115), the Bank is required to classify investments in marketable equity
securities and all debt securities as trading securities, available-for-sale
securities, or held-to-maturity securities. The Statement requires trading
securities and available-for-sale securities to be carried at fair value,
with unrealized holding gains and losses of trading securities included in
the determination of net income and unrealized holding gains and losses of
available-for-sale securities included in equity. Held-to-maturity
securities are to be carried at amortized cost.
Investment securities are adjusted for accretion of discounts and
amortization of premiums. The adjusted carrying amount of the specific
securities sold is used to compute gains or losses on the sale of
securities.
2. Loan Income Recognition
-----------------------
Unearned discount on loans made on a discounted basis is taken into income
under a method which approximates the interest method.
3. Reserve for Loan Losses
-----------------------
The reserve for loan losses is established through a provision for loan
losses charged to operations. Loans are charged against the reserve for loan
losses when management believes that the collectibility of the principal is
unlikely. The reserve is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans. The evaluation takes
into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrower's ability to
pay. Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts,
that the borrower's financial condition is such that collection of interest
is doubtful.
F-8
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
3. Reserve for Loan Losses - Continued
-----------------------------------
When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
4. Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is provided principally on the straight-line
basis over the estimated useful life of each type of asset.
5. Income Tax
----------
The Bank files a consolidated income tax return with its parent company,
MFE.
Under the liability method specified by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FASB 109), deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by
the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax
assets and liabilities. The principal types of differences between assets
and liabilities for financial statement and tax return purposes are
accumulated depreciation, loan loss provisions and goodwill amortization.
6. Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and due from banks and federal funds
sold.
7. Excess of Cost over Net Assets Acquired (Goodwill)
--------------------------------------------------
Goodwill is being amortized over 15 years on a straight-line basis.
8. Loan Commitment Fees and Loan Origination Costs
-----------------------------------------------
Loan origination fees and certain direct loan origination costs are deferred
and the net amount amortized as an adjustment of the related loan's yield
over the life of the loan where such amounts are material to the financial
statements.
9. Income from Rental Operations
-----------------------------
A portion of the Bank's premises is rented under operating lease
arrangements. Rentals are reported as income over the lease term as they
become receivable.
F-9
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
10. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
11. Unaudited Financial Statements
------------------------------
The balance sheets as of September 30, 1998 and 1997, and the related
statements of earnings, stockholders' equity and cash flows for the nine
months ended September 30, 1998 and 1997 have been prepared without audit.
In the opinion of management, the financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position as of September 30, 1998 and 1997 and
the results of their operations and their cash flows for the nine months
ended September 30, 1998 and 1997.
12. Earnings Per Share
------------------
Earnings per share amounts are calculated based on the weighted average
number of shares outstanding during each period presented.
13. Impairment of Long-Lived Assets
-------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (FASB 121)" effective for
fiscal years beginning after December 15, 1995. The provisions of FASB 121
require the Bank to review long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If it
is determined that an impairment has occurred, the amount of the impairment
will be charged to operations. No impairments were recognized in 1997 or
1996.
F-10
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE B - INVESTMENT SECURITIES
In accordance with a special report issued by the Financial Accounting
Standards Board dated November 1995 entitled "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," except for a portion of the obligations of states and political
subdivisions, the Bank reclassified all of its investment securities
holdings to available-for-sale.
The cost and approximate fair values of investment securities are as
follows:
1997 Gross Gross
Securities Amortized Unrealized Unrealized
Available-for-Sale Cost Gains Losses Fair Value
------------------ -------- -------- -------- ----------
Equity Securities $ 3,176 $ -- $ -- $ 3,176
U.S. Treasury
securities 81,469 855 (166) 82,158
Obligations of U.S.
government
agencies 111,783 90 (320) 111,553
Obligations of states
and political
subdivision 4,331 173 -- 4,504
Mortgage-backed
securities 57,567 826 (163) 58,230
Collateral-mortgage
obligations 74,245 113 (1,088) 73,270
Other 678 -- -- 678
-------- -------- -------- --------
Totals $333,249 $ 2,057 $ (1,737) $333,569
======== ======== ======== ========
1997 Gross Gross
Securities Amortized Unrealized Unrealized
Held-to-Maturity Cost Gains Losses Fair Value
---------------- -------- -------- -------- ----------
Obligations of states
and political
subdivisions $ 10,453 $ 364 $ -- $ 10,817
======== ======== ---===== ========
F-11
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE B - INVESTMENT SECURITIES - CONTINUED
1996 Gross Gross
Securities Amortized Unrealized Unrealized
Available-for-Sale Cost Gains Losses Fair Value
------------------ -------- -------- -------- ----------
Equity securities $ 3,112 $ -- $ -- $ 3,112
U.S. Treasury
securities 95,861 375 (101) 96,135
Obligations of U.S.
government
agencies 77,456 47 (561) 76,942
Obligations of states
and political
subdivision 4,342 72 (7) 4,407
Mortgage-backed
securities 66,299 351 (403) 66,247
Collateral-mortgage
obligations 78,740 53 (2,969) 75,824
Other 675 1 -- 676
-------- -------- -------- --------
Totals $326,485 $ 899 $ (4,041) $323,343
======== ======== ======== ========
1996 Gross Gross
Securities Amortized Unrealized Unrealized
Held-to-Maturity Cost Gains Losses Fair Value
---------------- -------- -------- -------- ----------
Obligations of states
and political
subdivisions $ 10,659 $ 241 $ (20) $ 10,880
======== ======== ======== ========
F-12
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE B - INVESTMENT SECURITIES - CONTINUED
The amortized cost and estimated fair value of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Securities Securities
held-to-maturity available-for-sale
------------------------ ------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
Due in one year or less $ 590 $ 591 $ 72,823 $ 72,625
Due after one year
through five years 4,512 4,617 119,415 120,120
Due after five years
through ten years 3,623 3,784 3,520 3,636
Due after ten years 1,728 1,825 2,503 2,512
-------- -------- -------- --------
10,453 10,817 198,261 198,893
Mortgage-backed
securities and
collateral-mortgage
obligations -- -- 131,812 131,500
-------- -------- -------- --------
$ 10,453 $ 10,817 $330,073 $330,393
======== ======== ======== ========
Proceeds from sales and investment securities during 1997, 1996 and 1995
approximated $103,253, $129,601 and $117,411, respectively. Net realized
gains (losses) are as follows:
1997 1996 1995
------- -------- -------
Gross realized gains $ -- $ 239 $ 280
Gross realized losses -- (1,517) (274)
------- -------- -------
Net loss $ -- $ (1,278) $ 6
======= ======== =======
At December 31, 1997, investment securities having a carrying value of
approximately $277,641 were pledged to secure public funds on deposit and
for other purposes required or permitted by law.
F-13
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE C - LOANS RECEIVABLE
The composition of the Bank's loan portfolio is as follows:
1997 1996
--------- ---------
Commercial, financial and agricultural $ 92,987 $ 70,825
Interim real estate 12,655 10,766
Permanent real estate 152,128 138,992
Consumer loans 50,299 60,136
Foreign loans 34,139 36,186
--------- ---------
342,208 316,905
Unearned discount (564) (1,322)
--------- ---------
341,644 315,583
Reserve for loan losses (note D) (2,829) (2,685)
--------- ---------
Net Loans $ 338,815 $ 312,898
========= =========
The following is a schedule of maturities for the Bank's major categories of
loans as of December 31, 1997:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Comercial, financial
and agricultural $ 57,675 $ 9,974 $ 10,817 $ 4,977 $ 3,169 $ 6,375 $ 92,987
Interim real estate 5,201 1,514 348 2,222 1,342 2,028 12,655
Permanent real estate 28,034 21,545 19,547 26,925 30,011 25,594 151,656
Consumer loans 26,357 11,887 6,352 2,865 1,614 1,132 50,207
Foreign loans 26,697 4,053 1,450 892 748 299 34,139
</TABLE>
F-14
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE C - LOANS RECEIVABLE - CONTINUED
Loans with a variable and fixed rate of interest are $149,186 and $192,458,
respectively, as of December 31, 1997.
The majority of the Bank's loans are concentrated in the South Texas area.
In the normal course of business, the Bank has made loans to its
stockholders, directors, officers, employees and their related business
interests. In the opinion of management, such loans are consistent with
sound banking practices and are within applicable regulatory lending
limitations. The outstanding balance of such loans totaled approximately
$38,608 and $36,628 at December 31, 1997 and 1996, respectively.
Impairment of loans having recorded investments of $3,030 at December 31,
1997 and $2,956 at December 31, 1996 has been recognized in conformity with
FASB Statement No. 114, as amended by FASB Statement No. 118. The average
recorded investment in impaired loans during 1997 and 1996 was $3,262 and
$4,181, respectively. The total allowance for loan losses related to these
loans was $147 and $178 at December 31, 1997 and 1996, respectively.
Loans pledged as collateral for Federal Reserve borrowings at December 31,
1997 and 1996 were $8,394 and $10,709, respectively.
NOTE D - RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses are summarized as follows:
1997 1996 1995
------- ------- -------
Balance - beginning of year $ 2,685 $ 4,894 $ 5,289
Provisions charged to operating
expenses 845 263 100
Loans charged off (1,118) (2,709) (797)
Recoveries on loans previously
charged off 417 237 302
------- ------- -------
Balance - end of year $ 2,829 $ 2,685 $ 4,894
======= ======= =======
F-15
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE E - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
1997 1996
------- -------
Banking houses.............. $34,667 $34,286
Furniture and equipment..... 7,391 6,482
------- -------
42,058 40,768
Less accumulated
depreciation............... 11,764 9,326
------- -------
30,294 31,442
Land (including $3,801 for
future development)........ 9,729 9,661
------- -------
$40,023 $41,103
======= =======
The following is a schedule by years of future minimum rentals receivable on
non-cancelable operating leases as of December 31, 1997.
Year ending December 31,
------------------------
1998 1,745
1999 1,309
2000 790
2001 256
2002 178
Thereafter 28
------
$4,306
======
Rental income totaled $1,918, $1,993 and $1,878 for the years ended December
31, 1997, 1996 and 1995, respectively.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Live Assets and for Long-Lived Assets to
be Disposed of" (FASB 121), the Bank is required to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment has occurred, the amount of
the impairment will be charged to operations.
F-16
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE F - OTHER REAL ESTATE OWNED
Other real estate owned is comprised of property to which the Bank has
obtained title, through foreclosure, in lieu of payment of debts. At
acquisition, these properties are valued at the lower of estimated fair value or
the unpaid principal, accrued interest and other acquisition costs on the
related loans. Any resulting loss at that time is charged to the reserve for
loan losses.
NOTE G - INCOME TAXES
The income tax provision (benefit) is as follows for the year ended December
31,:
1997 1996 1995
------ ------ ------
Current $3,103 $3,436 $3,895
Deferred 261 (899) (117)
------ ------ ------
$3,364 $2,537 $3,778
====== ====== ======
1997 1996 1995
------ ------ ------
Tax at statutory rates $3,808 $3,613 $4,120
Increase (reduction) in tax resulting from:
Tax exempt interest (236) (237) (190)
Other (44) (655) 32
Nontaxable purchase discount accretion (164) (184) (184)
------ ------ ------
$3,364 $2,537 $3,778
====== ====== ======
F-17
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE G - INCOME TAXES - CONTINUED
Deferred tax assets and liabilities consist of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
Assets Liabilities Assets Liabilities Assets Liabilities
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation on property and
equipment $ 308 $ -- $ 91 $ -- $ -- $ 67
Bad debt reserve 962 -- 913 -- 1,664 --
Discount on purchased loans -- 91 -- 316 -- 505
Loan origination costs -- -- -- -- -- 233
Basis in other real estate 51 -- 28 -- 93 --
Basis in investment
securities -- 124 -- 91 -- 82
Goodwill amortization -- 327 -- 314 -- 301
Other 25 -- 754 -- -- 403
----------- ----------- ----------- ----------- ----------- -----------
1,346 542 1,786 721 1,757 1,591
Less: valuation allowance -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 1,346 $ 542 $ 1,786 $ 721 $ 1,757 $ 1,591
=========== =========== =========== =========== =========== ===========
</TABLE>
Management anticipates full utilization of the deferred tax asset reflected
above; therefore, no valuation allowance has been established.
An analysis of income tax liabilities (assets) is as follows as of December
31,:
1997 1996 1995
------- ------- -------
Current $ 145 $ 444 $ 128
Deferred (804) (1,065) (166)
------- ------- -------
$ (659) $ (621) $ (38)
The Internal Revenue Service (IRS) had completed examinations of the Bank's
federal income tax returns for the years 1991 through 1993 and the Bank received
"Notices of Deficiency" for those years. Proposed adjustments to income in the
notices resulted in proposed tax deficiencies of approximately $3,924 plus
interest. The major proposed adjustment to income related to losses resulting
from the sale of certain assets in 1991 and the use of net operating loss
carryforwards in 1992 and 1993 occurring as a result of those losses. The Bank
filed a petition with the United States Tax Court contesting the proposed tax
deficiencies. On February 3, 1997, the United States Tax Court determined that
there were no income tax deficiencies for the taxable years 1991, 1992 and 1993.
F-18
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE H - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank is a party to financial
instruments which are not reflected in the accompanying financial statements.
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 balance
sheet. The Bank evaluates its credit and market risks on each commitment on a
case by case basis and obtains collateral as deemed necessary. Losses are
provided using the same evaluation process as for existing loans as set forth in
note A3. The Bank has reserved $199 in anticipation of possible losses as a
result of existing commitments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
At December 31, 1997, the Bank had outstanding letters of credit of
approximately $7,307 and outstanding loan commitments of approximately $92,462.
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1997.
Year ending December 31,
------------------------
1998 $ 244
1999 194
2000 160
2001 119
2002 119
Thereafter 89
------
$ 925
======
Rental expense totaled $256, $235 and $256 for 1997, 1996 and 1995,
respectively.
F-19
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE I - STATEMENTS OF CASH FLOWS
Noncash activity consists of the following:
1997 1996 1995
------- ------- -------
Acquisition (disposal) of
other real estate and
other assets acquired
through the settlement
of loans $ 782 $ (167) $ -
Net unrealized gain
(loss) on available for
sale securities, net of
deferred taxes
(benefit) of $1,177
and $(1,092) 2,286 (2,118) 10,734
Cash paid for interest and taxes is summarized as follows:
1997 1996 1995
------- ------- -------
Interest $27,648 $26,431 $24,870
Taxes 3,401 3,120 4,258
------- ------- -------
Total $31,049 $29,551 $29,128
======= ======= =======
NOTE J - REGULATORY CAPITAL MATTERS
The Bank 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 the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined in the regulations), and of Tier I capital (as
defined in the regulations) to average assets (as defined in the regulations).
As of December 31, 1997, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
F-20
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE J - REGULATORY CAPITAL MATTERS - CONTINUED
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)........ $81,960 19.3% $34,004* 8.0%* $42,505* 10.0%*
Tier I Capital (to Risk
Weighted Assets)........ $79,131 18.6% $17,002* 4.0%* $25,503* 6.0%*
Tier I Capital (to
Average Assets)......... $79,131 9.6% $33,115* 4.0%* $41,394* 5.0%*
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)........ $73,687 18.6% $31,651* 8.0%* $39,564* 10.0%*
Tier I Capital (to Risk
Weighted Assets)........ $71,002 17.9% $15,826* 4.0%* $23,739* 6.0%*
Tier I Capital (to
Average Assets)......... $71,002 8.8% $32,439* 4.0%* $40,548* 5.0%*
- -----------------
*Greater than or equal to
</TABLE>
F-21
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE K - INTEREST INCOME
A summary of the major components of interest income and other income
follows:
Interest Income 1997 1996 1995
--------------- ------- ------- -------
Interest and fees on loans... $30,940 $29,101 $31,163
Interest on federal funds
sold........................ 3,572 2,848 2,624
Interest on investment
securities.................. 20,770 22,227 20,611
Interest on due from banks-
time........................ 6 142 16
------- ------- -------
$55,288 $54,318 $54,414
======= ======= =======
Other Income 1997 1996 1995
------------ ------- ------- -------
Trustee fees................. $ 1,694 $ 1,718 $ 1,553
Capital market fees.......... 182 321 231
Safe deposit fees............ 169 176 177
ATM interchange fees......... 71 72 99
Official checks.............. 56 64 71
Wire transfer fees........... 150 128 167
Merchant discounts and other
commissions................. 69 80 140
Foreign currency gain........ 113 123 486
Gain on purchased assets..... 27 89 224
Other........................ 265 305 257
------- ------- -------
$ 2,796 $ 3,076 $ 3,405
======= ======= =======
NOTE L - DEFINED CONTRIBUTION RETIREMENT PLAN
The Bank has established a defined contribution retirement plan (Plan)
covering substantially all employees. Participants may make voluntary
salary reduction contributions to the Plan ranging from two to fifteen
percent of their compensation.
The Bank's contribution to the Plan is discretionary and is allocated to
participating employees based upon a formula that provides a 50% matching
of employee contributions up to five percent of an employee's compensation.
The balance of the Bank's contribution is allocated to participants based
on salaries. The Bank contributed $133 and $127 to the Plan in 1997 and
1996, respectively.
Plan funds are currently invested in money market accounts. Payments upon
termination of employment are based on vested amounts credited to
individual accounts.
The Bank has obtained a ruling from the Internal Revenue Service confirming
that the Plan qualifies for special tax treatment under Section 401 of the
Internal Revenue Code of 1986.
F-22
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE M - INTEREST-BEARING DEPOSITS
Interest-bearing deposits are summarized as follows:
1997 1996
-------- --------
NOW and super NOW accounts.. $ 78,118 $ 72,819
Money market accounts....... 75,640 70,444
Savings deposits............ 42,116 43,866
Certificates of deposit
less than $100,000......... 136,636 132,888
Certificates of deposit and
state time deposits of
$100,000 or more.......... 254,555 234,251
Individual retirement
accounts................... 17,874 18,784
-------- --------
$604,939 $573,052
======== ========
Year ending December 31,
------------------------
1998.................. $374,784
1999.................. 7,650
2000.................. 3,176
2001.................. 2,114
2002.................. 3,247
Thereafter............. 220
--------
$391,191
========
NOTE N - INTEREST EXPENSE
A summary of the major components of interest expense follows:
1997 1996 1995
------- ------- -------
NOW and super NOW accounts.. $ 1,536 $ 1,624 $ 2,472
Money Market accounts....... 1,999 1,802 1,944
Savings Deposits............ 1,184 1,258 1,415
Certificates of Deposit
less than $100,000......... 6,425 6,046 5,819
Certificates of deposit and
state time deposits of
$100,00 or more........... 11,810 12,450 11,062
Individual retirement
accounts................... 1,001 1,119 1,208
Federal funds purchased and
securities sold under
agreements to repurchase.. 3,765 2,454 2,395
------- ------- -------
$27,720 $26,753 $26,315
======= ======= =======
F-23
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE O - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities underlying these agreements were as follows as of December
31,:
1997 1996
------- --------
U.S. Treasury Securities............... $31,285 $ 50,812
Obligations of U.S. government agencies 46,988 52,039
Mortgage-backed securities............. 5,386 11,154
Collateral-mortgage obligations........ 3,485 8,698
------- --------
$87,144 $122,703
======= ========
At December 31, 1997, approximately $57,000 of the agreements were term
agreements and average a matruity of one month and the remainder mature
overnight. The securities underlying the agreements are held by a third
party custodian for the Bank. Average balances of securities sold under
agreements to repurchase approximated $75,000 and $54,000 during 1997 and
1996, respectively. The maximum amount outstanding at any month end during
1997 and 1996 approximated $87,000 and $98,000, respectively.
The Bank requires that the outstanding balance of repurchase agreements be
collateralized with at least 102% coverage. If volatility becomes abnormal,
the coverage will be adjusted upward. Collateral coverage for term
repurchase agreements is at least 103%.
F-24
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE P - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107
"Disclosures about fair value of financial institutions" FASB 107, the Bank
is required to disclose fair values of financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and cash equivalents - for these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment securities - fair value equals quoted market price, if
available; otherwise, fair value is estimated using quoted market prices
for similar securities.
Loans - fair value was estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit liabilities - fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the
reporting date. Fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturity.
Commitments to extend credit, standby letters of credit, financial
guarantees written - fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties
at the reporting date.
