Filed pursuant to Rule 424 (b)(2)
Registration No. 333-23841
LETTERHEAD OF MERCANTILE BANK
April 25, 1997
Dear Fellow Shareholder,
Pursuant to our Bank's pending acquisition by SierraWest Bancorp and merger with
and into its wholly owned subsidiary, SierraWest Bank, we have enclosed the
following documents for your review:
1. Booklet containing the Notice of a Special Meeting of Shareholders,
the Prospectus of SierraWest Bancorp and the Proxy Statement of
Mercantile Bank together with financial information, a copy of the
Plan of Acquisition and Merger and related information.
2. A blue Proxy Form to be executed and returned in the enclosed green
envelope.
3. SierraWest Bancorp's Form 10-K.
4. The 1996 Annual Report of SierraWest Bancorp.
5. The 1996 Annual Report of Mercantile Bank.
After you have reviewed the enclosed materials concerning the proposed Plan of
Acquisition and Merger, please indicate your vote on the blue Proxy Form and
return it immediately in the green envelope.
Should you have any questions or comments, please feel free to call our Bank's
President, Michael Burkart, at your convenience.
Thank you for your attention given to this matter. We shall look forward to
seeing you at the Special Meeting of Shareholders at 5:00 P.M. on May 27, 1997,
at the Bank's Main Office.
Sincerely,
/s/ Robert F. Gaines
Robert F. Gaines
Chairman of the Board
Enclosures
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MERCANTILE BANK
Notice of Special Meeting
of Shareholders
May 27, 1997
5:00 P.M.
TO THE SHAREHOLDERS:
A Special Meeting of Shareholders of Mercantile Bank, a California banking
corporation, will be held at the Bank's offices, 455 Capitol Mall, Sacramento,
California on May 27, 1997 at 5:00 P.M. for the following purposes:
1. To approve the Plan of Acquisition and Merger dated January 23, 1997,
among Mercantile Bank ("Mercantile"), SierraWest Bancorp ("SierraWest"), and
SierraWest's wholly-owned subsidiary SierraWest Bank (the "Bank") and the
related Merger Agreement to be entered into by Mercantile and the Bank, pursuant
to which Mercantile would merge with and into the Bank; and
2. To act upon such other matters as may properly come before such
meeting or any adjournment thereof.
Only shareholders of record at the close of business on April 17, 1997 are
entitled to notice of and to vote at this meeting and any adjournments thereof.
By Order of the Board of Directors,
/S/ Denis R. Long
Denis R. Long, Corporate Secretary
Sacramento, California
April 22, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN
THE ENCLOSED POST-PAID ENVELOPE.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus of Proxy Statement of
SIERRAWEST BANCORP MERCANTILE BANK
10181 Truckee-Tahoe Airport Road 455 Capitol Mall
Truckee, California 96160 Sacramento, California 95814
916-582-3000 916-442-6000
- --------------------------------------------------------------------------------
This Proxy Statement/Prospectus is being furnished to the
shareholders of Mercantile Bank ("Mercantile") in connection with the
solicitation of proxies by the Board of Directors of Mercantile to be used in
voting at the special meeting of shareholders of Mercantile to be held on May
27, 1997 (the "Mercantile Meeting"). This Proxy Statement/Prospectus is first
being mailed to holders of common stock of Mercantile on or about April 25,
1997.
The Mercantile Meeting has been called to consider and vote
upon proposals:
1. To approve the Plan of Acquisition and Merger (the
"Agreement") dated January 23, 1997, among Mercantile, SierraWest Bancorp
("SierraWest") and SierraWest's wholly owned subsidiary SierraWest Bank,
and the related Merger Agreement to be entered into by SierraWest Bank and
Mercantile (the "Merger Agreement"), pursuant to which Mercantile would merge
with and into SierraWest Bank (the "Merger"); and
2. To act upon such other matters as may properly come before
such meeting or any adjournment thereof.
This Proxy Statement/Prospectus covers a maximum of 250,000
shares of SierraWest common stock, which are to be issued to shareholders of
Mercantile in exchange for shares of Mercantile common stock. The specific
details of the Agreement are more fully discussed under the heading "PROPOSAL
ONE: THE MERGER" in this Proxy Statement/Prospectus, and in the Agreement and in
the Merger Agreement which are set forth in full in Annex A to this Proxy
Statement/Prospectus, which is incorporated herein by reference.
The affirmative vote of the holders of a majority of the
issued and outstanding shares of Mercantile common stock are required to approve
the Merger.
This Proxy Statement/Prospectus also constitutes the
Prospectus of SierraWest under the Securities Act of 1933, as amended (the "1933
Act"), for the public offering of the shares of SierraWest common stock to be
issued in exchange for Mercantile common stock in the Merger. This Proxy
Statement/Prospectus does not cover any resales of SierraWest common stock to be
received by the shareholders of Mercantile or SierraWest in the Merger, and no
person is authorized to make any use of this Proxy Statement/Prospectus in
connection with any such resale.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF SIERRAWEST HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is April 22, 1997.
No person is authorized to give any information or to make any
representation with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein or in the documents
incorporated by reference herein. Any information or representations with
respect to such matters not contained herein or therein must not be relied upon
as having been authorized by SierraWest or Mercantile. This Proxy Statement/
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities or the solicitation of a proxy or an offer to sell or a
solicitation of an offer to buy such securities in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of SierraWest or
Mercantile since the date hereof or that the information in this Proxy
Statement/Prospectus or in the documents incorporated by reference herein is
correct as of any time subsequent to the dates hereof or thereof.
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AVAILABLE INFORMATION
SierraWest is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith has filed reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by SierraWest with the Commission can be inspected and
copied at the Public Reference Room of the Commission, 450 Fifth Street, NW,
Room 1024, Washington, DC 20549 and at the public reference facilities of the
Chicago Regional Office, Room 3190, John C. Kluczynski Building, 230 South
Dearborn Street, Chicago, Illinois 60604, and the New York Regional Office, 75
Park Place, New York, New York, 10007. Copies of such material also can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
NW Washington DC 20549 at prescribed rates.
The Commission maintains a web site, which contains reports,
proxy and information statements and other information pertaining to registrants
that file electronically with the Commission including SierraWest. The address
of this site is http://www.sec.gov.
SierraWest has filed with the Commission a Registration
Statement on Form S-4 as amended (No. 333-23841) under the 1933 Act relating to
the shares of SierraWest common stock to be issued in connection with the Merger
(the "Registration Statement"). This Proxy Statement/Prospectus also constitutes
the Prospectus of SierraWest filed as part of the Registration Statement and
does not contain all the information set forth in the Registration Statement and
Exhibits thereto. The Registration Statement and the Exhibits thereto may be
inspected and copied, at prescribed rates, at the public reference facilities
maintained by the Commission at the addresses set forth above.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS
WITH RESPECT TO SIERRAWEST AND ITS SUBSIDIARY HAS BEEN SUPPLIED BY SIERRAWEST
AND ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO
MERCANTILE HAS BEEN SUPPLIED BY MERCANTILE.
INFORMATION INCORPORATED BY REFERENCE
The following documents previously filed or to be filed with
the Commission pursuant to the Exchange Act are hereby incorporated by reference
in this Proxy Statement/Prospectus:
(a) SierraWest's Annual Report on Form 10-K for the year
ended December 31, 1996 (the "SierraWest 10-K");
(b) SierraWest's Current Report on Form 8-K filed with
the Commission on January 31, 1997; and
(c) All documents filed by SierraWest pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement/Prospectus and prior to the date of the Meeting
shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing thereof.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE
DOCUMENTS RELATING TO SIERRAWEST WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE
AVAILABLE WITHOUT CHARGE UPON REQUEST FROM DAVID C. BROADLEY, EVP/CHIEF
FINANCIAL OFFICER, SIERRAWEST BANCORP, 10181 TRUCKEE-TAHOE AIRPORT ROAD,
TRUCKEE, CALIFORNIA 96160, TELEPHONE 916-582-3000. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 12, 1997.
2
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Any statement contained in a SierraWest document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Proxy Statement/Prospectus to the extent that
a statement contained herein, or in any other subsequently filed document that
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS AND DOCUMENTS HEREIN
INCORPORATED BY REFERENCE INCLUDING, BUT NOT LIMITED TO THE SIERRAWEST 10-K
CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF SIERRAWEST FOLLOWING THE
CONSUMMATION OF THE MERGER, INCLUDING STATEMENTS RELATING TO THE EXPECTED IMPACT
OF THE MERGER ON SIERRAWEST'S FINANCIAL PERFORMANCE AND THE MARKET VALUE OF
SIERRAWEST COMMON STOCK (SEE "INVESTMENT CONSIDERATIONS", "SUMMARY", "THE
MERGER--REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS"
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS" AND "MERCANTILE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MERCANTILE"). THESE FORWARD-LOOKING STATEMENTS INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS IN-
CLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS
FROM THE MERGER CANNOT BE FULLY REALIZED; (2) DEPOSIT ATTRITION, CUSTOMER
LOSS OR REVENUE LOSS FOLLOWING THE MERGER IS GREATER THAN EXPECTED; (3) COM-
PETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES SIGNIFICANTLY; (4) COSTS OR
DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESS OF SIERRAWEST AND
MERCANTILE ARE GREATER THAN EXPECTED; (5) CHANGES IN THE INTEREST RATE ENVIRON-
MENT REDUCE MARGINS; (6) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR
REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS,
A DETERIORATION IN CREDIT QUALITY; (7) CHANGES IN THE REGULATORY ENVIRONMENT;
(8) CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND(9) CHANGES IN THE
SECURITIES MARKETS. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN EXAMINED OR COMPILED BY THE INDEPENDENT
PUBLIC ACCOUNTANTS OF SIERRAWEST OR MERCANTILE NOR HAVE SUCH ACCOUNTANTS APPLIED
ANY PROCEDURES THERETO. ACCORDINGLY, SUCH ACCOUNTANTS DO NOT EXPRESS AN OPINION
OR ANY OTHER FORM OF ASSURANCE ON THEM. FURTHER INFORMATION ON OTHER FACTORS
WHICH COULD AFFECT THE FINANCIAL RESULTS OF SIERRAWEST AFTER THE MERGER IS
INCLUDED IN THE COMMISSION FILINGS INCORPORATED BY REFERENCE HEREIN.
MOREOVER, WHENEVER PHRASES SUCH AS, OR SIMILAR TO, "IN MANAGEMENT'S OPINION,"
"MANAGEMENT BELIEVES," OR "MANAGEMENT CONSIDERS" ARE USED, SUCH STATEMENTS
ARE AS OF, AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND
ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND
ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES
NOTED ABOVE WITH RESPECT TO FORWARD-LOOKING STATEMENTS.