F-25
<PAGE>
Mercantile Bank, National Association
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(amounts in thousands, except share data)
NOTE P - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Bank's financial instruments are as
follows:
1997
-----------------------
Carrying
Amount Fair Value
--------- ----------
Financial Assets
Cash and cash equivalents........ $ 126,859 $ 126,859
Investment securities............ 344,022 344,386
Loans, net....................... 338,815 338,815
--------- ----------
$ 809,696 $ 810,060
========= =========
Financial Liabilities
Deposits......................... $(700,562) $(700,562)
========= =========
Unrecognized financial instruments:
Commitments to extend credit..... $ (92,462) $ (92,462)
Letters of credit................ (7,307) (7,307)
--------- ----------
$ (99,769) $ (99,769)
========= =========
1996
-----------------------
Carrying
Amount Fair Value
--------- ----------
Financial Assets
Cash and cash equivalents........ $ 132,463 $ 132,463
Investment securities............ 334,002 334,223
Loans, net....................... 312,898 312,898
--------- ----------
$ 779,363 $ 779,584
========= =========
Financial Liabilities
Deposits......................... $(669,816) $(669,816)
========= =========
Unrecognized financial instruments:
Commitments to extend credit..... $ (85,859) $ (85,859)
Letters of credit................ (4,222) (4,222)
--------- ----------
$ (90,081) $ (90,081)
========= =========
F-26
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF MERGER
(Attached as Exhibit A-1 to the Agreement and Plan of Reorganization)
<PAGE>
AGREEMENT
AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") entered into as of
the ___ day of October, 1998, by and between MERCANTILE FINANCIAL ENTERPRISES,
INC. ("MERCANTILE"), A DELAWARE CORPORATION, MERCANTILE BANK, NATIONAL
ASSOCIATION ("BANK"), A NATIONAL BANKING ASSOCIATION, AND NORWEST CORPORATION
("NORWEST"), A DELAWARE CORPORATION.
WHEREAS, the parties hereto desire to effect a reorganization whereby a
wholly-owned subsidiary of Norwest will merge with and into Mercantile (the
"Merger") pursuant to an agreement and plan of merger (the "Merger Agreement")
in substantially the form attached hereto as Exhibit A-1, which provides, among
other things, for the exchange of the shares of Common Stock of Mercantile of
the par value of $1.00 per share ("Mercantile Common Stock") outstanding
immediately prior to the time the Merger becomes effective in accordance with
the provisions of the Merger Agreement for shares of voting Common Stock of
Norwest of the par value of $1-2/3 per share ("Norwest Common Stock");
WHEREAS, Norwest desires that, immediately following the Merger, Norwest
will contribute its newly formed, wholly-owned bank subsidiary ("Norwest Bank")
to Mercantile and, immediately thereafter, Norwest Bank will merge with the Bank
under the charter of the Bank (the "Consolidation") pursuant to an agreement of
consolidation (the "Consolidation Agreement") in substantially the form attached
hereto as Exhibit A-2, which provides, among other things, for the exchange of
the shares of voting common stock of the Bank, of the par value of $1.00 per
share, outstanding immediately prior to the time the Consolidation becomes
effective in accordance with the provisions of the Consolidation Agreement and
owned by shareholders other than Mercantile ("Bank Common Stock") for shares of
Norwest Common Stock; and
WHEREAS, the Merger Agreement and Consolidation Agreement are hereafter
sometimes referred to collectively as the "Transaction Agreements" and the
Merger and Consolidation are hereafter sometimes referred to collectively as the
"Transactions."
NOW, THEREFORE, to effect such reorganization and in consideration of the
premises and the mutual covenants and agreements contained herein, the parties
hereto do hereby represent, warrant, covenant and agree as follows:
A-1
<PAGE>
1. Basic Plan of Reorganization
(a) Transaction.
(i) Merger. Subject to the terms and conditions contained herein, a
wholly-owned subsidiary of Norwest will merge with and into Mercantile
pursuant to the Merger Agreement, with Mercantile as the surviving
corporation, in which merger each share of Mercantile Common Stock
outstanding immediately prior to the Effective Time of the Merger (defined
below) (other than shares as to which statutory dissenters' appraisal
rights have been exercised) will be converted into and exchanged for a
number of shares of Norwest Common Stock determined as follows
(A) If the Norwest Measurement Price (as defined below) is equal to or
less than $37.00, the number of shares of Norwest Common Stock will be
determined by (i) dividing the Merger Value (defined below) by $37.00,
and (ii) dividing the result of thereof by the total number of shares
of Mercantile Common Stock then outstanding.
(B) If the Norwest Measurement Price is between $37.00 and $41.00, the
number of shares of Norwest Common Stock will be determined by (i)
dividing the Merger Value by the Norwest Measurement Price, and (ii)
dividing the result thereof by the total number of shares of
Mercantile Common Stock then outstanding.
(C) If the Norwest Measurement Price is equal to or greater than $41.00,
the number of shares of Norwest Common Stock will be determined by (i)
dividing the Merger Value by $41.00, and (ii) dividing the result
thereof by the total number of shares of Mercantile Common Stock then
outstanding.
(ii) Consolidation. Following the Effective Time of the Merger and
subject to the terms and conditions contained herein, Norwest will
contribute Norwest Bank to Mercantile and, immediately thereafter, Norwest
Bank will consolidate with Bank under the charter of Bank pursuant to the
Consolidation Agreement, in which Consolidation each share of Bank Common
Stock outstanding immediately prior to the Effective Time of the
Consolidation (defined below) (other than shares as to which statutory
dissenters' appraisal rights have been exercised and other than shares
owned by Mercantile) will be converted into and exchanged for a number of
shares of Norwest Common Stock determined as follows:
A-2
<PAGE>
(A) If the Norwest Measurement Price (as defined below) is equal to or
less than $37.00, the number of shares of Norwest Common Stock will be
determined by (i) dividing the Bank Consolidation Value (defined
below) by $37.00, and (ii) dividing the result thereof by the total
number of shares of Bank Common Stock then outstanding held by
shareholders of the Bank other than Mercantile.
(B) If the Norwest Measurement Price is between $37.00 and $41.00, the
number of shares of Norwest Common Stock will be determined by (i)
dividing the Bank Consolidation Value by the Norwest Measurement
Price, and (ii) dividing the result thereof by the total number of
shares of Bank Common Stock then outstanding held by shareholders of
the Bank other than Mercantile.
(C) If the Norwest Measurement Price is equal to or greater than $41.00,
the number of shares of Norwest Common Stock will be determined by (i)
dividing the Bank Consolidation Value by $41.00, and (ii) dividing the
result thereof by the total number of shares of Bank Common Stock then
outstanding held by shareholders of the Bank other than Mercantile.
(iii) The "Norwest Measurement Price" is defined as the average of the
closing prices of a share of Norwest Common Stock as reported on the
consolidated tape of the New York Stock Exchange during the period of ten
(10) trading days ending on the day immediately preceding the meetings of
the shareholders of Mercantile and the Bank (or the effective dates of any
consent actions in lieu of meetings) required by paragraph 4(c) of the
Agreement. The "Merger Value" shall mean $174,000,000 minus the "Bank
Consolidation Value." The "Bank Consolidation Value" equals the amount
determined by (i) dividing the "Nominal Value" (as hereinafter defined) by
2,739,928, and (ii) multiplying the result thereof by 110,551. The "Nominal
Value" shall mean $174,000,000, plus cash liabilities of Mercantile minus
the cash assets of Mercantile as shown on Mercantile's statement of
shareholders equity as of the month end immediately preceding the closing
date, prepared in accordance with generally accepted accounting principles
applied on a consistent basis.
(c) Norwest Common Stock Adjustments. If, between the date hereof and the
Effective Time of the Merger or the Effective Time of the Consolidation (the
"Effective Times"), shares of Norwest Common Stock shall be changed into a
different number of shares or a different class of shares by reason of any
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 (a "Common Stock Adjustment"), then the number of shares
of Norwest Common Stock into which a share of Mercantile Common Stock or Bank
Common Stock shall be converted pursuant to subparagraph
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(a)(i) or (ii), above, will be appropriately and proportionately adjusted so
that the number of such shares of Norwest Common Stock into which a share of
Mercantile Common Stock or Bank Common Stock shall be converted will equal the
number of shares of Norwest Common Stock which holders of shares of Mercantile
Common Stock or Bank Common Stock would have received pursuant to such Common
Stock Adjustment had the record date therefor been immediately following the
Effective Times.
(d) Fractional Shares. No fractional shares of Norwest Common Stock and
no certificates or scrip certificates therefor shall be issued to represent any
such fractional interest, and any holder thereof shall be paid an amount of cash
equal to the product obtained by multiplying the fractional share interest to
which such holder is entitled by the average of the closing prices of a share of
Norwest Common Stock as reported by the consolidated tape of the New York Stock
Exchange for each of the five (5) trading days ending on the day immediately
preceding the Closing Date.
(e) Mechanics of Closing the Transaction. Subject to the terms and
conditions set forth herein:
(i) The Merger Agreement shall be executed and it or Articles of
Merger or a Certificate of Merger shall be filed with the Secretary of
State of the State of Delaware within ten (10) business days following the
satisfaction or waiver of all conditions precedent set forth in Sections 6
and 7 of this Agreement or on such other date as may be agreed to by the
parties (the "Closing Date"). Each of the parties agrees to use its best
efforts to cause the Merger to be completed as soon as practicable after
the receipt of final regulatory approval of the Merger and the expiration
of all required waiting periods. The time that the filing referred to in
the first sentence of this paragraph is made is herein referred to as the
"Time of Filing." The day on which such filing is made and accepted is
herein referred to as the "Effective Date of the Merger." The "Effective
Time of the Merger" shall be 11:59 p.m. Wilmington, Delaware time on the
Effective Date of the Merger. At the Effective Time of the Merger on the
Effective Date of the Merger, the separate existence of Merger Co. shall
cease and Merger Co. will be merged with and into Mercantile pursuant to
the Merger Agreement; and
(ii) The Consolidation shall become effective at 12:01 a.m. (the
"Effective Time of the Consolidation") on the date specified in the
Certificate of Approval of Merger to be issued by the Office of the
Comptroller of the Currency ("Comptroller"), which date shall be the first
business day after the Effective Date of the Merger (the "Effective Date of
the Consolidation").
The closing of the Transactions contemplated by this Agreement, the Merger
Agreement, and the Consolidation Agreement (the "Closing") shall take place on
the Closing Date and the Effective Date of the Consolidation at the offices of
Norwest, Norwest Center, Sixth and Marquette, Minneapolis, Minnesota.
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(f) Payment of Mercantile Indebtedness. On the first business day
succeeding the Closing Date, Norwest shall cause to be paid in full the
indebtedness from Mercantile in favor of Bank, as described on Schedule 1(f)
("Indebtedness") and to release and deliver to the pledgor thereof all
collateral securing such Indebtedness.
2. Representations and Warranties of Mercantile and Bank. Mercantile (and
Bank, but only as to representations and warranties concerning the Bank)
represent and warrant to Norwest as follows:
(a) Organization and Authority. Mercantile 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 and failure to be so qualified would
have a material adverse effect on Mercantile and the Mercantile Subsidiaries
taken as a whole and has corporate power and authority to own its properties and
assets and to carry on its business as it is now being conducted. Mercantile is
registered as a bank holding company with the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). Mercantile has
furnished Norwest true and correct copies of its articles of incorporation and
by-laws, as amended.
(b) Mercantile's Subsidiaries. Schedule 2(b) sets forth a complete and
correct list of all of Mercantile's subsidiaries as of the date hereof
(individually a "Mercantile Subsidiary" and collectively the "Mercantile
Subsidiaries"), all shares of the outstanding capital stock of each of which,
except as set forth on Schedule 2(b), are owned directly or indirectly by
Mercantile. No equity security of any Mercantile Subsidiary is or may be
required to be issued by reason of any option, warrant, scrip, preemptive right,
right to subscribe to, call or commitment of any character whatsoever relating
to, or security or right convertible into, shares of any capital stock of such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Mercantile Subsidiary is bound to issue additional
shares of its capital stock, or any option, warrant or right to purchase or
acquire any additional shares of its capital stock. Subject to 12 U.S.C. (S) 55
(1982) and the Delaware Business Corporation Act, all of such shares so owned by
Mercantile are fully paid and nonassessable and are owned by it free and clear
of any lien, claim, charge, option, encumbrance or agreement with respect
thereto. Each Mercantile Subsidiary is a corporation or national banking
association duly organized, validly existing, duly qualified to do business and
in good standing under the laws of its jurisdiction of incorporation, 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. Except as set forth on
Schedule 2(b), Mercantile does not own beneficially, directly or indirectly,
more than 5% of any class of equity securities or similar interests of any
corporation, bank, business trust, association or similar organization, and is
not, directly or indirectly, a partner in any partnership or party to any joint
venture.
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(c) Capitalization. The authorized capital stock of Mercantile consists
of 100,000 shares of common stock, $1.00 par value, and the authorized capital
stock of the Bank consisting of 30,000,000 shares of common stock, $1.00 par
value, of which as of the close of business May 31, 1998, 1,000 and 2,739,928
shares were outstanding and no shares were held in the treasury. The maximum
number of shares of Mercantile Common Stock (assuming for this purpose that
phantom shares and other share-equivalents constitute Mercantile Common Stock)
that would be outstanding as of the Effective Date of the Merger if all options,
warrants, conversion rights and other rights with respect thereto were exercised
is 1,000 and 2,739,928, respectively. All of the outstanding shares of capital
stock of Mercantile have been duly and validly authorized and issued and are
fully paid and nonassessable. Except as set forth in Schedule 2(c), there are
no outstanding subscriptions, contracts, conversion privileges, options,
warrants, calls, preemptive rights or other rights obligating Mercantile or any
Mercantile Subsidiary to issue, sell or otherwise dispose of, or to purchase,
redeem or otherwise acquire, any shares of capital stock of Mercantile or any
Mercantile Subsidiary. Since May 31, 1998, no shares of Mercantile capital
stock have been purchased, redeemed or otherwise acquired, directly or
indirectly, by Mercantile or any Mercantile Subsidiary and no dividends or other
distributions have been declared, set aside, made or paid to the shareholders of
Mercantile.
(d) Authorization. Mercantile and Bank each have the corporate power and
authority to enter into this Agreement, the Merger Agreement, and the
Consolidation Agreement, as applicable, and, subject to any required approvals
of its shareholders, to carry out its respective obligations hereunder and
thereunder. The execution, delivery, and performance of this Agreement, the
Merger Agreement, and the Consolidation Agreement by Mercantile and Bank, as the
case may be, and the consummation of the Transactions contemplated hereby and
thereby have been duly authorized by the respective Boards of Directors of
Mercantile and Bank. Subject to such approvals of shareholders and of
government agencies and other governing boards having regulatory authority over
Mercantile and Bank as may be required by statute or regulation, this Agreement
and the Merger Agreement are valid and binding obligations of Mercantile and
Bank, respectively, enforceable against Mercantile and Bank in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting
the rights of creditors and contracting parties generally and except as
enforceability may be subject to general principles of equity.
Except as set forth on Schedule 2(d), neither the execution, delivery, and
performance by Mercantile and Bank of this Agreement, the Merger Agreement, or
the Consolidation Agreement, as applicable, nor the consummation of the
Transactions contemplated hereby and thereby, nor compliance by Mercantile or
Bank with any of the provisions hereof or thereof, will (i) violate, conflict
with, or result in a breach of any provision 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
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the creation of, any lien, security interest, charge or encumbrance upon any of
the properties or assets of Mercantile or any Mercantile Subsidiary under any of
the terms, conditions or provisions of (x) its articles of incorporation or by-
laws or (y) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Mercantile
or any Mercantile Subsidiary is a party or by which it may be bound, or to which
Mercantile or any Mercantile Subsidiary or any of the properties or assets of
Mercantile or any Mercantile Subsidiary may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
to the best knowledge of Mercantile, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to Mercantile or any
Mercantile Subsidiary or any of their respective properties or assets.
Other than in connection or in compliance with the provisions of the
Securities Act of 1933 and the rules and regulations thereunder (the "Securities
Act"), the Securities Exchange Act of 1934 and the rules and regulations
thereunder (the "Exchange Act"), 12 U.S.C. (S) 21, et seq. (the "National Bank
Act"), 12 U.S.C. (S) 1828 (the "Bank Merger Act"), the securities or blue sky
laws of the various states or filings, consents, reviews, authorizations,
approvals or exemptions required under the BHC Act or the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 ("HSR Act"), and filings required to effect
the Merger under Delaware law and the Consolidation under the laws of the United
States, 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 Bank of the Transactions contemplated by this
Agreement, the Merger Agreement, and the Consolidation Agreement.
(e) Mercantile Financial Statements. The consolidated balance sheets of
Mercantile and Mercantile's Subsidiaries as of December 31, 1997 and 1996 and
related consolidated statements of earnings and statement of stockholders'
equity for the two (2) years ended December 31, 1997, together with the notes
thereto, certified by Burton, McCumber & Prichard, L.L.P., and the unaudited
consolidated statements of financial condition of Mercantile and Mercantile's
Subsidiaries as of June 30, 1998 and the related unaudited consolidated
statements of income, shareholders' equity and cash flows for the six (6) months
then ended (collectively, the "Mercantile Financial Statements"), have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis and present fairly (subject, in the case of financial
statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Mercantile and Mercantile's Subsidiaries at
the dates and the consolidated results of operations and cash flows of
Mercantile and Mercantile's Subsidiaries for the periods stated therein.
(f) Reports. Since December 31, 1993, Mercantile and each Mercantile
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with (i) the
Securities and Exchange Commission (the "SEC"), (ii) the Federal Reserve Board,
(iii) the Federal Deposit Insurance Corporation (the "FDIC"), (iv) the
Comptroller, and (v) any applicable state
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securities or banking authorities. All such reports and statements filed with
any such regulatory body or authority are collectively referred to herein as the
"Mercantile Reports." As of their respective dates, the Mercantile Reports
complied in all material respects with all the rules and regulations promulgated
by the Federal Reserve Board, the FDIC, the Comptroller and applicable state
securities or banking authorities, as the case may be. Copies of all the
Mercantile Reports have been made available to Norwest by Mercantile.
(g) Properties and Leases. Except as may be reflected in the Mercantile
Financial Statements and except for any lien for current taxes not yet
delinquent, Mercantile and each Mercantile Subsidiary have good title free and
clear of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Mercantile's
consolidated balance sheet as of June 30, 1998, and all real and personal
property acquired since such date, except such real and personal property as has
been disposed of in the ordinary course of business. All leases of real
property and all other leases material to Mercantile or any Mercantile
Subsidiary pursuant to which Mercantile or such Mercantile Subsidiary, as
lessee, leases real or personal property, which leases are described on Schedule
2(g), are valid and effective in accordance with their respective terms, and
there is not, under any such lease, any material existing default by Mercantile
or such Mercantile Subsidiary or any event which, with notice or lapse of time
or both, would constitute such a material default. Substantially all of
Mercantile's and each of Mercantile Subsidiary's buildings and equipment in
regular use have been well maintained and are in good and serviceable condition,
reasonable wear and tear excepted.
(h) Taxes. Each of Mercantile and the Mercantile Subsidiaries has filed
all federal, state, county, local and foreign tax returns, including information
returns, required to be filed by it, and paid all taxes owed by it, including
those with respect to income, withholding, social security, unemployment,
workers compensation, franchise, ad valorem, premium, excise and sales taxes,
and no taxes shown on such returns to be owed by it or assessments received by
it are delinquent. The federal income tax returns of Mercantile and the
Mercantile Subsidiaries for the fiscal year ended December 31, 1994, and for all
fiscal years prior thereto, are for the purposes of routine audit by the
Internal Revenue Service closed because of the statute of limitations, and no
claims for additional taxes for such fiscal years are pending. Except only as
set forth on Schedule 2(h), (i) neither Mercantile nor any Mercantile Subsidiary
is a party to any pending action or proceeding, nor is any such action or
proceeding threatened by any governmental authority, for the assessment or
collection of taxes, interest, penalties, assessments or deficiencies and (ii)
no issue has been raised by any federal, state, local or foreign taxing
authority in connection with an audit or examination of the tax returns,
business or properties of Mercantile or any Mercantile Subsidiary which has not
been settled, resolved and fully satisfied. Each of Mercantile and the
Mercantile Subsidiaries has paid all taxes owed or which it is required to
withhold from amounts owing to employees, creditors or other third parties. The
consolidated balance sheet as of June 30, 1998, referred to in paragraph 2(e)
hereof, includes adequate provision for all accrued but
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unpaid federal, state, county, local and foreign taxes, interest, penalties,
assessments or deficiencies of Mercantile and the Mercantile Subsidiaries with
respect to all periods through the date thereof.
(i) Absence of Certain Changes. Since December 31, 1997, there has been
no change in the business, financial condition or results of operations of
Mercantile or any Mercantile Subsidiary, which has had, or may reasonably be
expected to have, a material adverse effect on the business, financial condition
or results of operations of Mercantile and the Mercantile Subsidiaries taken as
a whole.
(j) Commitments and Contracts. Except as set forth on Schedule 2(j),
neither Mercantile nor any Mercantile Subsidiary is a party or subject to any of
the following (whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable at
will by Mercantile or such Mercantile Subsidiary);
(ii) any plan, contract or understanding providing for any bonus,
pension, option, deferred compensation, retirement payment, profit sharing
or similar arrangement with respect to any present or former officer,
director, employee or consultant;
(iii) any labor contract or agreement with any labor union;
(iv) any contract not made in the ordinary course of business
containing covenants which limit the ability of Mercantile or any
Mercantile Subsidiary to compete in any line of business or with any person
or which involve any restriction of the geographical area in which, or
method by which, Mercantile or any Mercantile Subsidiary may carry on its
business (other than as may be required by law or applicable regulatory
authorities);
(v) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K; or
(vi) any lease with annual rental payments aggregating $10,000 or
more; or
(vii) any agreement or commitment with respect to the Community
Reinvestment Act with any state or federal bank regulatory authority or any
other party; or
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(viii) any current or past agreement, contract or understanding with
any current or former director, officer, employee, consultant, financial
adviser, broker, dealer, or agent providing for any rights of
indemnification in favor of such person or entity.