3
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
AVAILABLE INFORMATION...........................................................................2
INFORMATION INCORPORATED BY REFERENCE...........................................................2
SUMMARY.........................................................................................4
The Parties to the Merger.......................................................................4
Date, Time and Place of Meeting.................................................................4
Purpose of the Meeting..........................................................................4
Persons Entitled to Vote........................................................................5
Vote Required...................................................................................5
Principal Terms of the Merger; Exchange Amount..................................................5
Cash/Stock Election.............................................................................6
Conditions and Regulatory Approvals.............................................................6
Termination and Amendment; Termination Payment..................................................6
Expenses........................................................................................7
Certain Federal Income Tax Consequences.........................................................7
Effective Date of the Merger....................................................................7
Recommendations of the Board of Directors.......................................................7
Fairness Opinion................................................................................8
Dissenters' Rights of Appraisal.................................................................8
Differences in Charter Documents and Applicable Law.............................................8
Interests of Certain Persons in the Merger......................................................8
Market Price Data...............................................................................9
Dividend Policy.................................................................................9
Selected Financial Information.................................................................10
Recent Developments............................................................................13
INVESTMENT CONSIDERATIONS......................................................................14
Concentration of Lending Activities............................................................14
Reliance on SBA Loan Sales.....................................................................14
Prepayment Risk................................................................................14
Environmental Liabilities......................................................................15
Growth Strategy................................................................................15
Potential Adverse Climatic and Economic Conditions.............................................15
Impact of New Accounting Pronouncement on Regulatory Capital...................................15
Mercantile-Regulatory Agreement................................................................16
SPECIAL MEETING OF THE SHAREHOLDERS OF MERCANTILE..............................................17
INTRODUCTION...................................................................................17
VOTING AND PROXIES.............................................................................17
Date, Time and Place of Meeting...........................................................17
Record Date and Voting Rights.............................................................17
Voting by Proxy...........................................................................17
Adjournments..............................................................................17
Solicitation of Proxies...................................................................18
PROPOSAL ONE: THE MERGER.......................................................................19
Background.....................................................................................19
Reasons for the Merger and Recommendation......................................................19
Fairness Opinion...............................................................................20
General...................................................................................20
Analysis of Selected Merger Transactions..................................................21
Contribution Analysis.....................................................................21
Interests of Certain Persons in the Merger.....................................................22
</TABLE>
i
<PAGE>
<TABLE>
TABLE OF CONTENTS
(Continued)
PAGE
<S> <C>
Principal Terms of the Merger..................................................................22
General...................................................................................22
Effective Date of the Merger..............................................................22
Exchange Amount...........................................................................22
Adjustments to the Exchange Amount........................................................25
Cash/Stock Election.......................................................................25
Rights of Holders After Effective Date; Dividends.........................................26
Exchange of Mercantile Stock Certificates; Fractional Interests...........................26
Personnel Matters.........................................................................26
Conduct of Business Prior to Merger.......................................................27
Representations and Warranties............................................................28
Conditions to the Merger..................................................................28
Required Regulatory Approvals.............................................................28
Dissenters' Rights of Appraisal...........................................................29
Non-Solicitation Covenants................................................................30
Certain Federal Income Tax Consequences...................................................30
Accounting Treatment......................................................................31
Termination and Amendment; Termination Payment............................................31
Expenses..................................................................................32
Resales of SierraWest Common Stock........................................................32
Conduct of Business of SierraWest and Mercantile Following the Merger.....................32
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..............................................34
INFORMATION ABOUT SIERRAWEST...................................................................38
INFORMATION ABOUT MERCANTILE...................................................................39
SELECTED FINANCIAL DATA........................................................................48
MERCANTILE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MERCANTILE............................................................50
DESCRIPTION OF SIERRAWEST CAPITAL STOCK........................................................57
DESCRIPTION OF MERCANTILE CAPITAL STOCK........................................................58
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS..................................................58
MARKET PRICE AND DIVIDEND INFORMATION..........................................................61
EXPERTS........................................................................................62
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.....................................................................................62
LEGAL MATTERS..................................................................................63
OTHER MATTERS..................................................................................63
MERCANTILE BANK Financial Statements December 31, 1996 and 1995 (With Auditors' Report Thereon)
MERCANTILE BANK Financial Statements December 31, 1995 and 1994 (With Auditors' Report Thereon)
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(Continued)
ANNEX A Plan of Acquisition and Merger dated January 23, 1997
ANNEX B Fairness Opinion of Carpenter & Company
ANNEX C Excerpts of Chapter 13 of the California Corporations Code regarding
Dissenters Rights
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SUMMARY
Certain matters discussed or incorporated by reference in this
Proxy Statement/Prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in "INVESTMENT
CONSIDERATIONS", "SUMMARY", "PROPOSAL ONE: THE MERGER - Reasons for the Merger
and Recommendation; Principal Terms of the Merger - Exchange Amount", "UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS" and "MERCANTILE MANAGEMENT'S DISCUS-
SION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MERCAN-
TILE". Therefore, the information set forth therein should be carefully con-
sidered when evaluating the business prospects of SierraWest and Mercantile.
The following is a summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. This summary does not contain a
complete statement of all material features of the Merger and is qualified in
its entirety by reference to the full text of this Proxy Statement/Prospectus
and the Annexes hereto. Mercantile shareholders are urged to read this Proxy
Statement/Prospectus and the accompanying Annexes in their entirety.
The Parties to the Merger
SierraWest is a corporation organized under the laws of the
State of California. It is registered as a bank holding company under the Bank
Holding Company Act of 1956 (the "BHC Act"). SierraWest owns one banking
subsidiary, SierraWest Bank (the "Bank" or "subsidiary"), a California state
banking corporation. SierraWest's former Nevada banking subsidiary was merged
with and into the Bank on October 1, 1996. At December 31, 1996, SierraWest had
consolidated assets of approximately $ 447.9 million and shareholders' equity of
approximately $33.9 million. SierraWest's principal office is located in
Truckee, California. The Bank has eleven banking offices and eight loan
production offices in California and Nevada.
Mercantile is a state banking corporation licensed by the
California State Banking Department as a commercial bank. It was incorporated
under the laws of the State of California in 1975 and is headquartered in
Sacramento, California. Mercantile conducts a general commercial banking
business through its single office. At December 31, 1996, Mercantile had assets
of approximately $46.4 million and shareholders' equity of approximately $4.9
million.
The Bank and Mercantile have their deposits insured by the
Federal Deposit Insurance Corporation ("FDIC") up to applicable limits.
If the Merger had been consummated on December 31, 1996, the
combined companies would have had, on a pro forma basis after certain
adjustments, total assets of $492.7 million and shareholders' equity of
approximately $37.2 million. Combined net income for the year ended December 31,
1996 would have been approximately $3.5 million.
Date, Time and Place of the Meeting
The Mercantile Meeting will be held on May 27, 1997 at 5:00
p.m. local time at Mercantile's office at 455 Capitol Mall, Sacramento,
California.
Purpose of the Meeting
At the Mercantile Meeting, the shareholders of Mercantile will
be asked to (1) consider and vote upon the Agreement and the Merger Agreement;
and (2) consider and vote upon such other business as may properly come before
the Mercantile Meeting, including any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF MERCANTILE RECOMMENDS THAT
SHAREHOLDERS VOTE THEIR SHARES OF MERCANTILE COMMON STOCK IN FAVOR OF THE MERGER
PROPOSAL.
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Persons Entitled to Vote
Mercantile has fixed the close of business on April 17, 1997,
as the record date for determining persons entitled to notice of and to vote at
the Mercantile Meeting. At the close of business on April 17, 1997, there were
outstanding and entitled to vote 336,980 shares of Mercantile common stock.
See "VOTING AND PROXIES."
Vote Required
Under the Agreement and applicable law, approval of the Merger
by an affirmative vote of the holders of a majority of the outstanding shares of
Mercantile common stock is a condition to completion of the Merger. See "VOTING
AND PROXIES--Record Date and Voting Rights."
As a group, executive officers and directors of Mercantile and
the affiliates of such officers and directors beneficially owned 188,565 shares,
or approximately 56%, of Mercantile common stock outstanding as of April 17,
1997. Holders of approximately 56% of the outstanding shares of Mercantile
common stock, including all of the directors, have agreed to vote their shares
in favor of the Merger. Accordingly, no additional shares are required to
approve the transaction. No executive officer or director of Mercantile or any
affiliate of any such officer or director beneficially owned any shares of
SierraWest common stock as of such date.
Principal Terms of the Merger; Exchange Amount
The Merger will become effective on the date (the "Effective
Date") that the Merger Agreement is filed with the Secretary of State of the
State of California and the California Superintendent of Banks (the
"Superintendent"). Assuming all conditions to the Merger are met, the parties
anticipate that the Effective Date will be on or about June 30, 1997, or as soon
thereafter as practicable. Upon completion of the Merger, Mercantile will be
merged with the Bank. The Bank will be the surviving corporation in the Merger
and will continue to operate as a wholly owned subsidiary of SierraWest.
On the Effective Date, the outstanding shares of Mercantile
common stock will be converted into the right to receive a combination of cash
and shares of SierraWest common stock (the "Cash Component" and the "Stock
Component") with an aggregate value equal to the Exchange Amount. The Exchange
Amount will be $6,601,000 or approximately $19.59 per share, subject to certain
adjustments. The Exchange Amount will consist one-half of cash and one-half of
SierraWest common stock, subject to a cash/stock election by Mercantile
shareholders. For purposes of determining the number of shares of SierraWest
common stock to be issued, such stock will be valued at the average of the
closing prices of the shares of SierraWest common stock as reported in the
western edition of the Wall Street Journal for the 20 trading days ending five
business days before the Effective Date, provided that the maximum number of
shares of SierraWest common stock that will be issued is 250,000.
The Exchange Amount will be reduced by 7.44% of the amount by
which Mercantile's average core deposits for the 20 business days ending the
month end before the Effective Date are less than $22.7 million. Core deposits
include all deposits of Mercantile other than certificates of deposit; brokered
deposits, wholesale deposits and deposits of other depository institutions;
deposits maintained by the officers, directors or shareholders of Mercantile or
their related interests to the extent that such deposits exceed $1 million in
the aggregate; and deposits opened or renewed after the date of the Agreement
for which the rate exceeds the rates established by SierraWest for similar
deposit products. At March 31, 1997, Core Deposits were approximately $24.1
million. See "SUMMARY -- Recent Developments."
The Exchange Amount will also be increased or decreased by the
amount by which Mercantile's Adjusted Shareholders' Equity is greater or less
than $4,912,000. Mercantile's Adjusted Shareholders' Equity is defined as actual
shareholders' equity under generally accepted accounting principles ("GAAP"),
reduced by certain pro forma reserves and accruals to reflect SierraWest's loan
grading system, any prospective inconsistencies in Mercantile's method of
calculating its allowance for loan losses and amount necessary to increase the
valuation reserve reflected on Mercantile's books to offset the effect of any
additional carry-forward tax losses resulting from additions to Mercantile's
allowance for loan losses or operating losses occurring after December 31, 1996.