(k) Litigation and Other Proceedings. Mercantile has furnished Norwest
copies of (i) all attorney responses to the request of the independent auditors
for Mercantile with respect to loss contingencies as of December 31, 1997 in
connection with the Mercantile financial statements, and (ii) a written list of
legal and regulatory proceedings filed against Mercantile or any Mercantile
Subsidiary since said date. Neither Mercantile nor any Mercantile Subsidiary 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 cannot reasonably be expected to have, a material adverse effect on the
business, financial condition or results of operations of Mercantile and the
Mercantile Subsidiaries taken as a whole.
(l) Insurance. Mercantile and each Mercantile Subsidiary is presently
insured, and during each of the past five (5) calendar years (or during such
lesser period of time as Mercantile has owned such Mercantile Subsidiary) has
been insured, for reasonable amounts with financially sound and reputable
insurance companies against such risks as companies engaged in a similar
business would, in accordance with good business practice, customarily be
insured and has maintained all insurance required by applicable law and
regulation.
(m) Compliance with Laws. Mercantile and each Mercantile Subsidiary has
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties and assets and to carry on its business as presently
conducted and that are material to the business of Mercantile or such Mercantile
Subsidiary; 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. The conduct by Mercantile
and each Mercantile Subsidiary of its business and the condition and use of its
properties does not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Mercantile nor any
Mercantile Subsidiary is in default under any order, license, regulation or
demand of any federal, state, municipal or other governmental agency or with
respect to any order, writ, injunction or decree of any court. Except for
statutory or regulatory restrictions of general application and except as set
forth on Schedule 2(m), no federal, state, municipal or other governmental
authority has placed any restriction on the business or properties of Mercantile
or any Mercantile Subsidiary which reasonably could be expected to have a
material adverse effect on the business or properties of Mercantile and the
Mercantile Subsidiaries taken as a whole.
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(n) Labor. No work stoppage involving Mercantile or any Mercantile
Subsidiary is pending or, to the best knowledge of Mercantile, threatened.
Neither Mercantile nor any Mercantile Subsidiary is involved in, or threatened
with or affected by, any labor dispute, arbitration, lawsuit or administrative
proceeding which could materially and adversely affect the business of
Mercantile or such Mercantile Subsidiary. Employees of Mercantile and the
Mercantile Subsidiaries are not represented by any labor union nor are any
collective bargaining agreements otherwise in effect with respect to such
employees.
(o) Material Interests of Certain Persons. Except as set forth on
Schedule 2(o), to the best knowledge of Mercantile no officer or director of
Mercantile or any Mercantile Subsidiary, or any "associate" (as such term is
defined in Rule l4a-1 under the Exchange Act) of any such officer or director,
has any interest in any material contract or property (real or personal),
tangible or intangible, used in or pertaining to the business of Mercantile or
any Mercantile Subsidiary.
Schedule 2(o) sets forth a correct and complete list of any loan from
Mercantile or any Mercantile Subsidiary to any present officer, director,
employee or any associate or related interest of any such person which was
required under Regulation O of the Federal Reserve Board to be approved by or
reported to Mercantile's or such Mercantile Subsidiary's Board of Directors.
(p) Mercantile Benefit Plans.
(i) The only "employee benefit plans" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), for which Mercantile or any Mercantile Subsidiary acts as the
plan sponsor as defined in ERISA Section 3(16)(B), and with respect to
which any liability under ERISA or otherwise exists or may be incurred by
Mercantile or any Mercantile Subsidiary are those set forth on Schedule
2(p) (the "Plans"). No Plan is a "multi-employer plan" within the meaning
of Section 3(37) of ERISA.
(ii) Each Plan is and has been in all material respects operated and
administered in accordance with its provisions and applicable law. Except
as set forth on Schedule 2(p), Mercantile or the Mercantile subsidiaries
have received favorable determination letters from the Internal Revenue
Service under the provisions of the Tax Reform Act of 1986 ("TRA `86") for
each of the Plans to which the qualification requirements of Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), apply.
Mercantile knows of no reason that any Plan which is subject to the
qualification provisions of Section 401(a) of the Code is not "qualified"
within the meaning of Section 401(a) of the Code and that each related
trust is not exempt from taxation under Section 501(a) of the Code.
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(iii) The present value of all benefits vested and all benefits
accrued under each Plan which is subject to Title IV of ERISA did not, in
each case, as determined for purposes of reporting on Schedule B to the
Annual Report on Form 5500 of each such Plan as of the end of the most
recent Plan year exceed the value of the assets of the Plan allocable to
such vested or accrued benefits.
(iv) Except as disclosed in Schedule 2(p), and to the best knowledge
of Mercantile, no Plan or any trust created thereunder, nor any trustee,
fiduciary or administrator thereof, has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA or violated any of the fiduciary standards under Part
4 of Title I of ERISA which could subject, to the best knowledge of
Mercantile, such Plan or trust, or any trustee, fiduciary or administrator
thereof, or any party dealing with any such Plan or trust, to the tax or
penalty on prohibited transactions imposed by said Section 4975 or would
result in material liability to Mercantile and the Mercantile Subsidiaries
taken as a whole.
(v) No Plan which is subject to Title IV of ERISA or any trust
created thereunder has been terminated, nor have there been any "reportable
events" as that term is defined in Section 4043 of ERISA, with respect to
any Plan, other than those events which may result from the Transactions
contemplated by this Agreement, the Merger Agreement, or the Consolidation
Agreement.
(vi) No Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 412 of
the Code (whether or not waived), since the effective date of ERISA.
(vii) Except as disclosed in Schedule 2(p), neither the execution and
delivery of this Agreement, the Merger Agreement, or the Consolidation
Agreement nor the consummation of the Transactions contemplated hereby and
thereby will (i) result in any material payment (including, without
limitation, severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or employee or former employee of
Mercantile or any Mercantile Subsidiary under any Plan or otherwise, (ii)
materially increase any benefits otherwise payable under any Plan or (iii)
result in the acceleration of the time of payment or vesting of any such
benefits to any material extent.
(q) Proxy Statement, etc. None of the information regarding Mercantile
and the Mercantile Subsidiaries supplied or to be supplied by Mercantile and
Bank for inclusion in (i) a Registration Statement on Form S-4 to be filed with
the SEC by Norwest for the purpose of registering the shares of Norwest Common
Stock to be exchanged for shares of Mercantile Common Stock and Bank Common
Stock pursuant to the provisions of the Merger Agreement and the Consolidation
Agreement (the "Registration Statement"), (ii) the joint proxy statement to be
mailed to Mercantile's and Bank's shareholders in connection with the meetings
(or unanimous consent actions in lieu of meetings) to be
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called to consider the Transactions (the "Proxy Statement"), and (iii) any other
documents to be filed with the SEC or any regulatory authority in connection
with the Transactions contemplated hereby, by the Merger Agreement, or by the
Consolidation Agreement, will, at the respective times such documents are filed
with the SEC or 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 meetings of shareholders (or the
effective dates of any unanimous consent actions in lieu of meetings) referred
to in paragraph 4(c), 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 any such
meeting or consent action.
(r) Registration Obligations. Neither Mercantile nor any Mercantile
Subsidiary is under any obligation, contingent or otherwise, which will survive
the Transaction by reason of any agreement to register any of its securities
under the Securities Act.
(s) Brokers and Finders. Except as described on Schedule 2(s) and except
for Alex Sheshunoff & Co. Investment Banking, neither Mercantile nor any
Mercantile Subsidiary 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 any
Mercantile Subsidiary in connection with this Agreement and the Merger Agreement
or the Transactions contemplated hereby and thereby.
(t) Administration of Trust Accounts. To the best of Mercantile's and
Bank's knowledge, Mercantile and each Mercantile Subsidiary has properly
administered in all material respects and which could reasonably be expected to
be material to the financial condition of Mercantile and the Mercantile
Subsidiaries taken as a whole all accounts for which it acts as a fiduciary,
including but not limited to accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor,
in accordance with the terms of the governing documents and applicable state and
federal law and regulation and common law. To the best of Mercantile's and
Bank's knowledge, neither Mercantile, any Mercantile Subsidiary, nor any
director, officer or employee of Mercantile or any Mercantile Subsidiary has
committed any breach of trust with respect to any such fiduciary account which
is material to or could reasonably be expected to be material to the financial
condition of Mercantile and the Mercantile Subsidiaries taken as a whole, and
the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account.
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(u) No Defaults. Neither Mercantile nor any Mercantile Subsidiary is in
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default, under any material
agreement, indenture, loan agreement or other instrument to which it is a party
or by which it or any of its assets is bound or to which any of its assets is
subject, the result of which has had or could reasonably be expected to have a
material adverse effect upon Mercantile and the Mercantile Subsidiaries, taken
as a whole. To the best of Mercantile's and Bank's knowledge, all parties with
whom Mercantile or any Mercantile Subsidiary has material leases, agreements or
contracts or who owe to Mercantile or any Mercantile Subsidiary material
obligations other than with respect to those arising in the ordinary course of
the banking business of the Mercantile Subsidiaries are in compliance therewith
in all material respects.
(v) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition of, on Mercantile, any Mercantile Subsidiary, or any
trust for which Bank is acting as trustee, any liability relating to the release
of hazardous substances as defined under any local, state or federal
environmental statute, regulation or ordinance including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), pending or to the best of Mercantile's knowledge,
threatened against Mercantile, any Mercantile Subsidiary, or any trust for which
Bank is acting as trustee, the result of which has had or could reasonably be
expected to have a material adverse effect upon Mercantile and Mercantile's
Subsidiaries taken as a whole or any trust for which Bank is acting as trustee;
to the best of Mercantile's knowledge there is no reasonable basis for any such
proceeding, claim or action; and to the best of Mercantile's knowledge neither
Mercantile nor any Mercantile Subsidiary is subject to any agreement, order,
judgment, or decree by or with any court, governmental authority or third party
imposing any such environmental liability. Mercantile has provided Norwest with
copies of all environmental assessments, reports, studies and other related
information in its possession with respect to each bank facility and each non-
residential OREO property and for each trust for which Bank is acting as
trustee.
(w) Compliance with Year 2000 Requirements. Except as set forth in
Schedule 2(w), Mercantile is in full compliance with its Year 2000 project
management process as set forth in the May 5, 1997 Federal Financial
Institutions Examination Council ("FFIEC") Interagency Statement on the Year
2000 and subsequent guidance documents (the "FFIEC Requirements"). Mercantile
and Bank have each made its Year 2000 project assessment and remediation plan
available to Norwest for review and have furnished Norwest with copies of all
communications between Mercantile or any Mercantile Subsidiary and regulators
having responsibility for overseeing compliance with such current FFIEC
Requirements.
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3. Representations and Warranties of Norwest. Norwest represents and
warrants to Mercantile and Bank as follows:
(a) Organization and Authority. Norwest 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 and failure to be so qualified would have a
material adverse effect on Norwest and its subsidiaries taken as a whole and has
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted. Norwest is registered as a bank
holding company with the Federal Reserve Board under the BHC Act.
(b) Norwest Subsidiaries. Schedule 3(b) sets forth a complete and correct
list as of December 31, 1997, of Norwest's Significant Subsidiaries (as defined
in Regulation S-X promulgated by the SEC) (individually a "Norwest Subsidiary"
and collectively the "Norwest Subsidiaries"), all shares of the outstanding
capital stock of each of which, except as set forth in Schedule 3(b), are owned
directly or indirectly by Norwest. No equity security of any Norwest Subsidiary
is or may be required to be issued to any person or entity other than Norwest by
reason of any option, warrant, scrip, right to subscribe to, call or commitment
of any character whatsoever relating to, or security or right convertible into,
shares of any capital stock of such subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any Norwest Subsidiary is
bound to issue additional shares of its capital stock, or options, warrants or
rights to purchase or acquire any additional shares of its capital stock.
Subject to 12 U.S.C. (S) 55 (1982), all of such shares so owned by Norwest are
fully paid and nonassessable and are owned by it free and clear of any lien,
claim, charge, option, encumbrance or agreement with respect thereto. Each
Norwest Subsidiary is a corporation or national banking association duly
organized, validly existing, duly qualified to do business and in good standing
under the laws of its jurisdiction of incorporation, 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.
(c) Norwest Capitalization. As of June 30, 1998, the authorized capital
stock of Norwest consists of (i) 5,000,000 shares of Preferred Stock, without
par value, of which as of the close of business on June 30, 1998, 980,000 shares
of Cumulative Tracking Preferred Stock, at $200 stated value, 9,890 shares of
ESOP Cumulative Convertible Preferred Stock, at $1,000 stated value, 20,386
shares of 1995 ESOP Cumulative Convertible Preferred Stock, at $1,000 stated
value, 22,458 shares of 1996 ESOP Cumulative Convertible Preferred Stock, at
$1,000 stated value, and 19,982 shares of 1997 ESOP Cumulative Convertible
Preferred Stock, at $1,000 stated value, and 20,636 shares of 1998 ESOP
Cumulative Convertible Preferred Stock, at $1,000 par value, were outstanding;
(ii) 4,000,000 shares of Preference Stock, without par value, of which as of the
close of business on June 30, 1998, no shares were outstanding; and (iii)
2,000,000,000 shares of Common Stock, $1-2/3 par value, of which as of the close
of business on June 30, 1998, 771,113,149 shares were outstanding and 11,502,502
shares
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<PAGE>
were held in the treasury. All of the outstanding shares of capital stock
of Norwest have been duly and validly authorized and issued and are fully paid
and nonassessable. On June 7, 1998, Norwest entered into an Agreement and Plan
of Merger (the "Wells Merger Agreement") by and between Norwest and Wells Fargo
& Company ("Wells Fargo"), a Delaware corporation, under which it is
contemplated that Wells Fargo will merge with and into a wholly-owned subsidiary
of Norwest, and that Norwest will change its name to "Wells Fargo & Company"
(the "Wells Merger"). The Wells Merger Agreement provides that, prior to
consummation of the Wells Merger, Norwest will amend its Restated Certificate of
Incorporation to provide that Norwest shall have authority to issue an aggregate
of 20,000,000 shares of Preferred Stock without par value, 4,000,000 of
Preference Stock without par value, and 4,000,000,000 shares of Common Stock of
the par value of $1-2/3 per share.
(d) Authorization. Norwest has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder. The execution,
delivery, and performance of this Agreement by Norwest and the consummation of
the Transactions contemplated hereby have been duly authorized by the Board of
Directors of Norwest. No approval or consent by the stockholders of Norwest is
necessary for the execution and delivery of this Agreement, the Merger
Agreement, and the Consolidation Agreement and the consummation of the
Transactions contemplated hereby and thereby. Subject to such approvals of
government agencies and other governing boards having regulatory authority over
Norwest as may be required by statute or regulation, this Agreement is a valid
and binding obligation of Norwest enforceable against Norwest in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the rights of
creditors and contracting parties generally and except as enforceability may be
subject to general principles of equity.
Neither the execution, delivery, and performance by Norwest of this
Agreement or the Merger Agreement, nor the execution, delivery, and performance
by Norwest Bank of the Consolidation Agreement, nor the consummation of the
Transactions contemplated hereby and thereby, nor compliance by Norwest with any
of the provisions hereof or thereof, will (i) violate, conflict with, or result
in a breach of any provision 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, security interest, charge or encumbrance upon any of the
properties or assets of Norwest or any Norwest Subsidiary under any of the
terms, conditions or provisions of (x) its certificate of incorporation or by-
laws or (y) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Norwest or
any Norwest Subsidiary is a party or by which it may be bound, or to which
Norwest or any Norwest Subsidiary or any of the properties or assets of Norwest
or any Norwest Subsidiary may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in the next paragraph, to the best
knowledge of Norwest, violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation
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<PAGE>
applicable to Norwest or any Norwest Subsidiary or any of their respective
properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act, the Exchange Act, the National Bank Act, the Bank Merger Act,
the securities or blue sky laws of the various states or filings, consents,
reviews, authorizations, approvals or exemptions required under the BHC Act or
the HSR Act, and filings required to effect the Merger under Delaware law and
the Consolidation under the laws of the United States, 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 Norwest of the
Transactions contemplated by this Agreement, the Merger Agreement, and the
Consolidation Agreement.
(e) Norwest Financial Statements. The consolidated balance sheets of
Norwest and Norwest's subsidiaries as of December 31, 1997 and 1996 and related
consolidated statements of income, stockholders' equity and cash flows for the
three (3) years ended December 31, 1997, together with the notes thereto,
certified by KPMG Peat Marwick and included in Norwest's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 (the "Norwest 10-K") as filed
with the SEC, and the unaudited consolidated balance sheets of Norwest and its
subsidiaries as of June 30, 1998 and the related unaudited consolidated
statements of income and cash flows for the six (6) months then ended included
in Norwest's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1998, as filed with the SEC (collectively, the "Norwest Financial Statements"),
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis and present fairly (subject, in the case of
financial statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Norwest and its subsidiaries at the dates and
the consolidated results of operations, changes in financial position and cash
flows of Norwest and its subsidiaries for the periods stated therein.
(f) Reports. Since December 31, 1993, Norwest and each Norwest Subsidiary
has filed all 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 and proxy statements, (ii) the
Federal Reserve Board, (iii) the FDIC, (iv) the Comptroller and (v) any
applicable state securities or banking authorities. All such reports and
statements filed with any such regulatory body or authority are collectively
referred to herein as the "Norwest Reports." As of their respective dates, the
Norwest Reports complied in all material respects with all the rules and
regulations promulgated by the SEC, the Federal Reserve Board, the FDIC, the
Comptroller and any applicable state securities or banking authorities, as the
case may be, and the Norwest Reports filed with the SEC 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.
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<PAGE>
(g) Properties and Leases. Except as may be reflected in the Norwest
Financial Statements and except for any lien for current taxes not yet
delinquent, Norwest and each Norwest Subsidiary has good title free and clear of
any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Norwest's
consolidated balance sheet as of June 30, 1998 included in Norwest's Quarterly
Report on Form 10-Q for the period then ended, and all real and personal
property acquired since such date, except such real and personal property has
been disposed of in the ordinary course of business. All leases of real
property and all other leases material to Norwest or any Norwest Subsidiary
pursuant to which Norwest or such Norwest Subsidiary, as lessee, leases real or
personal property, are valid and effective in accordance with their respective
terms, and there is not, under any such lease, any material existing default by
Norwest or such Norwest Subsidiary or any event which, with notice or lapse of
time or both, would constitute such a material default. Substantially all
Norwest's and each Norwest Subsidiary's buildings and equipment in regular use
have been well maintained and are in good and serviceable condition, reasonable
wear and tear excepted.
(h) Taxes. Each of Norwest and the Norwest Subsidiaries has filed all
material federal, state, county, local and foreign tax returns, including
information returns, required to be filed by it, and paid or made adequate
provision for the payment of all taxes owed by it, including those with respect
to income, withholding, social security, unemployment, workers compensation,
franchise, ad valorem, premium, excise and sales taxes, and no taxes shown on
such returns to be owed by it or assessments received by it are delinquent. The
federal income tax returns of Norwest and the Norwest Subsidiaries for the
fiscal year ended December 31, 1982, and for all fiscal years prior thereto, are
for the purposes of routine audit by the Internal Revenue Service closed because
of the statute of limitations, and no claims for additional taxes for such
fiscal years are pending. Except only as set forth on Schedule 3(h), (i)
neither Norwest nor any Norwest Subsidiary is a party to any pending action or
proceeding, nor to Norwest's knowledge is any such action or proceeding
threatened by any governmental authority, for the assessment or collection of
taxes, interest, penalties, assessments or deficiencies which could reasonably
be expected to have any material adverse effect on Norwest and its subsidiaries
taken as a whole, and (ii) no issue has been raised by any federal, state, local
or foreign taxing authority in connection with an audit or examination of the
tax returns, business or properties of Norwest or any Norwest Subsidiary which
has not been settled, resolved and fully satisfied, or adequately reserved for.
Each of Norwest and the Norwest Subsidiaries has paid all taxes owed or which it
is required to withhold from amounts owing to employees, creditors or other
third parties.
(i) Absence of Certain Changes. Since December 31, 1997, there has been
no change in the business, financial condition or results of operations of
Norwest or any Norwest Subsidiary which has had, or may reasonably be expected
to have, a material adverse effect on the business, financial condition or
results of operations of Norwest and its subsidiaries taken as a whole.
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<PAGE>
(j) Commitments and Contracts. Except as set forth on Schedule 3(j), as
of December 31, 1997 neither Norwest nor any Norwest Subsidiary is a party or
subject to any of the following (whether written or oral, express or implied):
(i) any labor contract or agreement with any labor union;
(ii) any contract not made in the ordinary course of business
containing covenants which materially limit the ability of Norwest or any
Norwest Subsidiary to compete in any line of business or with any person or
which involve any material restriction of the geographical area in which,
or method by which, Norwest or any Norwest Subsidiary may carry on its
business (other than as may be required by law or applicable regulatory
authorities);
(iii) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K.