At March 31, 1997, Mercantile's shareholders' equity under GAAP was
$5,024,000. See SUMMARY -- Recent Developments." No assurance can be given
that actual shareholders' equity or Adjusted Shareholders' Equity will be
higher or lower than this amount as of the Effective Date. All adjustments,
except for the valuation allowance adjustment, will be net of the related tax
benefit or cost.
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The Agreement limits the Stock Component to 250,000 shares of
SierraWest common stock. If the Exchange Amount remains at $6,601,000 and the
Stock Component remains at $3,300,500, the Exchange Amount will effectively be
reduced by any decrease in the average stock price of SierraWest common stock
during the measurement period below $13.20. The last reported sale price for
SierraWest common stock on April 16, 1997 was $18.00 per share.
For a more complete description of the Exchange Amount, see
"PROPOSAL ONE: THE MERGER--Principal Terms of the Merger."
Cash/Stock Election
The Exchange Amount will be allocated to the Stock Component
and the Cash Component in accordance with an election procedure (the "Cash/Stock
Election").
Each Mercantile shareholder may elect to receive his or her
portion of the Exchange Amount in either all SierraWest shares or all cash. If
no election is made, the shareholder will receive 50% of his or her Exchange
Amount in a Cash Component and 50% in a Stock Component, subject to certain
adjustments and limitations. The aggregate Cash Component for all Mercantile
shareholders must equal 50% of the Exchange Amount, including cash used to pay
dissenters. The aggregate Stock Component may not exceed 250,000 shares of
SierraWest common stock. If the aggregate Cash Component is undersubscribed, the
unsubscribed portion of this minimum aggregate Cash Component will be allocated
pro rata (by number of shares) among all Mercantile shareholders receiving
stock; if the aggregate Cash Component is oversubscribed, the Cash Component of
each Mercantile shareholder electing to receive cash will be reduced pro rata
(by number of shares electing to receive cash) so that the aggregate Cash
Component of all Mercantile shareholders (plus amounts paid to shareholders
exercising dissenters' rights) will equal one-half of the Exchange Amount or
$3,300,500, as adjusted. The total of the Cash Component and the Stock Component
will always equal the Exchange Amount, subject to the limitation on the total
number of shares of SierraWest common stock to be issued as part of the Exchange
Amount.
After the Effective Date, SierraWest will send to each
Mercantile shareholder a letter of transmittal describing the Cash/Stock
Election in more detail and providing forms for making the Cash/Stock Election.
The Cash/Stock Election, if made, must be made for all shares held in the name
of the Mercantile shareholder. A Mercantile shareholder who holds shares in two
or more capacities or in different names may make a separate Cash/Stock Election
for each name or capacity in which shares are held.
Mercantile shareholders who make a Cash/Stock Election have no
assurance that they will receive all cash or all stock or any specific
proportion thereof.
There are certain differences in the rights of holders of
Mercantile common stock and the rights of holders of SierraWest common stock.
See "CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS."
Conditions and Regulatory Approvals
Consummation of the Merger is subject to the satisfaction of
various conditions, including the accuracy of each party's representations and
warranties, each party's substantial compliance with its obligations under the
Agreement, the absence of any material adverse change (as defined in the
Agreement) in the business or financial condition of SierraWest or Mercantile,
receipt of required regulatory approvals from the FDIC and California State
Banking Department (the "Department"), the effectiveness of SierraWest's Regis-
tration Statement, receipt of a legal or accounting opinion as to the qualifi-
cation of the Merger as a tax-free reorganization with respect to the Stock
Component, the exchange of current unaudited financial information, Mercan-
tile's receipt of a fairness opinion from its financial advisor and the adjust-
ment (if necessary) of certain of Mercantile's reserves and asset classifica-
tions to conform to specified standards. See "PROPOSAL ONE: THE MERGER--
Representations and Warranties; Conditions to the Merger." Except as to any
condition the satisfaction of which is required by law, the Boards of Directors
of SierraWest and Mercantile have the corporate power and authority to waive
satisfaction of the conditions to their respective company's obligation to
consummate the Merger.
Termination and Amendment; Termination Payment
The Agreements may be terminated any time prior to the
Effective Date as follows: (a) by the mutual consent of the respective Boards of
Directors; (b) by the Board of Directors of SierraWest on or after June 30,
6
<PAGE>
1997, if any of the conditions to the obligations of SierraWest have not been
fulfilled or waived, any material adverse change in Mercantile or its
properties, operations or financial condition occurs or is learned, Mercantile
materially fails to comply with its obligations under the Agreement, Mercantile
enters into a transaction or series of transactions with a third person or group
providing for the acquisition of all or a substantial part of Mercantile,
whether by way of merger, exchange or purchase of stock, sale of assets or
otherwise; (c) by the Board of Directors of Mercantile on or after June 30,
1997, if any of the conditions to the obligations of Mercantile are subject have
not been fulfilled or waived by Mercantile (subject to SierraWest's right to
pursue certain litigation or administrative proceedings to obtain one or more of
the required regulatory approvals, but not beyond December 31, 1997), any
material adverse change in SierraWest or its properties, operations or financial
condition occurs or is learned, SierraWest materially fails to comply with its
obligations under the Agreement, SierraWest or its affiliates enter into a
business combination with any other entity which does not expressly contemplate
the performance by SierraWest or its successor in interest of SierraWest's
obligations under the Agreement and SierraWest indicates it will not consummate
the Agreement.