(k) Litigation and Other Proceedings. Neither Norwest nor any Norwest
Subsidiary is a party to any pending or, to the best knowledge of Norwest,
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 cannot reasonably be expected to have, a material adverse effect on
the business, financial condition or results of operations of Norwest and its
subsidiaries taken as a whole.
(l) Insurance. Norwest and each Norwest Subsidiary is presently insured
or self-insured, and during each of the past five (5) calendar years (or during
such lesser period of time as Norwest has owned such Norwest Subsidiary) has
been insured or self-insured, for reasonable amounts with financially sound and
reputable insurance companies against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured and has maintained all insurance required by applicable law and
regulation.
(m) Compliance with Laws. Norwest and each Norwest Subsidiary has all
permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties or assets and to carry on its business as presently
conducted and that are material to the business of Norwest or such Subsidiary;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect, and to the best knowledge of Norwest, no suspension or
cancellation of any of them is threatened; and all such filings, applications
and registrations are current. The conduct by Norwest and each Norwest
Subsidiary of its business and the condition and use of its properties does not
violate or infringe, in any respect material to any such business, any
applicable domestic (federal, state or local) or foreign law, statute,
ordinance, license or regulation. Neither Norwest nor any Norwest Subsidiary is
in default under any order, license, regulation or demand of any federal, state,
municipal or other governmental agency or with respect to any
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<PAGE>
order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application, no federal, state, municipal or
other governmental authority has placed any restrictions on the business or
properties of Norwest or any Norwest Subsidiary which reasonably could be
expected to have a material adverse effect on the business or properties of
Norwest and its subsidiaries taken as a whole.
(n) Labor. No work stoppage involving Norwest or any Norwest Subsidiary
is pending or, to the best knowledge of Norwest, threatened. Neither Norwest
nor any Norwest Subsidiary is involved in, or threatened with or affected by,
any labor dispute, arbitration, lawsuit or administrative proceeding which could
materially and adversely affect the business of Norwest or such Norwest
Subsidiary. Except as set forth on Schedule 3(j), employees of Norwest and the
Norwest Subsidiaries are not represented by any labor union nor are any
collective bargaining agreements otherwise in effect with respect to such
employees.
(o) Norwest Benefit Plans.
(i) As of December 31, 1997, the only "employee benefit plans" within
the meaning of Section 3(3) of ERISA for which Norwest or any Norwest
Subsidiary acts as plan sponsor as defined in ERISA Section 3(16)(B) with
respect to which any liability under ERISA or otherwise exists or may be
incurred by Norwest or any Norwest Subsidiary are those set forth on
Schedule 3(o) (the "Norwest Plans"). No Norwest Plan is a "multi-employer
plan" within the meaning of Section 3(37) of ERISA.
(ii) Each Norwest Plan is and has been in all material respects
operated and administered in accordance with its provisions and applicable
law. Except as set forth on Schedule 3(o), Norwest or the Norwest
Subsidiaries have received favorable determination letters from the
Internal Revenue Service under the provisions of TRA `86 for each of the
Norwest Plans to which the qualification requirements of Section 401(a) of
the Code apply. Norwest knows of no reason that any Norwest Plan which is
subject to the qualification provisions of Section 401(a) of the Code is
not "qualified" within the meaning of Section 401(a) of the Code and that
each related trust is not exempt from taxation under Section 501(a) of the
Code.
(iii) The present value of all benefits vested and all benefits
accrued under each Norwest Plan which is subject to Title IV of ERISA did
not, in each case, as determined for purposes of reporting on Schedule B to
the Annual Report on Form 5500 of each such Norwest Plan as of the end of
the most recent Plan year, exceed the value of the assets of the Norwest
Plans allocable to such vested or accrued benefits.
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<PAGE>
(iv) Except as set forth on Schedule 3(o), and to the best knowledge
of Norwest, no Norwest Plan or any trust created thereunder, nor any
trustee, fiduciary or administrator thereof, has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA or violated fiduciary standards under Part 4 of Title
I of ERISA, which could subject, to the best knowledge of Norwest, such
Norwest Plan or trust, or any trustee, fiduciary or administrator thereof,
or any party dealing with any such Norwest Plan or trust, to the tax or
penalty on prohibited transactions imposed by said Section 4975 or would
result in material liability to Norwest and its subsidiaries taken as a
whole.
(v) Except as set forth on Schedule 3(o), no Norwest Plan which is
subject to Title IV of ERISA or any trust created thereunder has been
terminated, nor have there been any "reportable events" as that term is
defined in Section 4043 of ERISA with respect to any Norwest Plan, other
than those events which may result from the Transactions contemplated by
this Agreement, the Merger Agreement, and the Consolidation Agreement.
(vi) No Norwest Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 412 of
the Code (whether or not waived), during the last five Norwest Plan years
which would result in a material liability.
(vii) Neither the execution and delivery of this Agreement, the
Merger Agreement, or the Consolidation Agreement, nor the consummation of
the Transactions contemplated hereby and thereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director
or employee or former employee of Norwest under any Norwest Plan or
otherwise, (ii) materially increase any benefits otherwise payable under
any Norwest Plan or (iii) result in the acceleration of the time of payment
or vesting of any such benefits to any material extent.
(p) Registration Statement, etc. None of the information regarding
Norwest and the Norwest Subsidiaries supplied or to be supplied by Norwest for
inclusion in (i) the Registration Statement, (ii) the Proxy Statement, or (iii)
any other documents to be filed with the SEC or any regulatory authority in
connection with the transactions contemplated hereby or by the Merger Agreement,
or the Consolidation Agreement will, at the respective times such documents are
filed with the SEC or 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 (or the effective dates of any unanimous consent actions in lieu of
meetings) referred to in paragraph 4(c), be false
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<PAGE>
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 or consent action. All
documents which Norwest and the Norwest Subsidiaries are responsible for filing
with the SEC and any other regulatory authority in connection with the Merger
and the Consolidation will comply as to form in all material respects with the
provisions of applicable law.
(q) Brokers and Finders. Neither Norwest nor any Norwest Subsidiary 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 Norwest or any Norwest Subsidiary in connection with this
Agreement, the Merger Agreement, and the Consolidation Agreement or the
Transactions contemplated hereby and thereby.
(r) No Defaults. Neither Norwest nor any Norwest Subsidiary is in
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default under any material
agreement, indenture, loan agreement or other instrument to which it is a party
or by which it or any of its assets is bound or to which any of its assets is
subject, the result of which has had or could reasonably be expected to have a
material adverse effect upon Norwest and its subsidiaries taken as a whole. To
the best of Norwest's knowledge, all parties with whom Norwest or any Norwest
Subsidiary has material leases, agreements or contracts or who owe to Norwest or
any Norwest Subsidiary material obligations other than with respect to those
arising in the ordinary course of the banking business of the Norwest
Subsidiaries are in compliance therewith in all material respects.
(s) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition, on Norwest or any Norwest Subsidiary of any liability
relating to the release of hazardous substances as defined under any local,
state or federal environmental statute, regulation or ordinance including,
without limitation, CERCLA, pending or to the best of Norwest's knowledge,
threatened against Norwest or any Norwest Subsidiary, the result of which has
had or could reasonably be expected to have a material adverse effect upon
Norwest and its subsidiaries taken as a whole; to the best of Norwest's
knowledge there is no reasonable basis for any such proceeding, claim or action;
and to the best of Norwest's knowledge neither Norwest nor any Norwest
Subsidiary is subject to any agreement, order, judgment, or decree by or with
any court, governmental authority or third party imposing any such environmental
liability.
(t) Merger Co. As of the Closing Date, Merger Co. will be a corporation
duly organized, validly existing, duly qualified to do business, and in good
standing under the laws of its jurisdiction of incorporation, and will have
corporate power and authority to own or lease its properties and assets and to
carry on its business. As of the Effective Date of the Merger, the execution,
delivery, and performance by Merger Co. of the Merger Agreement will have been
duly authorized by the Board of Directors and
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shareholders of Merger Co. and the Merger Agreement will be a valid and binding
obligation of Merger Co. enforceable against Merger Co. in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the rights of
creditors and contracting parties generally and except as enforceability may be
subject to general principles of equity.
(u) Norwest Bank. As of the Effective Date of the Consolidation, Norwest
Bank will be a national banking association duly organized, validly existing,
duly qualified to do business, and in good standing under the laws of the United
States, and will have corporate power and authority to own or lease its
properties and assets and to carry on its business. As of the Effective Date of
the Consolidation, the execution, delivery, and performance by Norwest Bank of
the Consolidation Agreement will have been duly authorized by the Board of
Directors and shareholders of Norwest Bank and the Consolidation Agreement will
be a valid and binding obligation of Norwest Bank enforceable against Norwest
Bank in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the rights of creditors and contracting parties generally and except
as enforceability may be subject to general principles of equity.
(u) Year 2000. None of Norwest or any of the Norwest Subsidiaries has
received, or reasonably expects to receive, a "Year 2000 Deficiency Notification
Letter" (as such term is employed in the Federal Reserve's Supervision and
Regulation Letter No. SR 98-3 (SUP), dated March 4, 1998).
4. Covenants of Mercantile and Bank. Mercantile and Bank (to the extent a
covenant or agreement applies to Bank) covenants and agrees with Norwest as
follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until the Effective Time of the Merger, Mercantile, and each
Mercantile Subsidiary will: maintain its corporate existence in good standing;
maintain the general character of its business and conduct its business in its
ordinary and usual manner; extend credit in accordance with existing lending
policies, except that it shall not, without the prior written consent of Norwest
(such consent to be deemed given if Norwest does not respond within two (2)
business days of receiving notice from Mercantile), make any new loan or modify,
restructure or renew any existing loan (except pursuant to commitments made
prior to the date of this Agreement) to any borrower if the amount of the
resulting loan, when aggregated with all other loans or extensions of credit to
such person, would be in excess of $1,000,000; maintain proper business and
accounting records in accordance with generally accepted principles; maintain
its properties in good repair and condition, ordinary wear and tear excepted;
maintain in all material respects presently existing insurance coverage; use its
best efforts to preserve its business organization intact, to keep the services
of its present principal employees and to preserve its good will and the good
will of its suppliers, customers and others having business relationships with
it; use its best efforts to obtain any approvals or consents required to
maintain
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existing leases and other contracts in effect following the Merger; comply in
all material respects with all laws, regulations, ordinances, codes, orders,
licenses and permits applicable to the properties and operations of Mercantile
and each Mercantile Subsidiary the non-compliance with which reasonably could be
expected to have a material adverse effect on Mercantile and the Mercantile
Subsidiaries taken as a whole; promptly upon request provide access to Norwest
and its representatives of Mercantile or Mercantile's Subsidiaries' bank
application computer files and provide or cause to be provided any vendor
deconversion tape from Electronic Data Systems Corporation; and permit Norwest
and its representatives (including KPMG Peat Marwick) to examine its and its
subsidiaries books, records and properties and to interview officers, employees
and agents at all reasonable times when it is open for business. No such
examination by Norwest or its representatives either before or after the date of
this Agreement shall in any way affect, diminish or terminate any of the
representations, warranties or covenants of Mercantile herein expressed.
(b) Except as otherwise contemplated or required by this Agreement, from
the date hereof until the Effective Time of the Merger, Mercantile and each
Mercantile subsidiary will not (without the prior written consent of Norwest):
amend or otherwise change its articles of incorporation or association or by-
laws; issue or sell or authorize for issuance or sale, or grant any options or
make other agreements with respect to the issuance or sale or conversion of, any
shares of its capital stock, phantom shares or other share-equivalents, or any
other of its securities; authorize or incur any long-term debt (other than
deposit liabilities); mortgage, pledge or subject to lien or other encumbrance
any of its properties, except in the ordinary course of business; enter into any
material agreement, contract or commitment in excess of $10,000 except banking
transactions in the ordinary course of business and in accordance with policies
and procedures in effect on the date hereof; make any investments except
investments made by bank subsidiaries in the ordinary course of business for
terms of up to one (1) year and in amounts of $100,000 or less; amend or
terminate any Plan except as required by law; make any contributions to any Plan
except as required by the terms of such Plan in effect as of the date hereof;
declare, set aside, make or pay any dividend or other distribution with respect
to its capital stock except any dividend declared by a subsidiary's Board of
Directors in accordance with applicable law and regulation; redeem, purchase or
otherwise acquire, directly or indirectly, any of the capital stock of
Mercantile or a Mercantile Subsidiary; increase the compensation of any
officers, directors or executive employees, except pursuant to existing
compensation plans and practices; sell or otherwise dispose of any shares of the
capital stock of any Mercantile Subsidiary; or sell or otherwise dispose of any
of its assets or properties other than in the ordinary course of business.
(c) Shareholder Actions.
(i) The Board of Directors of Mercantile will duly call, and will
cause to be held not later than twenty-five (25) business days following
the effective date of the Registration Statement referred to in paragraph
5(c) hereof, and on a date acceptable to Norwest, a meeting of its
shareholders and will direct that this
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<PAGE>
Agreement and the Merger Agreement be submitted to a vote at such meeting.
The Board of Directors of Mercantile will (A) cause proper notice of such
meeting to be given to its shareholders in compliance with the Delaware
General Corporation Law and other applicable law and regulation, (B)
recommend by the affirmative vote of the Board of Directors a vote in favor
of approval of this Agreement and the Merger Agreement, and (C) use its
best efforts to solicit from its shareholders proxies in favor thereof.
Notwithstanding the foregoing, such meeting will not be required to be
called or held if the Board of Directors of Mercantile obtains the
unanimous written consent of the shareholders of Mercantile approving this
Agreement and the Merger Agreement on or before the twenty-fifth (25th)
business day (and on a date acceptable to Norwest) following the effective
date of the Registration Statement referred to in paragraph 5(c) hereof.
(ii) The Board of Directors of Bank will duly call, and will cause to
be held not later than twenty-five (25) business days following the
effective date of the Registration Statement referred to in paragraph 5(c)
hereof, and on a date acceptable to Norwest, a meeting of its shareholders
and will direct that this Agreement and the Consolidation Agreement be
submitted to a vote at such meeting. The Board of Directors of Bank will
(A) cause proper notice of such meeting to be given to its shareholders in
compliance with the National Bank Act and other applicable law and
regulation, (B) recommend by the affirmative vote of the Board of Directors
a vote in favor of approval of this Agreement and the Consolidation
Agreement, and (C) use its best efforts to solicit from its shareholders
proxies in favor thereof. Notwithstanding the foregoing, such meeting will
not be required to be called or held if the Board of Directors of Bank
obtains the unanimous written consent of the shareholders of Bank approving
this Agreement and the Consolidation Agreement on or before the twenty-
fifth (25th) business day (and on a date acceptable to Norwest) following
the effective date of the Registration Statement referred to in paragraph
5(c) hereof.
(iii) Mercantile and Bank agree to cause the meetings (or unanimous
consent actions in lieu of meetings) of their respective shareholders to be
held on or be effective on the same date.
(d) Mercantile and Bank will furnish or cause to be furnished to Norwest
all the information concerning Mercantile and the Mercantile Subsidiaries
required for inclusion in the Registration Statement referred to in paragraph
5(c) hereof, or any statement or application made by Norwest to any governmental
body in connection with the transactions contemplated by this Agreement. Any
financial statement for any fiscal year provided under this paragraph must
include the audit opinion and the consent of Burton, McCumber & Prichard, L.L.C.
to use such opinion in such Registration Statement.
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<PAGE>
(e) Mercantile and Bank will take all necessary corporate and other action
and use its best efforts to obtain all approvals of regulatory authorities,
consents and other approvals required of Mercantile and Bank to carry out the
Transactions contemplated by this Agreement and will cooperate with Norwest to
obtain all such approvals and consents required of Norwest.
(f) Mercantile and Bank will use its respective best efforts to deliver to
the Closing all opinions, certificates and other documents required to be
delivered by it at the Closing.
(g) Mercantile and the Mercantile Subsidiaries will hold in confidence all
documents and information concerning Norwest and its subsidiaries furnished to
Mercantile and the Mercantile Subsidiaries and their representatives in
connection with the Transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to Mercantile's and the Mercantile Subsidiaries' outside
professional advisers in connection with this Agreement, with the same
undertaking from such professional advisers. If the Transactions contemplated
by this Agreement shall not be consummated, such confidence shall be maintained
and such information shall not be used in competition with Norwest (except to
the extent that such information can be shown to be previously known to
Mercantile or any Mercantile Subsidiary, in the public domain, or later acquired
by Mercantile and any Mercantile Subsidiary from other legitimate sources) and,
upon request, all such documents, any copies thereof and extracts therefrom
shall immediately thereafter be returned to Norwest.
(h) Neither Mercantile, nor any Mercantile Subsidiary, nor any director,
officer, representative or agent thereof, will, directly or indirectly, solicit,
authorize the solicitation of or enter into any discussions with any
corporation, partnership, person or other entity or group (other than Norwest)
concerning any offer or possible offer (i) to purchase any shares of common
stock, any option or warrant to purchase any shares of common stock, any
securities convertible into any shares of such common stock, or any other equity
security of Mercantile or any Mercantile Subsidiary, (ii) to make a tender or
exchange offer for any shares of such common stock or other equity security,
(iii) to purchase, lease or otherwise acquire the assets of Mercantile or any
Mercantile Subsidiary except in the ordinary course of business, or (iv) to
merge, consolidate or otherwise combine with Mercantile or any Mercantile
Subsidiary. If any corporation, partnership, person or other entity or group
makes an offer or inquiry to Mercantile or any Mercantile Subsidiary concerning
any of the foregoing, Mercantile or such Mercantile Subsidiary will promptly
disclose such offer or inquiry, including the terms thereof, to Norwest.
(i) Mercantile shall consult with Norwest 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.
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<PAGE>
(j) Mercantile and each Mercantile Subsidiary will take all action
necessary or required (i) to terminate or amend, if requested by Norwest, all
qualified pension and welfare benefit plans and all non-qualified benefit plans
and compensation arrangements as of the Effective Date of the Merger, and (ii)
to submit application to the Internal Revenue Service for a favorable
determination letter for each of the Plans which is subject to the qualification
requirements of Section 401(a) of the Code prior to the Effective Date of the
Merger.
(k) Neither Mercantile nor any Mercantile Subsidiary shall take any action
which with respect to Mercantile would disqualify the Merger as a "pooling of
interests" for accounting purposes.
(l) Mercantile and Bank shall each use its respective best efforts to
obtain and deliver at least thirty-two (32) days prior to the Effective Date of
the Merger signed representations substantially in the form attached hereto as
Exhibit C ("Affiliate Letter") to Norwest by each executive officer, director or
shareholder of Mercantile and Bank who may reasonably be deemed an "affiliate"
of Mercantile or Bank within the meaning of such term as used in Rule 145 under
the Securities Act.
(m) At or before the Closing Date, Mercantile shall establish such
additional accruals and reserves as may be necessary to conform Mercantile's
accounting and credit loss reserve practices and methods to those of Norwest and
Norwest's plans with respect to the conduct of Mercantile's business following
the Merger and to provide for the costs and expenses relating to the
consummation by Mercantile of the Merger and the other Transactions contemplated
by this Agreement; provided, however, that (a) Mercantile shall not be required
to take such actions more than one (1) day prior to the Closing Date or prior to
the time Norwest and Norwest Bank agree in writing that all of the conditions to
their obligation to close as set forth in paragraph 7 have been satisfied or
waived (other than the deliveries to be made on the Closing Date), and (b) based
upon consultation with counsel and accountants for Mercantile, no such
adjustment shall (i) require any filing with any governmental agency or
regulatory authority, (ii) violate any law, rule or regulation applicable to
Mercantile or the Bank, or (iii) otherwise materially disadvantage Mercantile or
the Bank if the Merger were not consummated; provided that in any event no
accrual or reserve made by Mercantile or Bank pursuant to this paragraph 4(m),
or any litigation or regulatory proceeding arising out of any such accrual or
reserve, shall constitute or be deemed to be a breach, violation of or failure
to satisfy any representation, warranty, covenant, condition or other provision
of this Agreement or otherwise be considered in determining whether any such
breach, violation or failure to satisfy shall have occurred. The recording of
such adjustments pursuant to this paragraph 4(m) shall not be deemed to imply
any misstatement of previously furnished financial statements or information any
shall not be construed as concurrence of Mercantile's management with any such
adjustments, and shall not affect the Merger Value, the Bank Consolidation
Value, the Nominal Value, or the Norwest Measurement Price.
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<PAGE>
(n) Mercantile shall obtain, at its sole expense, Phase I environmental
assessments for each bank owned facility, properties held by the Bank in trust
or a fiduciary capacity, and each non-residential OREO property. Oral reports
of such environmental assessments shall be delivered to Norwest no later than
four (4) weeks and written reports shall be delivered to Norwest no later than
eight (8) weeks from the date of this Agreement. Mercantile shall obtain, at
its sole expense, Phase II environmental assessments for properties identified
by Norwest on the basis of the results of such Phase I environmental
assessments. Mercantile shall obtain a survey and assessment of all potential
asbestos containing material in owned or leased properties (other than OREO
property) and a written report of the results shall be delivered to Norwest
within eight (8) weeks of execution of the definitive agreement.
(o) Mercantile shall obtain, at its sole expense, commitments for title
insurance and real estate surveys for each bank owned facility which shall be
delivered to Norwest no later than eight (8) weeks from the date of this
Agreement.
(p) Mercantile will cooperate with Norwest to assess the impact of the
Transactions contemplated by this Agreement on Mercantile's continued actions to
comply with the FFIEC Requirements and Mercantile will take such action, in
consultation with Norwest, as may be necessary to amend Mercantile's Year 2000
project assessment and remediation plan in order to comply with FFIEC
Requirements. Mercantile will prepare a contingency plan for Mercantile to be
in compliance with FFIEC Requirements to be used in the event the Transactions
contemplated by this Agreement are not consummated. Mercantile will consult and
cooperate with Norwest concerning credit, customer, and vendor assessments and
criteria for FFIEC Requirements.
5. Covenants of Norwest. Norwest covenants and agrees with Mercantile and
Bank as follows:
(a) From the date hereof until the Effective Times, Norwest will maintain
its corporate existence in good standing; conduct, and cause the Norwest
Subsidiaries to conduct, their respective businesses in compliance with all
material obligations and duties imposed on them by all laws, governmental
regulations, rules and ordinances, and judicial orders, judgments and decrees
applicable to Norwest or the Norwest Subsidiaries, their businesses or their
properties; maintain all books and records of it and the Norwest Subsidiaries,
including all financial statements, in accordance with the accounting principles
and practices consistent with those used for the Norwest Financial Statements,
except for changes in such principles and practices required under generally
accepted accounting principles.
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<PAGE>
(b) Norwest will furnish to Mercantile and Bank all the information
concerning Norwest required for inclusion in a proxy statement or statements to
be sent to the shareholders of Mercantile and Bank, or in any statement or
application made by Mercantile to any governmental body in connection with the
Transactions contemplated by this Agreement.
(c) As promptly as practicable after the execution of this Agreement,
Norwest will file with the SEC a registration statement on Form S-4 (the
"Registration Statement") under the Securities Act and any other applicable
documents, relating to the shares of Norwest Common Stock to be delivered to the
sole shareholder of Mercantile pursuant to the Merger Agreement and to the
shareholders of Bank pursuant to the Consolidation Agreement, and will use its
best efforts to cause the Registration Statement to become effective. At the
time the Registration Statement becomes effective, the Registration Statement
will comply in all material respects with the provisions of the Securities Act
and the published rules and regulations thereunder, and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not false or
misleading, and at the time of mailing thereof to the Mercantile and Bank
shareholders, at the time of the Mercantile and Bank shareholders' meetings (or
the effective dates of any unanimous consent actions in lieu of meetings)
referred to in paragraph 4(c) hereof and at the Effective Times the prospectus
included as part of the Registration Statement, as amended or supplemented by
any amendment or supplement filed by Norwest (hereinafter the "Prospectus"),
will not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not false or misleading;
provided, however, that none of the provisions of this subparagraph shall apply
to statements in or omissions from the Registration Statement or the Prospectus
made in reliance upon and in conformity with information furnished by Mercantile
or any Mercantile Subsidiary for use in the Registration Statement or the
Prospectus.
(d) Norwest will file all documents required to be filed to list the
Norwest Common Stock to be issued pursuant to the Merger Agreement and the
Consolidation Agreement on the New York Stock Exchange and the Chicago Stock
Exchange and use its best efforts to effect said listings.
(e) The shares of Norwest Common Stock to be issued by Norwest to the
shareholders of Mercantile and Bank pursuant to this Agreement, the Merger
Agreement, and the Consolidation Agreement will, upon such issuance and delivery
to said shareholders pursuant to the Merger Agreement and the Consolidation
Agreement, be duly authorized, validly issued, fully paid and nonassessable.
The shares of Norwest Common Stock to be delivered to the shareholders of
Mercantile and Bank pursuant to the Merger Agreement and the Consolidation
Agreement are and will be free of any preemptive rights of the stockholders of
Norwest.
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<PAGE>
(f) Norwest will file all documents required to obtain, prior to the
Effective Times, all necessary Blue Sky permits and approvals, if any, required
to carry out the Transactions contemplated by this Agreement, will pay all
expenses incident thereto and will use its best efforts to obtain such permits
and approvals.
(g) Norwest will take all necessary corporate and other action and file
all documents required to obtain and will use its best efforts to obtain all
approvals of regulatory authorities, consents and approvals required of it to
carry out the Transactions contemplated by this Agreement and will cooperate
with Mercantile and Bank to obtain all such approvals and consents required by
Mercantile and Bank.
(h) Norwest will hold in confidence all documents and information
concerning Mercantile and Mercantile's Subsidiaries furnished to it and its
representatives in connection with the Transactions contemplated by this
Agreement and will not release or disclose such information to any other person,
except as required by law and except to its outside professional advisers in
connection with this Agreement, with the same undertaking from such professional
advisers. If the Transactions contemplated by this Agreement shall not be
consummated, such confidence shall be maintained and such information shall not
be used in competition with Mercantile (except to the extent that such
information can be shown to be previously known to Norwest, in the public
domain, or later acquired by Norwest from other legitimate sources) and, upon
request, all such documents, copies thereof or extracts therefrom shall
immediately thereafter be returned to Mercantile.
(i) Norwest will file any documents or agreements required to be filed in
connection with the Merger and the Consolidation under the Delaware General
Corporation Law and the National Bank Act, respectively.
(j) Norwest will use its best efforts to deliver to the Closing all
opinions, certificates and other documents required to be delivered by it at the
Closing.
(k) Norwest shall consult with Mercantile and Bank 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.
(l) Norwest shall give Mercantile and Bank notice of receipt of the
regulatory approvals referred to in paragraph 7(e).
(m) Neither Norwest nor any Norwest Subsidiary shall take any action which
with respect to Norwest would disqualify the Transaction as a "pooling of
interests" for accounting purposes.
(n) For a period not exceeding fifteen (15) days prior to the Closing
Date, subject to applicable securities laws and regulations and any obligations
of confidentiality to which Norwest may be subject, Norwest will permit
Mercantile and Bank and their
A-30
<PAGE>
respective representatives to examine its books, records and properties and
interview officers, employees and agents of Norwest at all reasonable times when
it is open for business. No such examination by Mercantile or Bank or their
respective representatives shall in any way affect, diminish or terminate any of
the representations, warranties or covenants of Norwest herein expressed.
6. Conditions Precedent to Obligation of Mercantile and Bank. The
obligation of Mercantile to effect the Merger and of Bank to effect the
Consolidation shall be subject to the satisfaction at or before the Time of
Filing of the following further conditions, which may be waived in writing by
Mercantile and Bank:
(a) Except as they may be affected by the Transactions contemplated hereby
and except to the extent such representations and warranties are by their
express provisions made as of a specified date and except for activities or
Transactions after the date of this Agreement made in the ordinary course of
business and not expressly prohibited by this Agreement, the representations and
warranties contained in paragraph 3 hereof shall be true and correct in all
respects material to Norwest and the Norwest Subsidiaries taken as a whole as if
made at the Time of Filing.
(b) Norwest shall have, or shall have caused to be, performed and observed
in all material respects all covenants, agreements and conditions hereof to be
performed or observed by it, Merger Co., and Norwest Bank at or before the Time
of Filing.
(c) Mercantile and Bank shall have received favorable certificates, dated
as of the Effective Date of the Merger and the Effective Date of the
Consolidation, signed by the Chairman, the President or any Executive Vice
President or Senior Vice President and by the Secretary or Assistant Secretary
of Norwest, as to the matters set forth in subparagraphs (a) and (b) of this
paragraph 6.
(d) (i) This Agreement and the Merger Agreement shall have been approved
by the unanimous written consent of the sole shareholder of Mercantile in
accordance with the provisions of Mercantile's Certificate of Incorporation and
the Delaware General Corporation Act, and (ii) this Agreement and the
Consolidation Agreement shall have been approved by the unanimous written
consent of the shareholders of the Bank or the affirmative vote of the holders
of the percentage of the outstanding shares of Bank required for approval of a
plan of consolidation in accordance with the provisions of the Bank's Articles
of Association and the National Bank Act.
(e) Norwest shall have received approval by the Federal Reserve Board and
by such other governmental agencies as may be required by law of the
Transactions contemplated by this Agreement, the Merger Agreement, and the
Consolidation Agreement and all waiting and appeal periods prescribed by
applicable law or regulation shall have expired.
A-31
<PAGE>
(f) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the Transactions contemplated by this Agreement.
(g) The shares of Norwest Common Stock to be delivered to the stockholders
of Mercantile and Bank pursuant to this Agreement, the Merger Agreement, and the
Consolidation Agreement shall have been authorized for listing on the New York
Stock Exchange and the Chicago Stock Exchange.
(h) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and be
continuing, or have been threatened and be unresolved. Norwest shall have
received all state securities law or blue sky authorizations necessary to carry
out the Transactions contemplated by this Agreement.
(i) Mercantile and Bank shall have received an opinion, dated the Closing
Date, of counsel to Mercantile and Bank, substantially to the effect that, for
federal income tax purposes: (i) the Merger will constitute a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code and the
Consolidation will constitute a reorganization within the meaning of Section
368(a)(1)(B) of the Code; (ii) no gain or loss will be recognized by the holders
of Mercantile Common Stock or Bank Common Stock upon receipt of Norwest Common
Stock except for cash received in lieu of fractional shares; (iii) the basis of
the Norwest Common Stock received by the shareholders of Mercantile and Bank
will be the same as the basis of Mercantile Common Stock or Bank Common Stock
exchanged therefor; and (iv) the holding period of the shares of Norwest Common
Stock received by the shareholders of Mercantile and Bank will include the
holding period of the Mercantile Common Stock or Bank Common Stock, provided
such shares of Mercantile Common Stock or Bank Common Stock were held as a
capital asset as of the Effective Time of the Merger or the Effective Time of
the Consolidation, as the case may be.
7. Conditions Precedent to Obligation of Norwest and Norwest Bank. The
obligation of Norwest to effect the Merger and of Norwest and Norwest Bank to
effect the Consolidation shall be subject to the satisfaction at or before the
Time of Filing of the following conditions, which may be waived in writing by
Norwest:
(a) Except as they may be affected by Transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or Transactions
or events occurring after the date of this Agreement made in the ordinary course
of business and not expressly prohibited by this Agreement, the representations
and warranties contained in paragraph 2 hereof shall be true and correct in all
respects material to Mercantile and the Mercantile Subsidiaries taken as a whole
as if made at the Time of Filing.
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<PAGE>
(b) Mercantile shall have, or shall have caused to be, performed and
observed in all material respects all covenants, agreements and conditions
hereof to be performed or observed by it at or before the Time of Filing.
(c) (i) This Agreement and the Merger Agreement shall have been approved
by the unanimous written consent of the sole shareholder of Mercantile in
accordance with the provisions of Mercantile's Certificate of Incorporation and
the Delaware General Corporation Law, and the National Bank Act, as applicable,
and (ii) this Agreement and the Consolidation Agreement shall have been approved
by the unanimous written consent of the shareholders of the Bank or the
affirmative vote of the holders of the percentage of the outstanding shares of
Bank required for approval of a plan of consolidation in accordance with the
provisions of the Bank's Articles of Association and the National Bank Act.
(d) Norwest shall have received favorable certificates dated as of the
Effective Date of the Merger and the Effective Date of the Consolidation signed
by the Chairman or President and by the Secretary or Assistant Secretary of
Mercantile, as to the matters set forth in subparagraphs (a) through (c) of this
paragraph 7.
(e) Norwest shall have received approval by all governmental agencies as
may be required by law of the Transactions contemplated by this Agreement, the
Merger Agreement, and the Consolidation Agreement and all waiting and appeal
periods prescribed by applicable law or regulation shall have expired. No
approvals, licenses or consents granted by any regulatory authority shall
contain any condition or requirement relating to Mercantile or any Mercantile
Subsidiary or to Norwest as a result of the Merger that, in the good faith
judgment of Norwest, is unreasonably burdensome to Norwest.
(f) Mercantile and each Mercantile Subsidiary shall have obtained any and
all material consents or waivers from other parties to loan agreements, leases
or other contracts material to Mercantile's or such subsidiary's business
required for the consummation of the Merger, and Mercantile and each Mercantile
Subsidiary shall have obtained any and all material permits, authorizations,
consents, waivers and approvals required for the lawful consummation by it of
the Merger and the Consolidation.
(g) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the Transactions contemplated by this Agreement.
(h) There shall be no facts with respect to Mercantile which would
disqualify the Transaction as a "pooling of interests" for accounting purposes
and Norwest shall have received from Burton, McCumber & Prichard, L.L.C. an
opinion to that effect.
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<PAGE>
(i) At any time since the date hereof the total number of shares of
Mercantile Common Stock and Bank Common Stock outstanding and subject to
issuance upon exercise (assuming for this purpose that phantom shares and other
share-equivalents constitute Mercantile Common Stock and Bank Common Stock) of
all warrants, options, conversion rights, phantom shares or other share-
equivalents, other than any option held by Norwest, shall not have exceeded
1,000 and 2,739,928, respectively.
(j) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and be
continuing, or have been threatened or be unresolved. Norwest shall have
received all state securities law or blue sky authorizations necessary to carry
out the Transactions contemplated by this Agreement.
(k) Norwest shall have received from the Chief Executive Officer and Chief
Financial Officer of Mercantile a letter, dated as of the effective date of the
Registration Statement and updated through the date of Closing, in form and
substance satisfactory to Norwest, to the effect that:
(i) the interim quarterly financial statements of Mercantile included or
incorporated by reference in the Registration Statement are prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the audited financial statements of Mercantile;
(ii) the amounts reported in the interim quarterly financial statements of
Mercantile agree with the general ledger of Mercantile;
(iii) the annual and quarterly financial statements of Mercantile and the
Mercantile Subsidiaries included in, or incorporated by reference in, the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the published
rules and regulations thereunder;
(iv) from September 30, 1998 (or, if later, since the date of the most
recent unaudited consolidated financial statements of Mercantile and the
Mercantile Subsidiaries as may be included in the Registration Statement)
to a date five (5) days prior to the effective date of the Registration
Statement or five (5) days prior to the Closing, there are no increases in
long-term debt, changes in the capital stock or decreases in stockholders'
equity of Mercantile and the Mercantile Subsidiaries, except in each case
for changes, increases or decreases which the Registration Statement
discloses have occurred or may occur or which are described in such
letters. For the same period, there have been no decreases in consolidated
net interest income, consolidated net interest income after provision for
credit losses, consolidated income before income taxes, consolidated net
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income and net income per share amounts of Mercantile and the Mercantile
Subsidiaries, or in income before equity in undistributed income of
subsidiaries, in each case as compared with the comparable period of the
preceding year, except in each case for changes, increases or decreases
which the Registration Statement discloses have occurred or may occur or
which are described in such letters;
(v) they have reviewed certain amounts, percentages, numbers of shares and
financial information which are derived from the general accounting records
of Mercantile and the Mercantile Subsidiaries, which appear in the
Registration Statement under the certain captions to be specified by
Norwest, and have compared certain of such amounts, percentages, numbers
and financial information with the accounting records of Mercantile and the
Mercantile Subsidiaries and have found them to be in agreement with
financial records and analyses prepared by Mercantile included in the
annual and quarterly financial statements, except as disclosed in such
letters.
(l) Mercantile and the Mercantile Subsidiaries considered as a whole shall
not have sustained since December 31, 1997 any material loss or interference
with their business from any civil disturbance or any fire, explosion, flood or
other calamity, whether or not covered by insurance.
(m) There shall be no reasonable basis for any proceeding, claim or action
of any nature seeking to impose, or that could result in the imposition on
Mercantile or any Mercantile Subsidiary of, any liability relating to the
release of hazardous substances as defined under any local, state or federal
environmental statute, regulation or ordinance including, without limitation,
CERCLA, which has had or could reasonably be expected to have a material adverse
effect upon Mercantile and its subsidiaries taken as a whole.
(n) Since December 31, 1997, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of Mercantile and the Mercantile Subsidiaries taken as a
whole (other than changes in banking laws or regulations, or interpretations
thereof, that affect the banking industry generally or changes in the general
level of interest rates).
(o) The waiver addressed to Bank from The Bank of New York dated July 22,
1998 shall be in full force and effect, and a certified original thereof shall
have been provided to Norwest.
(q) Either Mercantile shall be in material compliance with current FFIEC
Requirements or there shall be no feature of Mercantile's data processing,
operating or platform systems that would prevent those systems from being
successfully converted to Norwest systems on or before June 30, 1999.
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(r) Each shareholder of Mercantile and Bank who may be deemed to be an
"affiliate" of Mercantile or Bank within the meaning of such term as used in
Rule 145 under the Securities Act shall have executed and delivered the
Affiliate Letter.
(s) The employment agreements of even date between Graciela Gutierrez and
Edward J. Bacak shall be in full force and effect (unless such agreements are
not in force and effect as a result of the death or disability of Graciela
Gutierrez or Edward J. Bacak).
8. Employee Benefit Plans. Each person who is an employee of Mercantile
or any Mercantile Subsidiary as of the Effective Date of the Merger ("Mercantile
Employees") shall be eligible for participation in the employee welfare and
retirement plans of Norwest, as in effect from time to time, as follows:
(a) Employee Welfare Benefit Plans. Each Mercantile employee shall be
eligible for participation in the employee welfare benefit plans of Norwest
listed below subject to any eligibility requirements applicable to such plans
(and not subject to pre-existing condition exclusions, except with respect to
the Norwest Long-Term Care Plan) and shall enter each plan not later than the
first day of the calendar quarter which begins at least thirty-two (32) days
after the Effective Date of the Merger (provided, however, that the transition
from the Mercantile plans to the Norwest plans will be facilitated without gaps
in coverage to the participants and without duplication in costs of Norwest):
Medical Plan
Dental Plan
Vision Plan
Short Term Disability Plan
Long Term Disability Plan
Long Term Care Plan
Flexible Benefits Plan
Basic Group Life Insurance Plan
Group Universal Life Insurance Plan
Dependent Group Life Insurance Plan
Business Travel Accident Insurance Plan
Accidental Death and Dismemberment Plan
Severance Pay Plan (except for the employees named in paragraph 7(s)
and except for James S. Scott)
Mercantile Employees shall remain on the Mercantile Vacation Program through the
end of the calendar year of the Effective Date and become eligible for
participation in the Norwest Vacation Program on the first day of the calendar
year following the Effective Date, under the terms and conditions of the Norwest
Vacation Program on that date. Mercantile Employees shall receive credit for
years of service to Mercantile, the Mercantile Subsidiaries and any predecessors
of the Mercantile Subsidiaries (to the extent credited under the vacation and
short term disability programs of Mercantile) for the
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<PAGE>
purpose of determining benefits under the Norwest Vacation Program and Short
Term Disability Plan and Severance Pay Plan.
(b) Employee Retirement Benefit Plans. Each Mercantile Employee shall be
eligible for participation in the Norwest Savings-Investment Plan (the "SIP"),
subject to any eligibility requirements applicable to the SIP (with full credit
for years of past service to Mercantile and the Mercantile Subsidiaries for the
purpose of satisfying any eligibility and vesting periods applicable to the
SIP), and shall enter the SIP not later than the first day of the calendar
quarter which begins at least thirty-two (32) days after the Effective Date of
the Merger.
Each Mercantile Employee shall be eligible for participation, as a new
employee, in the Norwest Pension Plan under the terms thereof.
9. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Time of
Filing:
(i) by mutual written consent of the parties hereto;
(ii) by either Mercantile, if its Board of Directors determines by a
vote of a majority of the members of its entire Board, or Norwest, in the
event of either: (A) a breach by the other party of any representation or
warranty contained herein, which breach cannot be or has not been cured
within thirty (30) calendar days after the giving of written notice to the
breaching party of such breach; or (B) a breach by the other party of any
of the covenants or agreements contained herein, which breach cannot be or
has not been cured within thirty (30) calendar days after the giving of
written notice to the breaching party of such breach, provided that such
breach would entitle the non-breaching party not to effect the Merger under
Section 6 where the non-breaching party is Mercantile and under Section 7
where the non-breaching party is Norwest.
(iii) by either of the parties hereto upon written notice to the other
party if the Merger shall not have been consummated by April 30, 1999
unless such failure of consummation shall be due to the failure of the
party seeking to terminate to perform or observe in all material respects
the covenants and agreements hereof to be performed or observed by such
party; or
(iv) by Mercantile or Norwest upon written notice to the other party
if any court or governmental authority of competent jurisdiction shall have
issued a final order restraining, enjoining or otherwise prohibiting the
consummation of the Transactions contemplated by this Agreement.