If either party willfully breaches the Agreement or enters
into another transaction (such as a merger or similar business combination) that
prevents performance of its obligations under the Agreement, the other party may
terminate the Agreement and becomes entitled to liquidated damages of $350,000.
In addition, each party remains liable for its other expenses as set forth in
Section 10 of the Agreement.
Expenses
Each party will pay the costs incurred incident to the
performance of its obligations under the Agreement, including costs related to
the Registration Statement and these Proxy Materials, their respective financial
statements and the fees of its counsel, accountants, consultants and financial
advisors. Mercantile will pay or accrue up to $10,000 toward the printing costs
of the Registration Statement and the Proxy Materials and the costs of
distributing the Proxy Materials and other information relating to these
transactions to shareholders of Mercantile. All fees payable pursuant to state
"blue-sky" securities laws, fees related to obtaining a tax opinion, and the fee
required to be paid to the Commission to register the shares of SierraWest
common stock will be shared equally by the parties.
Certain Federal Income Tax Consequences
As a condition to the consummation of the Merger, SierraWest
and Mercantile have received an opinion from the law firm McCutchen, Doyle,
Brown & Enersen LLP, to the effect that the Merger will constitute a tax-free
reorganization for federal and California state income tax purposes as to the
Stock Component of the Exchange Amount. Consequently, it is the intent of
the parties that Mercantile shareholders who receive SierraWest common stock
pursuant to the Merger will not recognize gain or loss for federal income tax
purposes with respect to the Stock Component. Gain or loss will, however,
be recognized on the receipt by holders of Mercantile common stock of
cash as payment pursuant to the exercise of dissenters' rights and may be
recognized on the receipt of the Cash Component and cash in lieu of fractional
shares of SierraWest common stock. The character and amount of such gain or
loss may vary with each shareholder's individual circumstances. Mercantile's
shareholders are urged to consult their own tax advisors regarding the
federal (and any applicable foreign, state and local) income tax consequences
of the Merger. However, the opinion will be based on the assumption that the
value of the Stock Component will be equal to at least 50% of the Exchange
Amount. This assumption will not be correct if the market value of SierraWest
common stock is less than $13.20. See "PROPOSAL ONE: THE MERGER-- Certain
Federal Income Tax Consequences."
Effective Date of the Merger
The Merger will become effective on the date (the "Effective
Date") that the Merger Agreement is filed with the Secretary of State of the
State of California and the Superintendent. Assuming all conditions to the
Merger are met, the parties anticipate that the Effective Date will be on or
before June 30, 1997, or as soon thereafter as practicable.
Recommendations of the Board of Directors
The Board of Directors of Mercantile believes that the Merger
is in the best interests of Mercantile and its shareholders. The Board is of the
opinion that combining the business of SierraWest and Mercantile will enhance
the prospects of Mercantile. The Board of Directors of Mercantile voted to
recommend to its shareholders a vote FOR approval of the Merger. See "PROPOSAL
ONE: THE MERGER--Reasons for the Merger and Recommendations."
7
<PAGE>
Fairness Opinion
Mercantile has retained Carpenter & Company as its financial
advisor in connection with the Merger and to render an opinion to the Board of
Directors of Mercantile as to whether the Exchange Amount and the Exchange Ratio
in the proposed Merger are fair from a financial point of view to the
shareholders of Mercantile. Carpenter & Company delivered its opinion to this
effect on January 23, 1997. See "PROPOSAL ONE: THE MERGER Fairness Opinion" and
Annex B.
Dissenters' Rights of Appraisal
If the Merger is consummated, shareholders of Mercantile who
follow certain statutory procedures may demand dissenters' rights under
California law. A shareholder's vote against approval of the Merger alone is not
sufficient to preserve a dissenting shareholder's right to receive such
dissenters' rights. A dissenting shareholder must affirmatively complete certain
procedures including giving notice to Mercantile within certain statutory time
frames in order to preserve the dissenter's rights of appraisal. See "PROPOSAL
ONE: THE MERGER--Dissenters' Rights of Appraisal" and Annex C which set forth
the relevant sections of the California General Corporation Law.
Differences in Charter Documents and Applicable Law
SierraWest and Mercantile are both organized under the
corporate law of California. Mercantile is also subject to the California
Banking Law. While there are many similarities between the laws governing the
rights of shareholders, there are certain differences in the charter documents
and law applicable to the two companies. See "CERTAIN DIFFERENCES IN RIGHTS OF
SHAREHOLDERS."
Interests of Certain Persons in the Merger
Directors of Mercantile hold a substantial number of
Mercantile shares and will benefit to the same extent as all Mercantile
shareholders from the conversion of Mercantile shares to SierraWest shares.
Michael Burkart, president of Mercantile, has a contract with Mercantile under
which he is entitled, upon completion of the Merger, to certain incentive
compensation based on the value paid to Mercantile shareholders. If the Exchange
Amount is at least $6,293,000, his incentive compensation will be $50,000. He
will receive an additional $25,000 for each increment of $484,000 by which the
Exchange Amount exceeds $6,293,000. See "PROPOSAL ONE: THE MERGER--Interests of
Certain Persons in the Merger."