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<PAGE>
(v) by Mercantile, within five (5) business days after the end of the
Index Measurement Period (as defined in subparagraph (c)(ii) below), if
both of the following conditions are satisfied:
(A) the Norwest Measurement Price is less than $28.00; and
(B) the number obtained by dividing the Norwest Measurement Price by the
closing price of Norwest Common Stock on the trading day immediately
preceding the date of this Agreement is less than the number obtained
by dividing the Final Index Price (as defined in subparagraph (c)
below) by the Initial Index Price (as defined in subparagraph (c)
below) and subtracting 15% from such quotient.
(b) Termination of this Agreement under this paragraph 9 shall not
release, or be construed as so releasing, either party hereto from any liability
or damage to the other party hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or willful
and material failure in performance of any of its covenants, agreements, duties
or obligations arising hereunder, and the obligations under paragraphs 1(f),
4(g), 5(h), and 10 shall survive such termination.
(c) For purposes of this paragraph 9:
(i) The "Company Market Capitalization" shall mean (a) the price of
one (1) share of the common stock of a given company at the close of the
trading day immediately preceding the date of this Agreement multiplied by
(b) the number of shares of common stock of such company outstanding as of
June 30, 1998 (adjusted for any stock dividend, reclassification,
recapitalization, exchange of shares or similar transaction between June
30, 1998 and the close of the trading day immediately preceding the date of
this Agreement).
(ii) The "Index Group" shall mean all of those companies listed on
Exhibit C the common stock of which is publicly traded and as to which
there is, during the period of twenty (20) trading days ending on the day
immediately preceding the effective date of the unanimous written consent
of the sole shareholder of Mercantile approving this Agreement and the
Merger Agreement (the "Index Measurement Period"), no pending publicly
announced proposal for such company to be acquired, nor has there been any
proposal by such company publicly announced subsequent to the day before
the date of this Agreement to acquire another company in exchange for stock
where, if the company to be acquired were to become a subsidiary of the
acquiring company, the company to be acquired would be a "significant
subsidiary" as defined in Rule 1-02 of Regulation S-X promulgated by the
SEC nor has there been any program publicly announced subsequent to the day
before the date of this Agreement to repurchase 5% or more of the
outstanding shares of such company's common stock.
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<PAGE>
(iii) "The Initial Index Price" shall mean the sum of the following,
calculated for each of the companies in the Index Group: (a) the closing
price per share of common stock of each such company on the trading day
immediately preceding the date of this Agreement multiplied by (b) the
Weighting Factor (as defined below) for each such company.
(iv) The "Final Index Price" shall mean the sum of the following,
calculated for each of the companies in the Index Group: (a) the Final
Price for each such company multiplied by (b) the Weighting Factor (as
defined below) for each such company.
(v) The "Final Price" of any company in the Index Group shall mean the
average of the daily closing prices of a share of common stock of such
company, as reported on the consolidated transaction reporting system for
the market or exchange on which such common stock is principally traded,
during the Index Measurement Period.
(vi) The "Total Market Capitalization" shall mean the sum of the
Company Market Capitalization for each of the companies in the Index Group.
(vii) The "Weighting Factor" for any given company shall mean the
Company Market Capitalization for such company divided by the Total Market
Capitalization.
If a Common Stock Adjustment occurs with respect to the shares of Norwest
or any company in the Index Group between the date of this Agreement and the
Mercantile shareholder meeting date, the closing prices for the common stock of
such company shall be appropriately and proportionately adjusted for the
purposes of the definitions above so as to be comparable to what the price would
have been if the record date of the Common Stock Adjustment had been immediately
following the Effective Time of the Merger.
10. Expenses. All expenses in connection with this Agreement and the
Transactions contemplated hereby, including without limitation legal and
accounting fees, incurred by Mercantile and Mercantile Subsidiaries shall be
borne by Mercantile, and all such expenses incurred by Norwest shall be borne by
Norwest.
11. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by either party hereto without the prior
written consent of the other party hereto.
12. Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto, except that Don Olegario
Vasquez-Rana shall be a third party beneficiary of paragraph 1(f) hereof.
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<PAGE>
13. Notices. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be in writing and shall be delivered in
person or shall be mailed by first class registered or certified mail, postage
prepaid, addressed as follows:
If to Norwest:
Norwest Corporation
Sixth and Marquette
Minneapolis, Minnesota 55479-1026
Attention: Secretary
If to Mercantile and Bank:
Mercantile Financial Enterprises, Inc.
c/o Mercantile Bank, National Association
835 East Levee Street
Brownsville, Texas 78520
Attention: Ms. Graciela Gutierrez
With a copy to:
Sullivan & Cromwell
1888 Century Park East
Los Angeles, California 90067
Attention: Stanley F. Farrar
14. Complete Agreement. This Agreement, the Merger Agreement, and
the Consolidation Agreement contain the complete agreement between the parties
hereto with respect to the Merger and other Transactions contemplated hereby and
supersede all prior agreements and understandings between the parties hereto
with respect thereto.
15. Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
16. Waiver and Other Action. Either party hereto may, by a signed
writing, give any consent, take any action pursuant to paragraph 9 hereof or
otherwise, or waive any inaccuracies in the representations and warranties by
the other party and compliance by the other party with any of the covenants and
conditions herein.
17. Amendment. At any time before the Time of Filing, the parties
hereto, by action taken by their respective Boards of Directors or pursuant to
authority delegated by their respective Boards of Directors, may amend this
Agreement; provided, however, that no amendment after approval by the
shareholders of Mercantile or Bank shall be made which changes in a manner
adverse to such shareholders the consideration to be provided
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<PAGE>
to said shareholders pursuant to this Agreement, the Merger Agreement, or the
Consolidation Agreement, as applicable.
18. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
19. Non-Survival of Representations and Warranties. No
representation or warranty contained in the Agreement, the Merger Agreement, or
the Consolidation Agreement shall survive the Merger or except as set forth in
paragraph 9(b), the termination of this Agreement. Paragraphs 1(f) and 10 shall
survive the Merger and the Consolidation.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
[The rest of this page has intentionally been left blank.]
_______________________________________________________________
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NORWEST CORPORATION
By /s/ John E. Ganoe
----------------------------
Its Executive Vice President
----------------------------
MERCANTILE FINANCIAL ENTERPRISES, INC.
By /s/ Don Olegario Vazquez-Rana
-----------------------------
Its Chairman of the Board
-----------------------------
MERCANTILE BANK,
NATIONAL ASSOCIATION
By /s/ Graciela Gutierrez
------------------------------
Its Director General and Chief
----------------------------
Executive Officer
----------------------------
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<PAGE>
EXHIBIT A-1
AGREEMENT AND PLAN OF MERGER
between
MERCANTILE FINANCIAL ENTERPRISES, INC.,
a Delaware corporation
(the surviving corporation)
and
MBS MERGER CO.,
a Delaware corporation
(the merged corporation)
This Agreement and Plan of Merger dated as of _____________, 1998,
between MERCANTILE FINANCIAL ENTERPRISES, INC. ("Mercantile"), a Delaware
corporation (hereinafter sometimes called "Mercantile" and sometimes called the
"surviving corporation"), and MBS MERGER CO., a Delaware corporation ("MBS
Merger Co.") (said corporations being hereinafter sometimes referred to as the
"constituent corporations").
WHEREAS, MBS Merger Co., a wholly-owned subsidiary of Norwest
Corporation ("Norwest"), was incorporated by Certificate of Incorporation filed
in the office of the Secretary of State of the State of Delaware on
____________, 1998, and said corporation is now a corporation subject to and
governed by the provisions of the Delaware General Corporation Law. MBS Merger
Co. has authorized capital stock of 1,000 shares of common stock, par value of
$1.00 per share ("MBS Merger Co. Common Stock"). As of _____________, 1998,
there were 1,000 shares of MBS Merger Co. Common Stock outstanding and no shares
were held in the treasury; and
WHEREAS, Mercantile was incorporated by Certificate of Incorporation
filed in the office of the Secretary of State of the State of Delaware on
_______________, 19__, and said corporation is now a corporation subject to and
governed by the provisions of the Delaware General Corporation Law, with
authorized capital stock consisting of 100,000 shares of capital stock
consisting of 100,000 shares of common stock, $1.00 par value per share
("Mercantile Common Stock"), of which _________ shares of Mercantile Common
Stock were outstanding and no shares of Mercantile Common Stock were held in the
treasury; and
WHEREAS, Norwest, Mercantile, and Mercantile Bank, National
Association are parties to an Agreement and Plan of Reorganization dated as of
October __, 1998 (the "Reorganization Agreement"), setting forth certain
representations, warranties and covenants in connection with the merger provided
for herein;
<PAGE>
WHEREAS, the directors, or a majority of them, of each of the
constituent corporations respectively deem it advisable for the welfare and
advantage of said corporation and for the best interests of the respective
shareholders of said corporations that said corporations merge and that MBS
Merger Co. be merged with and into Mercantile, with Mercantile continuing as the
surviving corporation, on the terms and conditions hereinafter set forth in
accordance with the provisions of the Delaware General Corporation Law, which
statute permits such merger; and
NOW, THEREFORE, the parties hereto, subject to the approval of the
shareholders of MBS Merger Co. and Mercantile, in consideration of the premises
and of the mutual covenants and agreements contained herein and of the benefits
to accrue to the parties hereto, have agreed and do hereby agree that MBS Merger
Co. shall be merged with and into Mercantile pursuant to the laws of the State
of Delaware, and do hereby agree upon, prescribe and set forth the terms and
conditions of the merger of MBS Merger Co. with and into Mercantile, the mode of
carrying said merger into effect, the manner and basis of exchanging the shares
of Mercantile Common Stock for shares of common stock, par value $1-2/3 per
share, of Norwest ("Norwest Common Stock"), and such other provisions with
respect to said merger as are deemed necessary or desirable, as follows:
FIRST: At the time of merger, MBS Merger Co. shall be merged with and
into Mercantile, one of the constituent corporations, which shall be the
surviving corporation, and the separate existence of MBS Merger Co. shall cease
and the name of the surviving corporation shall remain "Mercantile Financial
Enterprises, Inc."
SECOND: The Articles of Incorporation of Mercantile at the time of
merger shall be the Articles of Incorporation of the surviving corporation until
amended according to law.
THIRD: The Bylaws of Mercantile at the time of merger shall be and
remain the Bylaws of the surviving corporation until amended according to the
provisions of the Articles of Incorporation of the surviving corporation or of
said Bylaws.
FOURTH: At the time of merger, the following-named persons shall
become the directors of the surviving corporation and shall hold office from the
time of merger until their respective successors are elected and qualify:
[To be designated by MBS Merger Co.]
FIFTH: The officers of MBS Merger Co. at the time of merger shall
become and remain the officers of the surviving corporation and shall hold
office from the time of merger until their respective successors are elected or
appointed and qualify.
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<PAGE>
SIXTH: The manner and basis of converting the shares of
Mercantile Common Stock shall be as follows:
1. [To conform to Reorganization Agreement.]
2. As soon as practicable after the merger becomes effective,
each holder of a certificate which, prior to the effective time of the
merger, represented shares of Mercantile Common Stock outstanding
immediately prior to the time of merger shall be entitled, upon surrender
of such certificate for cancellation to the surviving corporation or to
Norwest Bank Minnesota, National Association, as the designated agent of
the surviving corporation (the "Agent"), to receive a new certificate for
the number of whole shares of Norwest Common Stock to which such holder
shall be entitled on the basis set forth in paragraph 1 above. Until so
surrendered each certificate which, immediately prior to the time of
merger, represented shares of Mercantile Common Stock shall not be
transferable on the books of the surviving corporation but shall be deemed
to evidence only the right to receive (except for the payment of dividends
as provided below) the number of whole shares of Norwest Common Stock
issuable on the basis above set forth; provided, however, until the holder
of such certificate for Mercantile Common Stock shall have surrendered the
same for exchange as above set forth, no dividend payable to holders of
record of Norwest Common Stock as of any date subsequent to the effective
date of merger shall be paid to such holder with respect to the shares of
Norwest Common Stock, if any, issuable in connection with the merger, but,
upon surrender and exchange thereof as herein provided, there shall be paid
by the surviving corporation or the Agent to the record holder of such
certificate representing Norwest Common Stock issued in exchange therefor
an amount with respect to such shares of Norwest Common Stock equal to all
dividends that shall have been paid or become payable to holders of record
of Norwest Common Stock between the effective date of merger and the date
of such exchange.
3. If between the date hereof and the time of merger, shares of
Norwest Common Stock shall be changed into a different number of shares or
a different class of shares by reason of any 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 the number of shares of Norwest Common
Stock, if any, into which a share of Mercantile Common Stock shall be
converted on the basis above set forth, will be appropriately and
proportionately adjusted so that the number of such shares of Norwest
Common Stock into which a share of Mercantile Common Stock shall be
converted will equal the number of shares of Norwest Common Stock which the
holders of shares of Mercantile Common Stock would have received pursuant
to such reclassification, recapitalization, split-up, combination, exchange
of shares or readjustment, or stock dividend had the record date therefor
been immediately following the time of merger.
3
<PAGE>
4. No fractional shares of Norwest Common Stock and no
certificates or scrip certificates therefor shall be issued to represent
any such fractional interest, and any holder of a fractional interest shall
be paid an amount of cash equal to the product obtained by multiplying the
fractional share interest to which such holder is entitled by the average
of the closing prices of a share of Norwest Common Stock as reported by the
consolidated tape of the New York Stock Exchange for each of the five (5)
trading days ending on the day immediately preceding the meeting of
shareholders held to approve the merger.
5. Each share of MBS Merger Co. Common Stock issued and
outstanding at the time of merger shall be converted into and exchanged for
one (1) share of the surviving corporation after the time of merger.
SEVENTH: The merger provided for by this Agreement shall be
effective as follows:
1. The effective date of merger shall be the date on which the
Articles of Merger (as described in subparagraph 1(b) of this Article
Seventh) shall be delivered to and filed by the Secretary of State of the
State of Delaware; provided, however, that all of the following actions
shall have been taken in the following order:
a. This Agreement shall be approved and adopted on behalf
of MBS Merger Co. and Mercantile in accordance with the Delaware
General Corporation Law; and
b. Articles of merger (with this Agreement attached as part
thereof) with respect to the merger, setting forth the information
required by the Delaware General Corporation Law, shall be executed by
the President or a Vice President of MBS Merger Co. and by the
Secretary or an Assistant Secretary of MBS Merger Co., and by the
President or a Vice President of Mercantile and by the Secretary or an
Assistant Secretary of Mercantile, and shall be filed in the office of
the Secretary of State of the State of Delaware in accordance with the
Delaware General Corporation Law; and
2. The merger shall become effective as of 11:59 p.m. (the "time
of merger") on the effective date of merger.
4
<PAGE>
EIGHTH: At the time of merger:
1. The separate existence of MBS Merger Co. shall cease, and the
corporate existence and identity of Mercantile shall continue as the
surviving corporation.
2. The merger shall have the other effects prescribed by Section
____ of the Delaware General Corporation Law.
NINTH: The following provisions shall apply with respect to
the merger provided for by this Agreement:
1. If at any time Mercantile shall consider or be advised that
any further assignment or assurance in law or other action is necessary or
desirable to vest, perfect or confirm in Mercantile the title to any
property or rights of MBS Merger Co. acquired or to be acquired as a result
of the merger provided for herein, the proper officers and directors of
Mercantile and MBS Merger Co. may execute and deliver such deeds,
assignments and assurances in law and take such other action as may be
necessary or proper to vest, perfect or confirm title to such property or
right in Mercantile and otherwise carry out the purposes of this Agreement.
2. For the convenience of the parties and to facilitate the
filing of this Agreement, any number of counterparts hereof may be executed
and each such counterpart shall be deemed to be an original instrument.
3. This Agreement and the legal relations among the parties
hereto shall be governed by and construed in accordance with the laws of
the State of Delaware.
4. This Agreement cannot be altered or amended except pursuant
to an instrument in writing signed by both of the parties hereto.
5. At any time prior to the filing of Articles of Merger with the
Secretary of State of the State of Delaware, this Agreement may be
terminated in accordance with the terms of the Reorganization Agreement
upon approval by the Board of Directors of either of the constituent
corporations notwithstanding the approval of the shareholders of either
constituent corporation.
6. Mercantile will be responsible for the payment of all fees and
franchise taxes that may be owed by MBS Merger Co. and Mercantile will be
obligated to pay such fees and franchise taxes if the same are not timely
paid.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have cause this Agreement and
Plan of Merger to be signed in their respective corporate names by the
undersigned officers and their respective corporate seals to be affixed hereto,
pursuant to authority duly given by their respective Boards of Directors, all as
of the day and year first above written.
MBS MERGER CO.
By:__________________________________
[Title]___________________________
Attest:
_____________________________
____________________, Secretary [Assistant Secretary]
MERCANTILE FINANCIAL SERVICES, INC.
By:__________________________________
[Title]___________________________
Attest:
_____________________________
____________________, Secretary [Assistant Secretary]
[Signature page to Agreement and Plan of Merger]
6
<PAGE>
EXHIBIT A-2
AGREEMENT AND PLAN OF CONSOLIDATION
This Agreement and Plan of Consolidation (the "Consolidation
Agreement") is dated as of ______________, 19__, between NORWEST INTERIM BANK,
NATIONAL ASSOCIATION ("Interim Bank") and MERCANTILE BANK, NATIONAL ASSOCIATION,
Brownsville, Texas, a national banking association ("Bank"). Interim Bank and
Bank are sometimes referred to herein as the "Consolidating Banks."
PREAMBLE
Interim Bank and Bank acknowledge and confirm the following:
(a) Interim Bank is a national banking association having its
principal office and place of business at ______________________, ________
County, Texas _______. As of __________, 1998, Interim Bank had capital of
$100,000, divided into 1,000 shares of common stock, par value $100 per
share ("Interim Bank Common Stock"), and surplus of $20,000.
(b) Bank is a national banking association having its principal
office and place of business at 835 East Levee Street, Brownsville, Cameron
County, Texas 78520. As of __________, Bank had capital of $_________,
divided into 2,739,928 shares of common stock, par value $1.00 per share
("Bank Common Stock"), surplus of $______, and retained earnings of
$_______.
(c) Mercantile Financial Enterprises, Inc., Bank, and Norwest
Corporation ("Norwest") have entered into an Agreement and Plan of
Reorganization dated as of October __, 1998 (the "Reorganization
Agreement"), which Reorganization Agreement contemplates the transactions
to be effected by this Consolidation Agreement.
(d) A majority of the Boards of Directors of Interim Bank and of
Bank have duly approved this Consolidation Agreement and authorized its
execution.
<PAGE>
(e) It is the intent of the parties hereto to effect a corporate
reorganization which qualifies as a tax-free reorganization pursuant to
Section 368(a)(1)(B) of the Internal Revenue Code.
AGREEMENTS
IN CONSIDERATION OF THE PREMISES, Interim Bank and Bank make this
Consolidation Agreement and fix the terms and conditions of the Consolidation of
Interim Bank and Bank (the "Consolidation") as follows:
SECTION 1
1.1 Pursuant to the authority of and in accordance with the provisions of
12 U.S.C. 215, Interim Bank shall be consolidated with Bank, under the charter
of Bank (the "Consolidated Bank").
1.2 The name of the Consolidated Bank shall be "Mercantile Bank, National
Association."
1.3 The Consolidation shall be effective as of 12:01 a.m. on the date
specified in the certificate of approval to be issued by the Comptroller of the
Currency of the United States, under the seal of his office, approving the
Consolidation (the "Effective Date").
1.4 The business of the Consolidated Bank shall be that of a national
banking association and shall be conducted at the main office of the
Consolidated Bank, which shall be located at 835 East Levee Street, Brownsville,
Cameron County, Texas 78520, and at its legally established branches.
SECTION 2
As of the Effective Date:
2.1 The corporate existences of the Consolidating Banks shall be
consolidated into the Consolidated Bank.
2.2 All rights, franchises, and interests of the Consolidating Banks
in and to every type of property (real, personal and mixed) and choses in action
shall be transferred to and vested in the Consolidated Bank by virtue of the
Consolidation without any deed or other transfer. The Consolidated Bank, upon
the Consolidation and without any order or other action on the part of any court
or otherwise, shall hold and enjoy all rights of property, franchises, and
interests, including appointments, designations, and nominations, and all other
rights and
2
<PAGE>
interests as trustee, executor, administrator, registrar of stocks and bonds,
guardian of estates, assignee, receiver, and in every other fiduciary capacity,
in the same manner and to the same extent as such rights, franchises, and
interests were held or enjoyed by either of the Consolidating Banks at the time
of Consolidation.
2.3 The Consolidated Bank shall be liable for all liabilities of
every kind and description, including liabilities arising out of the operation
of a trust department, of each of the Consolidating Banks existing as of the
Effective Date.
2.4 The amount of capital stock of the Consolidated Bank shall be
$________, divided into _____ shares of common stock, each of $____ par value,
and at the time the Consolidation shall become effective, the Consolidated Bank
shall have a surplus of $________ and retained earnings which, when combined
with the capital and surplus, will be equal to the combined capital structures
of the Consolidating Banks as stated in the preamble of this Consolidation
Agreement, adjusted, however, for the results of operations, the payment of
dividends, if any, between __________, and the Effective Date, and the payment
provided for in Section 3.2 hereof.
SECTION 3
As of the Effective Date:
3.1 [To conform to Reorganization Agreement]
3.2 As soon as practicable after the consolidation becomes effective, each
holder of a certificate which, prior to the effective time of the consolidation,
represented shares of Bank Common Stock outstanding immediately prior to the
time of consolidation (other than shares held by Mercantile) shall be entitled,
upon surrender of such certificate for cancellation to Norwest Bank Minnesota,
National Association, as the designated agent of the Consolidated Bank (the
"Agent"), to receive a new certificate representing the number of whole shares
of Norwest Common Stock to which such holder shall be entitled on the basis
above set forth. Until so surrendered each certificate which, immediately prior
to the time of consolidation, represented shares of Bank Common Stock shall not
be transferable on the books of the Consolidated Bank but shall be deemed
(except for the payment of dividends as provided below) to evidence only the
right to receive the number of whole shares of Norwest Common Stock issuable on
the basis above set forth; provided, however, that, until the holder of such
certificate shall have surrendered the same as above set forth, no dividend
payable to holders of record of Norwest Common Stock as of any date subsequent
to the effective date of consolidation shall be paid to such holder with respect
to the shares of Norwest Common Stock issuable in connection with the
consolidation, but, upon surrender and exchange thereof as herein provided,
there shall be paid by the
3
<PAGE>
Agent to the record holder of such certificate representing Norwest Common Stock
issued in exchange therefor an amount with respect to such shares of Norwest
Common Stock equal to all dividends that shall have been paid or become payable
to holders of record of Norwest Common Stock between the effective date of the
consolidation and the date of such exchange.
3.3 The shares of Interim Bank outstanding immediately prior to the
time of Consolidation shall be converted into and exchanged for _______ shares
of the Consolidated Bank, plus cash in the amount of $120,000.
3.4 From and after the Effective Date, there shall be no transfers on
the stock transfer books of the Consolidated Bank of the shares of Bank Common
Stock or Interim Bank Common Stock which were issued and outstanding immediately
prior to the Effective Date.
SECTION 4
4.1 As of the Effective Date, the Articles of Association of the
Consolidated Bank shall be the Articles of Association of Bank and shall read in
their entirety as set forth in Appendix A attached hereto, and the Consolidated
Bank shall be authorized under such Articles of Association to issue _______
shares of common stock, par value $____ per share.
4.2 The by-laws of Bank as they exist at the Effective Date shall continue
in full force as the by-laws of the Consolidated Bank until altered, amended, or
repealed as provided therein or as provided by law.
4.3 As of the Effective Date, the following named persons shall serve
as the Board of Directors of the Consolidated Bank until the next annual meeting
of the shareholders or until such time as their successors have been elected and
have qualified:
-------------------------------
-------------------------------
-------------------------------
4.4 The officers of Bank holding office at the Effective Date shall
continue as the officers of the Consolidated Bank for the term prescribed in the
by-laws or until the Board of Directors otherwise shall determine.
4
<PAGE>
SECTION 5
5.1 This Consolidation Agreement shall be submitted to the shareholders of
Bank and Interim Bank, respectively, for approval at meetings to be called and
held in accordance with the articles of association of Bank and the articles of
association of Interim Bank, and in accordance with applicable provisions of
law. Such approval by the shareholders shall require the affirmative vote of the
shareholders of each of the Consolidating Banks owning at least two-thirds of
its capital stock outstanding.
SECTION 6
6.1 The Consolidation shall be subject to and conditioned upon the
following:
(a) approval of this Consolidation Agreement by the shareholders of
Bank and Interim Bank as required by law;
(b) approval of the Consolidation by all appropriate banking and
regulatory authorities and the satisfaction of all other requirements
prescribed by law necessary for consummation of the Consolidation; and
(c) satisfaction of the conditions precedent set forth in paragraphs
6 and 7 of the Reorganization Agreement.
6.2 At any time before the Effective Date, if any of the following
circumstances obtain, this Consolidation Agreement may be terminated, at the
election of Bank or Interim Bank, by written notice from the party so electing
to the other, or the consummation of the Consolidation may be postponed for such
period, and subject to such further rights of Bank and Interim Bank, or either
of them, to terminate this Consolidation Agreement as Bank and Interim Bank may
agree in writing:
(a) by mutual consent of the Boards of Directors of the Consolidating
Banks if consummation of the Consolidation would be inadvisable in the
opinion of said Boards; or
(b) by action of the Board of Directors of any party hereto if the
Reorganization Agreement is terminated.
SECTION 7
7.1 Bank and Interim Bank, by mutual consent of their respective Boards of
Directors, may amend this Consolidation Agreement before the Effective Date;
provided, however, that after this Consolidation Agreement has been approved by
5
<PAGE>
the shareholders of Bank, no such amendment shall affect the rights of such
shareholders of Bank in a manner which is materially adverse to such
shareholders.
7.2 This Consolidation Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, Bank and Interim Bank have caused this Consolidation
Agreement to be executed by their respective duly authorized officers and their
corporate seals, if any, to be hereunto affixed as of the date first above
written, pursuant to a resolution of each Consolidating Bank's Board of
Directors, acting by a majority thereof.
(NO BANK SEAL) NORWEST INTERIM BANK,
NATIONAL ASSOCIATION
ATTEST:
By:__________________________________
Its:_____________________________
__________________________
Secretary
STATE OF TEXAS )
) ss
COUNTY OF_______________)
On this _____ day of __________, 19__, before me, a Notary Public for
the State and County aforesaid, personally came___________________________
_________________________________, as _________________________________, and
_______________________________, as ________________________________, of NORWEST
INTERIM BANK, NATIONAL ASSOCIATION, and each in his or her said capacity
acknowledged the foregoing instrument to be the act and deed of said bank.
WITNESS my official seal and signature this day and year aforesaid.
_____________________________________
(Seal of Notary) Notary Public________________________
County
My Commission Expires________________
6
<PAGE>
(BANK SEAL) MERCANTILE BANK,
NATIONAL ASSOCIATION
ATTEST:
By:__________________________________
Its:_____________________________
__________________________
Secretary
STATE OF TEXAS )
) ss
COUNTY OF_______________)
On this _____ day of __________, 19__, before me, a Notary Public for
the State and County aforesaid, personally came
_____________________________________, as _________________________________, and
_______________________________, as ________________________________, of
MERCANTILE BANK, NATIONAL ASSOCIATION, and each in his or her said capacity
acknowledged the foregoing instrument to be the act and deed of said bank and
the seal affixed thereto to be its seal.
WITNESS my official seal and signature this day and year aforesaid.
_____________________________________
(Seal of Notary) Notary Public,_______________________
County
My Commission Expires________________
7
<PAGE>
EXHIBIT B
Norwest Corporation
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-1026
Attn: Secretary
Gentlemen:
I have been advised that I might be considered to be an "affiliate,"
as that term is defined for purposes of paragraphs (c) and (d) of Rule 145
("Rule 145") promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act") of Mercantile Financial Enterprises, Inc., a Delaware corporation
("Mercantile") [Mercantile Bank, National Association, a national banking
association ("Bank")].
Pursuant to an Agreement and Plan of Reorganization, dated as of
October 28, 1998 (the "Reorganization Agreement") between Mercantile,
[Mercantile Bank, National Association/Mercantile Financial Enterprises, Inc.]
and Norwest Corporation, a Delaware corporation ("Norwest"), it is contemplated
that a wholly-owned subsidiary of Norwest will merge with and into Mercantile
(the "Merger") [Mercantile will merge with and into a wholly-owned national bank
subsidiary of Norwest] and as a result, I will receive in exchange for each
share of Common Stock, par value $1.00 per share, of Mercantile ("Mercantile
Common Stock") owned by me immediately prior to the Effective Time of the Merger
(as defined in the Reorganization Agreement), a number of shares of Common
Stock, par value $1-2/3 per share, of Norwest ("Norwest Common Stock"), as more
specifically set forth in the Reorganization Agreement.
I hereby agree as follows:
I will not offer to sell, transfer or otherwise dispose of any of the
shares of Mercantile Common Stock or Norwest Common Stock held by me during the
30 days prior to the Effective Time of the Merger.
I will not offer to sell, transfer or otherwise dispose of any of the
shares of Norwest Common Stock issued to me pursuant to the Merger (the "Stock")
except (a) in compliance with the applicable provisions of Rule 145, (b) in a
transaction that is otherwise exempt from the registration requirements of the
Securities Act, or (c) in an offering registered under the Securities Act.
I will not sell, transfer or otherwise dispose of any Norwest Common
Stock or in any way reduce my risk relative to any shares of any Norwest common
Stock issued to me pursuant to the Merger until such time as financial results
covering at least 30 days of post-Merger combined operations of Mercantile and
Norwest have been published.
<PAGE>
I consent to the endorsement of the Stock issued to me pursuant to the
Merger with a restrictive legend which will read substantially as follows:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended (the "Act"), applies, and may be sold or otherwise
transferred only in compliance with the limitations of such Rule 145,
or upon receipt by Norwest Corporation of an opinion of counsel
reasonably satisfactory to it that some other exemption from
registration under the Act is available, or pursuant to a registration
statement under the Act."
Norwest's transfer agent shall be given an appropriate stop transfer
order and shall not be required to register any attempted transfer of the shares
of the Stock, unless the transfer has been effected in compliance with the terms
of this letter agreement.
It is understood and agreed that this letter agreement shall terminate
and be of no further force and effect and the restrictive legend set forth above
shall be removed by delivery of substitute certificates without such legend, and
the related stop transfer restrictions shall be lifted forthwith, if (a) (i) any
such shares of Stock shall have been registered under the Securities Act for
sale, transfer or other disposition by me or on my behalf and are sold,
transferred or otherwise disposed of, or (ii) any such shares of Stock are sold
in accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule
144 promulgated under the Securities Act, or (iii) I am not at the time of such
disposition an affiliate of Norwest and have been the beneficial owner of the
Stock for at least one year (or such other period as may be prescribed
thereunder) and Norwest has filed with the Commission all of the reports it is
required to file under the Securities Exchange Act of 1934, as amended, during
the preceding twelve months, or (iv) I am not and have not been for at least
three months an affiliate of Norwest and have been the beneficial owner of the
Stock for at least two years (or such other period as may be prescribed by the
Securities Act, and the rules and regulations promulgated thereunder), or (v)
Norwest shall have received an opinion of counsel acceptable to Norwest to the
effect that the stock transfer restrictions and the legend are not required, and
(b) financial results covering at least 30 days of post-Merger combined
operations have been published.
I have carefully read this letter agreement and the Reorganization
Agreement and have discussed their requirements and other applicable limitations
upon my ability to offer to sell, transfer or otherwise dispose of shares of
Mercantile Common Stock, Norwest Common Stock, or the Stock, to the extent I
felt necessary, with my counsel or counsel for Mercantile.
Sincerely,
_____________________________
2
<PAGE>
EXHIBIT C
BB&T Corporation
BancOne CorporationBankBoston CorporationBank of New York
Company, Inc.
Bankers Trust Corporation Chase Manhattan Corporation
CiticorpComerica, Inc.
Crestar Financial Corporation
Fifth Third BancorpFirst Union CorporationFleet Financial Group,
Inc.
Huntington Bancshares
KeyCorpMellon Bank Corporation
Mercantile BancorpNational City CorporationBankAmerica
Corporation
Northern Trust CorporationPNC Financial Corporation
Republic Financial Corporation
Republic New York CorporationSignet Banking Corporation
SouthTrust Corporation
State Street Boston Corporation
Summit BancorpSuntrust Banks, Inc.
UnionBanCal Corp.
U.S. Bancorp
Wachovia Corporation
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF CONSOLIDATION
<PAGE>
AGREEMENT AND PLAN OF CONSOLIDATION
This Agreement and Plan of Consolidation (the "Consolidation
Agreement") is dated as of ______________, 19__, between NORWEST INTERIM BANK,
NATIONAL ASSOCIATION ("Interim Bank") and MERCANTILE BANK, NATIONAL ASSOCIATION,
Brownsville, Texas, a national banking association ("Bank"). Interim Bank and
Bank are sometimes referred to herein as the "Consolidating Banks."
PREAMBLE
Interim Bank and Bank acknowledge and confirm the following:
(a) Interim Bank is a national banking association having its
principal office and place of business at ______________________, ________
County, Texas _______. As of __________, 1998, Interim Bank had capital of
$100,000, divided into 1,000 shares of common stock, par value $100 per
share ("Interim Bank Common Stock"), and surplus of $20,000.
(b) Bank is a national banking association having its principal
office and place of business at 835 East Levee Street, Brownsville, Cameron
County, Texas 78520. As of __________, Bank had capital of $_________,
divided into 2,739,928 shares of common stock, par value $1.00 per share
("Bank Common Stock"), surplus of $______, and retained earnings of
$_______.
(c) Mercantile Financial Enterprises, Inc., Bank, and Norwest
Corporation ("Norwest") have entered into an Agreement and Plan of
Reorganization dated as of October __, 1998 (the "Reorganization
Agreement"), which Reorganization Agreement contemplates the transactions
to be effected by this Consolidation Agreement.
(d) A majority of the Boards of Directors of Interim Bank and of
Bank have duly approved this Consolidation Agreement and authorized its
execution.
(e) It is the intent of the parties hereto to effect a corporate
reorganization which qualifies as a tax-free reorganization pursuant to
Section 368(a)(1)(B) of the Internal Revenue Code.
AGREEMENTS
IN CONSIDERATION OF THE PREMISES, Interim Bank and Bank make this
Consolidation Agreement and fix the terms and conditions of the Consolidation of
Interim Bank and Bank (the "Consolidation") as follows:
B-1
<PAGE>
SECTION 1
1.1 Pursuant to the authority of and in accordance with the provisions of
12 U.S.C. 215, Interim Bank shall be consolidated with Bank, under the charter
of Bank (the "Consolidated Bank").
1.2 The name of the Consolidated Bank shall be "Mercantile Bank, National
Association."
1.3 The Consolidation shall be effective as of 12:01 a.m. on the date
specified in the certificate of approval to be issued by the Comptroller of the
Currency of the United States, under the seal of his office, approving the
Consolidation (the "Effective Date").
1.4 The business of the Consolidated Bank shall be that of a national
banking association and shall be conducted at the main office of the
Consolidated Bank, which shall be located at 835 East Levee Street, Brownsville,
Cameron County, Texas 78520, and at its legally established branches.
SECTION 2
As of the Effective Date:
2.1 The corporate existences of the Consolidating Banks shall be
consolidated into the Consolidated Bank.
2.2 All rights, franchises, and interests of the Consolidating Banks
in and to every type of property (real, personal and mixed) and chooses in
action shall be transferred to and vested in the Consolidated Bank by virtue of
the Consolidation without any deed or other transfer. The Consolidated Bank,
upon the Consolidation and without any order or other action on the part of any
court or otherwise, shall hold and enjoy all rights of property, franchises, and
interests, including appointments, designations, and nominations, and all other
rights and interests as trustee, executor, administrator, registrar of stocks
and bonds, guardian of estates, assignee, receiver, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises,
and interests were held or enjoyed by either of the Consolidating Banks at the
time of Consolidation.
2.3 The Consolidated Bank shall be liable for all liabilities of
every kind and description, including liabilities arising out of the operation
of a trust department, of each of the Consolidating Banks existing as of the
Effective Date.
2.4 The amount of capital stock of the Consolidated Bank shall be
$________, divided into _____ shares of common stock, each of $____ par value,
and at the time the Consolidation shall become effective, the Consolidated Bank
shall have a surplus of
B-2
<PAGE>
$________ and retained earnings which, when combined with the capital and
surplus, will be equal to the combined capital structures of the Consolidating
Banks as stated in the preamble of this Consolidation Agreement, adjusted,
however, for the results of operations, the payment of dividends, if any,
between __________, and the Effective Date, and the payment provided for in
Section 3.2 hereof.
SECTION 3
As of the Effective Date:
3.1 [To conform to Reorganization Agreement]
3.2 As soon as practicable after the consolidation becomes effective, each
holder of a certificate which, prior to the effective time of the consolidation,
represented shares of Bank Common Stock outstanding immediately prior to the
time of consolidation (other than shares held by Mercantile) shall be entitled,
upon surrender of such certificate for cancellation to Norwest Bank Minnesota,
National Association, as the designated agent of the Consolidated Bank (the
"Agent"), to receive a new certificate representing the number of whole shares
of Norwest Common Stock to which such holder shall be entitled on the basis
above set forth. Until so surrendered each certificate which, immediately prior
to the time of consolidation, represented shares of Bank Common Stock shall not
be transferable on the books of the Consolidated Bank but shall be deemed
(except for the payment of dividends as provided below) to evidence only the
right to receive the number of whole shares of Norwest Common Stock issuable on
the basis above set forth; provided, however, that, until the holder of such
certificate shall have surrendered the same as above set forth, no dividend
payable to holders of record of Norwest Common Stock as of any date subsequent
to the effective date of consolidation shall be paid to such holder with respect
to the shares of Norwest Common Stock issuable in connection with the
consolidation, but, upon surrender and exchange thereof as herein provided,
there shall be paid by the Agent to the record holder of such certificate
representing Norwest Common Stock issued in exchange therefor an amount with
respect to such shares of Norwest Common Stock equal to all dividends that shall
have been paid or become payable to holders of record of Norwest Common Stock
between the effective date of the consolidation and the date of such exchange.
3.3 The shares of Interim Bank outstanding immediately prior to the
time of Consolidation shall be converted into and exchanged for _______ shares
of the Consolidated Bank, plus cash in the amount of $120,000.
3.4 From and after the Effective Date, there shall be no transfers on
the stock transfer books of the Consolidated Bank of the shares of Bank Common
Stock or Interim Bank Common Stock which were issued and outstanding immediately
prior to the Effective Date.
B-3
<PAGE>
SECTION 4
4.1 As of the Effective Date, the Articles of Association of the
Consolidated Bank shall be the Articles of Association of Bank and shall read in
their entirety as set forth in Appendix A attached hereto, and the Consolidated
Bank shall be authorized under such Articles of Association to issue _______
shares of common stock, par value $____ per share.
4.2 The by-laws of Bank as they exist at the Effective Date shall
continue in full force as the by-laws of the Consolidated Bank until altered,
amended, or repealed as provided therein or as provided by law.
4.3 As of the Effective Date, the following named persons shall serve
as the Board of Directors of the Consolidated Bank until the next annual meeting
of the shareholders or until such time as their successors have been elected and
have qualified:
________________________
________________________
________________________
4.4 The officers of Bank holding office at the Effective Date shall
continue as the officers of the Consolidated Bank for the term prescribed in the
by-laws or until the Board of Directors otherwise shall determine.
SECTION 5
5.1 This Consolidation Agreement shall be submitted to the shareholders of
Bank and Interim Bank, respectively, for approval at meetings to be called and
held in accordance with the articles of association of Bank and the articles of
association of Interim Bank, and in accordance with applicable provisions of
law. Such approval by the shareholders shall require the affirmative vote of the
shareholders of each of the Consolidating Banks owning at least two-thirds of
its capital stock outstanding.
SECTION 6
6.1 The Consolidation shall be subject to and conditioned upon the
following:
(a) approval of this Consolidation Agreement by the shareholders of
Bank and Interim Bank as required by law;
(b) approval of the Consolidation by all appropriate banking and
regulatory authorities and the satisfaction of all other requirements
prescribed by law necessary for consummation of the Consolidation; and
B-4
<PAGE>
(c) satisfaction of the conditions precedent set forth in paragraphs
6 and 7 of the Reorganization Agreement.
6.2 At any time before the Effective Date, if any of the following
circumstances obtain, this Consolidation Agreement may be terminated, at the
election of Bank or Interim Bank, by written notice from the party so electing
to the other, or the consummation of the Consolidation may be postponed for such
period, and subject to such further rights of Bank and Interim Bank, or either
of them, to terminate this Consolidation Agreement as Bank and Interim Bank may
agree in writing:
(a) by mutual consent of the Boards of Directors of the Consolidating
Banks if consummation of the Consolidation would be inadvisable in the
opinion of said Boards; or
(b) by action of the Board of Directors of any party hereto if the
Reorganization Agreement is terminated.
SECTION 7
7.1 Bank and Interim Bank, by mutual consent of their respective
Boards of Directors, may amend this Consolidation Agreement before the Effective
Date; provided, however, that after this Consolidation Agreement has been
approved by the shareholders of Bank, no such amendment shall affect the rights
of such shareholders of Bank in a manner which is materially adverse to such
shareholders.
7.2 This Consolidation Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Bank and Interim Bank have caused this
Consolidation Agreement to be executed by their respective duly authorized
officers and their corporate seals, if any, to be hereunto affixed as of the
date first above written, pursuant to a resolution of each Consolidating Bank's
Board of Directors, acting by a majority thereof.