The Agreement provides that Mercantile employee Denis Long
will be eligible for employment by SierraWest provided that he and SierraWest
have agreed to the terms of employment on or before the Determination Date;
provided, in the event that he has not reached agreement with SierraWest by such
date, Mercantile will have no obligation to terminate Denis Long prior to the
Effective Date. To resolve any questions as to the rights to the parties under
the agreement and their respective relationships with Denis Long, Mercantile and
SierraWest, with the consent of Denis Long, have entered into a letter agreement
which provides: (1) As of the Effective Date, the employment of Denis Long shall
be terminated and he shall have no further rights under the terms of any employ-
ment contracts that may exist between Denis Long and Mercantile; (2) In
consideration of receipt of an enforeceable release from Denis Long, SierraWest
and Mercantile shall jointly make a payment to him equal to $85,000 (one year's
base salary) less applicable withholdings as full and final severance. Each of
SierraWest and Mercantile shall bear one-half of the severance payment; and (3)
Following the Effective Date, SierraWest will have the right, but not the
obligation, to offer further employment to Denis Long on such terms as may be
agreed.
8
<PAGE>
Market Price Data
SierraWest common stock is quoted on the Nasdaq National
Market. Mercantile common stock is thinly traded in the over-the-counter market
and is not quoted on Nasdaq.
The following table sets forth historical per share market
values for SierraWest common stock and Mercantile common stock and the
equivalent pro forma market values (i) on January 23, 1997, the last trading day
prior to public announcement of the Merger and (ii) on April 16, 1997. The
historical per share market values shown below for SierraWest common stock and
Mercantile common stock represent the last sale prices on or before the dates
indicated; such values for SierraWest may be higher or lower than the "Market
Value" of SierraWest common stock as such term is defined in the Agreement for
purposes of determining the Exchange Amount. The equivalent pro forma market
value per share of Mercantile common stock reflects an Exchange Amount of $19.59
per share, assuming an average Cash Component of $9.795 per share and a Market
Value equivalent to the market price for SierraWest common stock shown in the
table.
<TABLE>
<S> <C> <C> <C> <C>
Equivalent Pro Forma
Market Price Market Value
Historical Historical
SierraWest Mercantile(1)
January 23, 1997 $17.00 $ 8.25 Cash Component $ 9.795
Stock Component 9.795
Total $ 19.590
April 16, 1997 $18.00 $ 8.25 Cash Component $ 9.795
Stock Component 9.795
Total $ 19.590
</TABLE>
(1) The historical market price for Mercantile's common stock is based on
information provided to management by various sources, but not verified by
Mercantile. Mercantile has not been a party to such trades. Mercantile is not
aware of any actual trades since January 23, 1997.
No assurance can be given that SierraWest's Market Value will
not be lower or higher than the amounts shown in the above table or that actual
stock prices for SierraWest's common stock will be equal to or greater than such
Market Value at any time after completion of the Merger. Upon completion of the
Merger, Mercantile will be merged into the Bank, and there will be no further
public market for Mercantile common stock. SierraWest common stock will continue
to be quoted on the Nasdaq National Market.
Dividend Policy
SierraWest's Board of Directors will consider the advisability
and amount of proposed dividends each year. Future dividends will be determined
in light of SierraWest's earnings, financial condition, future capital needs,
regulatory requirements and such other factors as the Board of Directors may
deem relevant. SierraWest's primary source of funds for payment of dividends to
its shareholders will be the receipt of dividends from its subsidiary. The
payment of dividends by California corporations is subject to various legal and
regulatory restrictions.
9
<PAGE>
Selected Financial Information
The following tables present selected historical and unaudited
pro forma combined financial information, including per share information, for
SierraWest and Mercantile. The following financial data should be read in
conjunction with the consolidated financial statements of SierraWest
incorporated by reference in this Proxy Statement/Prospectus and the financial
statements of Mercantile included in this Proxy Statement/Prospectus, the
unaudited pro forma combined financial information of SierraWest and Mercantile
appearing herein, and the notes to such statements and information. The
unaudited pro forma combined information presents selected financial information
based on the historical financial statements of the parties, giving effect to
the proposed combination under the purchase method of accounting and the
assumptions and adjustments in the notes thereto. The unaudited pro forma
combined financial statements do not necessarily indicate the results that would
have occurred if the Merger had been in effect on the dates indicated or that
may occur in the future. See "SUMMARY -- Recent Developments."