(NO BANK SEAL) NORWEST INTERIM BANK,
NATIONAL ASSOCIATION
ATTEST:
By:__________________________________
Its:_____________________________
_________________________
Secretary
B-5
<PAGE>
STATE OF TEXAS )
) ss
COUNTY OF_______________ )
On this _____ day of __________, 19__, before me, a Notary Public for
the State and County aforesaid, personally came
_____________________________________, as _________________________________, and
_______________________________, as ________________________________, of NORWEST
INTERIM BANK, NATIONAL ASSOCIATION, and each in his or her said capacity
acknowledged the foregoing instrument to be the act and deed of said bank.
WITNESS my official seal and signature this day and year aforesaid.
_____________________________________
(Seal of Notary) Notary Public, _________________ County
My Commission Expires _______________
(BANK SEAL) MERCANTILE BANK,
NATIONAL ASSOCIATION
ATTEST:
By:__________________________________
Its:_____________________________
_________________________
Secretary
STATE OF TEXAS )
) ss
COUNTY OF_____________ )
On this _____ day of __________, 19__, before me, a Notary Public for
the State and County aforesaid, personally came
_____________________________________, as _________________________________, and
_______________________________, as ________________________________, of
MERCANTILE BANK, NATIONAL ASSOCIATION, and each in his or her said capacity
acknowledged the foregoing instrument to be the act and deed of said bank and
the seal affixed thereto to be its seal.
WITNESS my official seal and signature this day and year aforesaid.
_____________________________________
(Seal of Notary) Notary Public, _________________ County
My Commission Expires _______________
B-6
<PAGE>
APPENDIX C
OPINION OF ALEX SHESHUNOFF & CO.
<PAGE>
October 9, 1998
Board of Directors
Mercantile Bank, National Association
835 East Levee Street
Brownsville, Texas 78520
Members of the Board:
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") understands Mercantile
Financial Enterprises, Inc., Brownsville, Texas ("Mercantile"), a Delaware
corporation, Mercantile Bank, National Association, Brownsville, Texas (Bank"),
a national banking association and Norwest Corporation, Minneapolis, Minnesota
("Norwest"), a Delaware corporation, entered into an Agreement and Plan of
Reorganization (the "Agreement"), that provides, among other things, for the
acquisition of all of the capital stock of Mercantile by means of a merger of
Mercantile with and into a wholly owned subsidiary of Norwest (the "Merger").
You have requested our opinion as to the financial fairness to the holders of
minority interest common stock in the Bank of the exchange ratio by which Bank
minority shareholders will receive Norwest common stock in the Merger. It is
our understanding that approximately 96% of the outstanding common stock of the
Bank is owned by Mercantile and approximately 4% of the outstanding common stock
of the Bank is owned by minority shareholders.
Pursuant to the Agreement at the Effective Time, each share of Mercantile Common
Stock, issued and outstanding prior to the effective time, excluding Dissenting
Shares, shall, by virtue of the Merger and without any action by the holder
thereof, be converted into a number of shares of Norwest Common Stock (the
"Exchange Ratio") as determined by:
1. Dividing the Merger Value by the "Norwest Measurement Price" and
dividing the result thereof by the total number of shares of Mercantile
common stock outstanding. The "Norwest Measurement Price" will equal
the average of the closing prices of a share of Norwest Common Stock as
reported on the consolidated tape of the New York Stock Exchange during
the period of ten (10) trading days ending on the day immediately
preceeding the meetings of the shareholders of Mercantile and the Bank
(or the effective dates of any consent actions in lieu of meetings) for
approval of the Merger; provided, however, if the average should fall
below $37.00 or rise above $41.00, the "Norwest
<PAGE>
Measurement Price" will be deemed to equal $37.00 and $41.00,
respectively, for the purpose of computing the Exchange Ratio.
2. Consolidation each share of Bank Common Stock other than dissenting
shares and shares owned by Mercantile will be converted into and
exchanged for a number of shares of Norwest determined as follows: (i)
dividing the Bank Consolidation Value by the "Norwest Measurement
Price" and (ii) dividing the result thereof by the total number of
shares of Bank Common Stock then outstanding held by shareholders of
the Bank other than Mercantile.
3. Merger Value means $174,000,000 minus the "Bank Consolidation Value";
4. Bank Consolidation Value equals the amount determined by (i) dividing
the "Nominal Value" by $2,739,928 and (ii) multiplying the result
thereof by 110,551;
5. Nominal Value shall mean $174,000,000 plus cash liabilities of
Mercantile minus the cash assets of Mercantile as shown on Mercantile's
statement of shareholders equity as of the month end immediately
preceding the closing date.
In connection with our opinion, Sheshunoff has: (i.) reviewed a draft copy of
the Agreement; (ii.) reviewed certain publicly available financial statements
and other information of Mercantile, the Bank and Norwest, respectively; (iii.)
discussed with Mercantile's and the Bank's management the results of regulatory
examinations of Mercantile and the Bank; (iv.) reviewed certain estimates of
cost savings prepared by Mercantile and Bank management arising from the
transaction; (v.) reviewed certain internal financial statements and other
financial and operating data concerning Mercantile and the Bank; (vi.) analyzed
certain budget and financial projections of Mercantile and the Bank prepared by
the management of Mercantile and the Bank; (vii.) analyzed the pro forma impact
of the Merger on the combined company's earnings, book value and tangible book
value per share, respectively; (viii.) reviewed the reported prices and trading
activity for Norwest; (ix.) discussed the past and current operations and
financial condition, and the prospects of Mercantile and the Bank with executive
management; (x) compared Mercantile, the Bank and Norwest from a financial point
of view with certain other companies which Sheshunoff deemed to be relevant;
(xi.) reviewed the financial terms, to the extent publicly available, of certain
comparable merger transactions, and (xii.) performed such other analyses and
examinations as Sheshunoff has deemed appropriate.
Sheshunoff has assumed and relied upon without independent verification the
accuracy and completeness of the information supplied or otherwise made
available to us by Mercantile, the Bank and Norwest for the purposes of this
opinion. Sheshunoff has not made an independent evaluation of the assets or
liabilities of Mercantile, the Bank nor Norwest, nor has Sheshunoff been
furnished with any such appraisals. With respect to Mercantile's and the Bank's
budgets and financial forecasts, Sheshunoff has assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of management of Mercantile and the Bank, as to the future financial
performance of Mercantile and the Bank, and Sheshunoff has assumed such
forecasts and projections will be realized in
<PAGE>
the amounts and at the times contemplated thereby. Sheshunoff has assumed that
obtaining any necessary regulatory approvals and third party consents for the
Merger or otherwise will not have an adverse effect on Mercantile, the Bank,
Norwest or the combined company pursuant to the Agreement. Sheshunoff is not an
expert in the evaluation of loan portfolios for the purpose of assessing the
adequacy of the allowance for losses with respect thereto and has assumed that
such allowances for each of the companies are in the aggregate, adequate to
cover such losses. In addition, Sheshunoff has not reviewed any individual
credit files or made an independent evaluation, appraisal or physical inspection
of the assets or individual properties of Mercantile, the Bank or Norwest, nor
has Sheshunoff been furnished with any such evaluations or appraisals.
Sheshunoff discussed with Mercantile and the Bank's management its recent
operating performance, future prospects, shareholder base and the lack of an
active trading market for its common stock, and its strategic plan. We assumed
that Mercantile's and the Bank's budget and financial forecasts were reasonably
prepared and reflect the best currently available estimates and judgments of
management of Mercantile and the Bank, as to the future financial performance of
Mercantile and the Bank, and we assumed such forecasts and projections will be
realized in the amounts and at the times contemplated thereby.
Sheshunoff further assumed that in the course of obtaining the necessary
regulatory and third party consents for the Merger, no restriction will be
imposed that will have a material adverse effect on the contemplated benefits of
the Merger or the transactions contemplated thereby, and that the Merger will be
consummated in accordance with the terms of the Agreement, without any
amendments to, and without any waiver by Mercantile or the Bank of any of the
material conditions to its obligations thereunder.
Sheshunoff is not an expert in the evaluation of loan portfolios for the purpose
of assessing the adequacy of the allowance for losses with respect thereto and
assumed that such allowances for each of the companies are in the aggregate,
adequate to cover such losses. In addition, Sheshunoff did not review any
individual credit files or make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of Mercantile, the Bank or
Norwest, nor were we furnished with any such evaluations or appraisals.
Sheshunoff's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it, as of the
date hereof. Events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. Sheshunoff has also assumed that
there are no material changes in Mercantile's, the Bank's or Norwest's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements reviewed by it, and that
off-balance sheet activities of Mercantile, the Bank and Norwest will not
materially and
<PAGE>
adversely impact the future financial position or results of operation of
Mercantile, the Bank and Norwest. Sheshunoff has also assumed the Merger will be
completed as set forth in the Agreement and that no material changes will be
made or restrictions imposed by regulatory or other parties on the terms of the
Agreement.
Sheshunoff's opinion is limited to the fairness, from a financial point of view,
to the holders of Bank Common Stock of the Exchange Ratio and does not address
the Mercantile's and Bank's underlying business decision to undertake the
Merger. Sheshunoff expresses no opinion as to the financial fairness of the
Merger or Exchange Ratio to shareholders of Mercantile. Moreover, this letter,
and the opinion expressed herein, does not constitute a recommendation to any
stockholder as to any approval of the Merger or the Agreement. It is understood
that this letter is for the information of the Board of Directors of the Bank
and may not be used for any other purpose without Sheshunoff's prior written
consent, except that this opinion may be included in its entirety in any filing
made by Mercantile and the Bank or Norwest with the Securities and Exchange
Commission with respect to the Merger.
Mercantile retained Sheshunoff to assist it in soliciting offers for the
possible acquisition of Mercantile from potential acquirers. Sheshunoff will
receive a fee for providing investment banking services to Mercantile and the
Bank including the preparation of this opinion.
Based upon and subject to the foregoing, Sheshunoff is of the opinion that, as
of the date hereof, the Exchange Ratio to be received by the Bank's Common
stockholders is fair from a financial point of view to the holders of such
shares.
Very truly yours,
/s/Alex Sheshunoff & Co. Investment Banking
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
<PAGE>
APPENDIX D
UNITED STATES CODE TITLE 12, SECTION 215, PARAGRAPHS (b) - (d)
<PAGE>
(S) 215. Consolidation of national banks or State banks with national banks
**********************
(b) Liability of consolidated association; capital stock; dissenting
shareholders
The consolidated association shall be liable for all liabilities of
the respective consolidating banks or associations. The capital stock of such
consolidated association shall not be less than that required under existing law
for the organization of a national bank in the place in which it is located:
Provided, That if such consolidation shall be voted for at such meetings by the
necessary majorities of the shareholders of each association and State bank
proposing to consolidate, and thereafter the consolidation shall be approved by
the Comptroller, any shareholder of any of the associations or State banks so
consolidated who has voted against such consolidation at the meeting of the
association or bank of which he is a stockholder or who has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of consolidation, shall be entitled to receive the value of the
shares so held by him when such consolidation is approved by the Comptroller
upon written request made to the consolidated association at any time before
thirty days after the date of consummation of the consolidation, accompanied by
the surrender of his stock certificates.
(c) Valuation of shares
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the consolidation, by an appraisal made
by a committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash; (2) one selected by the directors of the consolidated banking
association; and (3) one selected by the two so selected. The valuation agreed
upon by any two of the three appraisers shall govern. If the value so fixed
shall not be satisfactory to any dissenting shareholder who has requested
payment, that shareholder may, within five days after being notified of the
appraised value of his shares, appeal to the Comptroller, who shall cause a
reappraisal to be made which shall be final and binding as to the value of the
shares of the appellant.
(d) Appraisal by the Comptroller; expenses of consolidated association; sale
and resale of shares; State appraisal and consolidation law
If, within ninety days from the date of consummation of the
consolidation, for any reason one or more of the appraisers is not selected as
herein provided, or the appraisers fail to determine the value of such shares,
the Comptroller shall upon written request of any interested party cause an
appraisal to be made which shall be final and binding on all parties. The
expenses of the Comptroller in making the reappraisal or the appraisal, as the
case may be, shall be paid by the consolidated banking association. The value
of the shares ascertained shall be promptly paid to the dissenting shareholders
by the consolidated banking association. Within thirty days after payment has
been made to all dissenting shareholders as provided for in this section the
shares of stock of the consolidated banking association which would have been
delivered to such dissenting shareholders had they not requested payment shall
be sold by the consolidated banking association at an advertised public auction,
unless some other method of sale is approved by the Comptroller, and the
consolidated banking association shall have the rights to purchase any of such
shares at such public auction, if it is the highest bidder therefor, for the
purpose of reselling such shares within thirty days thereafter to such person or
persons and at such price not less than par as its board of directors by
resolution may determine. If the shares are sold at public auction at a price
greater than the amount paid to the dissenting shareholder the excess in such
sale price shall be paid to such shareholders. The appraisal of such shares of
stock in any State bank shall be determined in the manner prescribed by the law
of the State in such cases, rather than as provided in this section, if such
provision is made in the State law; and no such consolidation shall be in
contravention of the law of the State under which such bank is incorporated.
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<PAGE>
APPENDIX E
OCC- BANKING CIRCULAR BC-259
STOCK APPRAISALS
<PAGE>
OCC-BC-259 Stock Appraisals
Comptroller of the Currency BC 259
Administrator of National Banks
Type: Banking Circular Subject: Stock Appraisals
TO: Chief Executive Officers of National Banks, Deputy
Comptrollers (District), Department and Division Heads,
and Examining Personnel
PURPOSE
This Banking Circular informs all national banks of the valuation methods used
by the Office of the Comptroller of the Currency (OCC) to estimate the value of
a bank's shares when requested to do so by a shareholder dissenting to the
conversion, merger, or consolidation of its bank. The results of appraisals
performed by the OCC between January 1, 1985, and September 30, 1991 are
summarized.
References: 12 U.S.C. 214a, 215 and 215a; 12 CFR 11.590 (Item 2)
BACKGROUND
Under 12 U.S.C. Section 214a, a shareholder dissenting from a conversion,
consolidation, or merger involving a national bank is entitled to receive the
value of his or her shares from the resulting bank. A valuation of the shares
shall be made by a committee of three appraisers (a representative of the
dissenting shareholder, a representative of the resulting bank, and a third
appraiser selected by the other two). If the committee is formed and renders an
appraisal that is acceptable to the dissenting shareholder, the process is
complete and the appraised value of the shares is paid to the dissenting
shareholder by the resulting bank. If, for any reason, the committee is not
formed or if it renders an appraisal that is not acceptable to the dissenting
shareholder, an interested party may request an appraisal by the OCC. 12 U.S.C.
Section 215 provides these appraisal rights to any shareholder dissenting to a
consolidation. Any dissenting shareholder of a target bank in a merger is also
entitled to these appraisal rights pursuant to 12 U.S.C. Section 215a.
The above provides only a general overview of the appraisal process. The
specific requirements of the process are set forth in the statutes themselves.
METHODS OF VALUATION USED
Through its appraisal process, the OCC attempts to arrive at a fair estimate of
the value of a bank's shares. After reviewing the particular facts in each case
and the available information on a bank's shares, the OCC selects an appropriate
valuation method, or combination of methods, to determine a reasonable estimate
of the shares' value.
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<PAGE>
Market Value
The OCC uses various methods to establish the market value of shares being
appraised. If sufficient trading in the shares exists and the prices are
available from direct quotes from the Wall Street Journal or a market-maker,
those quotes are considered in determining the market value. If no market value
is readily available, or if the market value available is not well established,
the OCC may use other methods of estimating market value, such as the investment
value and adjusted book value methods.
Investment Value
Investment value requires an assessment of the value to investors of a share in
the future earnings of the target bank. Investment value is estimated by
applying an average price/earnings ratio of banks with similar earnings
potential to the earnings capacity of the target bank.
The peer group selection is based on location, size, and earnings patterns. If
the state in which the subject bank is located provides a sufficient number of
comparable banks using location, size and earnings patterns as the criteria for
selection, the price/earnings ratios assigned to the banks are applied to the
earnings per share estimated for the subject bank. In order to select a
reasonable peer group when there are too few comparable independent banks in a
location that is comparable to that of the subject bank, the pool of banks from
which a peer group is selected is broadened by including one-bank holding
company banks in a comparable location, and/or by selecting banks in less
comparable locations, including adjacent states, that have earnings patterns
similar to the subject bank.
Adjusted Book Value
The OCC also uses an "adjusted book value" method for estimating value.
Historically, the OCC has not placed any weight on the bank's "unadjusted book
value", since that value is based on historical acquisition costs of the bank's
assets, and does not reflect investors' perceptions of the value of the bank as
an ongoing concern. Adjusted book value is calculated by multiplying the book
value of the target bank's assets per share times the average market price to
book value ratio of comparable banking organizations. The average market price
to book value ratio measures the premium or discount to book value, which
investors attribute to shares of similarly situated banking organizations.
Both the investment value method and the adjusted book value method present
appraised values which are based on the target bank's value as a going concern.
These techniques provide estimates of the market value of the shares of the
subject bank.
OVERALL VALUATION
The OCC may use more than one of the above-described methods in deriving the
value of shares of stock. If more than one method is used, varying weights may
be applied in reaching an overall valuation. The weight given to the value by a
particular valuation method is based on how accurately the given method is
believed to represent market value. For example, the OCC may give more weight
to a market value representing infrequent trading by shareholders than to the
value derived from the investment value method when the subject bank's earnings
trend is so irregular that it is considered to be a poor predictor of future
earnings.
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<PAGE>
PURCHASE PREMIUMS
For mergers and consolidations, the OCC recognizes that purchase premiums do
exist and may, in some instances, be paid in the purchase of small blocks of
shares. However, the payment of purchase premiums depends entirely on the
acquisition or control plans of the purchasers, and such payments are not
regular or predictable elements of market value. Consequently, the OCC's
valuation methods do not include consideration of purchase premiums in arriving
at the value of shares.
STATISTICAL DATA
The chart below lists the results of appraisals the OCC performed between
January 1, 1985 and September 30, 1991. The OCC provides statistical data on
book value and price/earnings ratios for comparative purposes, but does not
necessarily rely on such data in determining the value of the banks' shares.
Dissenting shareholders should not view these statistics as determinative for
future appraisals.
In connection with disclosures given to shareholders under 12 CFR 11.590 (Item
2), banks may provide shareholders a copy of this Banking Circular or disclose
the information in the Banking Circular, including the past results of OCC
appraisals. If the bank discloses the past results of the OCC appraisals, it
should advise shareholders that: (1) the OCC did not rely on all the information
set forth in the chart in performing each appraisal; and (2) the OCC's past
appraisals are not necessarily determinative of its future appraisals of a
particular bank's shares.
APPRAISAL RESULTS
<TABLE>
<CAPTION>
OCC Average Price/
Appraisal Appraisal Price Book Earnings Ratio
Date Value Offered Value of Peer Group
- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
1/1/85 107.05 110.00 178.29 5.3
1/2/85 73.16 NA 66.35 6.8
1/15/85 53.41 60.00 83.95 4.8
1/31/85 22.72 20.00 38.49 5.4
2/1/85 30.63 24.00 34.08 5.7
2/25/85 27.74 27.55 41.62 5.9
4/30/85 25.98 35.00 42.21 4.5
7/30/85 3,153.10 2,640.00 6,063.66 NC
9/1/85 17.23 21.00 21.84 4.7
11/22/85 316.74 338.75 519.89 5.0
11/22/85 30.28 NA 34.42 5.9
12/16/85 66.29 77.00 89.64 5.6
12/27/85 60.85 57.00 119.36 5.3
12/31/85 61.77 NA 73.56 5.9
12/31/85 75.79 40.00 58.74 12.1
1/12/86 19.93 NA 26.37 7.0
3/14/86 59.02 200.00 132.20 3.1
4/21/86 40.44 35.00 43.54 6.4
5/2/86 15.50 16.50 23.69 5.0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
7/3/86 405.74 NA 612.82 3.9
7/31/86 297.34 600.00 650.63 4.4
8/22/86 103.53 106.67 136.23 NC
12/26/86 16.66 NA 43.57 4.0
12/31/86 53.39 95.58 69.66 7.1
5/1/87 186.42 NA 360.05 5.1
6/11/87 50.46 70.00 92.35 4.5
6/11/87 38.53 55.00 77.75 4.5
7/31/87 13.10 NA 20.04 6.7
8/26/87 55.92 57.52 70.88 NC
8/31/87 19.55 23.75 30.64 5.0
8/31/87 10.98 NA 17.01 4.2
10/6/87 56.48 60.00 73.11 5.6
3/15/88 297.63 NA 414.95 6.1
6/2/88 27.26 NA 28.45 5.4
6/30/88 137.78 NA 215.36 6.0
8/30/88 768.62 677.00 1,090.55 10.7
3/31/89 773.62 NA 557.30 7.9
5/26/89 136.47 180.00 250.42 4.5
5/29/90 9.87 NA 11.04 9.9
</TABLE>
* - The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA - Not Available NC - Not Computed
For more information regarding the OCC's stock appraisal process, contact the
Office of the Comptroller of the Currency, Bank Organization and Structure.
Frank Maguire
Acting Senior Deputy Comptroller
Corporate Policy and Economic Analysis
Date: March 10, 1992
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