<TABLE>
Summary of Selected Financial Information
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
At or for the Year Ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SierraWest
Results of operations:
Interest income $33,269 $ 25,831 $19,657 $17,246 $16,597
Interest expense 12,495 8,491 5,597 4,503 6,876
Net interest income 20,774 17,340 14,060 12,743 9,721
Provision for loan losses 1,010 1,270 885 1,560 915
Noninterest income 7,338 7,969 9,177 10,214 9,406
Noninterest expense 21,697 20,944 17,486 17,023 15,616
Net income 3,328 1,916 3,003 2,704 1,833
Balance sheet (end of period):
Total assets $447,889 $337,518 $259,975 $250,065 $243,758
Net loans 318,820 236,124 169,393 156,347 152,603
Deposits 399,651 293,154 218,876 220,768 211,976
Convertible debentures 8,520 10,000 10,000 250 250
Shareholders' equity 33,916 29,833 28,163 25,645 22,907
Financial ratios:
Tier 1 risk-based capital (1) 9.8% 11.6% 14.1% 13.8% 12.6%
Total risk-based capital (1) 13.6 16.6 20.3 15.1 13.9
Leverage ratio (1) 7.9 9.1 11.0 10.5 10.1
Allowance for loan
losses/period end loans 1.4 1.6 2.1 2.2 1.8
Return on average assets 0.9 0.7 1.2 1.2 0.8
Return on average equity 10.5 6.5 11.2 11.1 8.6
Nonperforming assets to total
assets 1.3 1.8 1.4 1.6 2.0
Dividend payout rate, primary 25.2 33.3 0.0 0.0 0.0
Dividend payout rate, fully diluted 29.7 36.4 0.0 0.0 0.0
</TABLE>
10
<PAGE>
<TABLE>
Selected Financial Information
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
At or for the Year Ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Per share:
Book value $12.24 $ 11.51 $ 10.75 $ 9.90 $ 8.84
Net income
Primary 1.19 0.72 1.12 1.04 0.73
Fully diluted 1.01 0.66 0.96 1.02 0.71
Dividends declared 0.30 0.24 0 0 0
Weighted average shares
outstanding primary 2,802 2,678 2,678 2,609 2,503
Weighted average shares
outstanding, fully diluted 3,747 3,687 3,606 2,657 2,642
Mercantile
Results of operations:
Interest income $4,047 $4,461 $ 3,687 $ 3,379 $ 3,449
Interest expense 1,689 2,017 1,436 1,320 1,685
Net interest income 2,358 2,444 2,251 2,059 1,764
Provision for loan losses 428 293 990 122 78
Noninterest income 424 133 126 127 222
Noninterest expense 1,698 2,235 1,400 1,391 1,396
Net income 358 23 11 453 361
Balance sheet (end of period):
Total assets $46,376 $52,265 $43,603 $ 44,819 $42,156
Net loans 30,801 35,695 33,602 34,801 32,727
Deposits 41,246 47,227 39,459 40,401 38,316
Shareholders' equity 4,931 4,151 4,026 4,133 3,659
Financial ratios
Tier 1 risk-based capital 13.9% 8.7% 11.6% 11.2% 11.3%
Total risk-based capital 15.1 7.8 12.8 12.5 12.5
Leverage ratio 10.6 8.8 9.7 9.1 8.2
Allowance for loan
losses/period end loans 3.4 2.5 3.0 1.6 1.5
Return on average assets 0.7 0.1 0.1 1.0 0.8
Return on average equity 7.6 0.6 0.3 11.6 10.4
Nonperforming assets to total
assets 3.6 3.1 3.2 2.9 2.7
Dividend payout rate, primary (5) N/A N/A N/A N/A N/A
Per share:
Book value $14.64 $ 14.65 $ 14.20 $ 14.58 $ 12.91
Net income, primary 1.15 0.08 0.04 1.60 1.28
Weighted average shares
outstanding, primary 312 283 283 283 283
</TABLE>
11
<PAGE>
Selected Financial Information
(in thousands, except per share amounts)
SierraWest and Mercantile - unaudited
(pro forma combined) (2), (3) 1996
----
Results of operations
Interest income $37,146
Interest expense 14,184
Net interest income 22,962
Provision for loan losses 1,438
Noninterest income 7,762
Noninterest expense 23,574
Net income 3,477
Balance sheet
Total assets $492,654
Net loans 349,621
Deposits 440,897
Other borrowed funds 8,520
Shareholders' equity 37,236
Per share:
Book value $12.64
Net income
Primary 1.17
Fully diluted 0.89
Dividends declared 0.30
Weighted average shares
outstanding, primary 2,976
Weighted average shares
outstanding, fully diluted 3,921
Mercantile - unaudited (pro forma equivalent
per share) (4)
Net income
Primary $0.60
Fully diluted 0.46
Dividends declared (5) 0.00
Book value 6.52
Notes to Selected Financial Information
(1) SierraWest, as a registered bank holding company, is regulated by the
Federal Reserve Board ("FRB"). In computing the capital level required for
bank holding companies, the FRB follows GAAP in the computation of the
components of the capital ratios. SierraWest's subsidiary bank is
regulated by the FDIC, which does not in all respects follow GAAP and has
special rules which have the effect of reducing the amount of capital it
will recognize for purposes of determining the capital adequacy of the
subsidiary bank. Because of the above difference in accounting principles,
the capital adequacy of SierraWest as a whole and its subsidiary bank
varies significantly.
(2) The unaudited pro forma combined per share data for net income have been
calculated using SierraWest's average number of common shares outstanding
for the period presented increased by 173,711 SierraWest shares to be
issued to Mercantile shareholders using an Exchange Amount of $6,601,000,
a Cash Component of $3,300,500, and an Exchange Ratio for the Stock
Component of 0.515492 SierraWest shares (assuming a SierraWest Market Value
of $19.00 per share) for each Mercantile share outstanding at December 31,
1996, as if these shares were outstanding for the period presented. The
unaudited pro forma combined per share data has been calculated by using
SierraWest's common shares outstanding increased by the SierraWest shares
12
<PAGE>
to be issued to Mercantile shareholders using an Exchange Ratio of 0.515492
SierraWest shares for each Mercantile share outstanding at December 31,
1996, as if these shares were outstanding for the period presented. Such
unaudited pro forma per share data assumes no dissenting Mercantile share-
holders and no exercise of outstanding SierraWest stock options.
(3) The unaudited pro forma combined information reflects the purchase method
of accounting. Intangibles, which are estimated to be $1,789,000 at
December 31, 1996, are allocated between core deposit intangibles and
goodwill. For income statement purposes, the core deposit intangible is
being amortized on a straight-line basis over a 7-year life and goodwill is
being amortized on a straight-line basis over a 15-year life.
(4) Mercantile pro forma equivalent per share data is based on SierraWest and
Mercantile unaudited pro forma combined per share data multiplied by the
Exchange Ratio of 0.515492. Such data assumes a per share Stock Component
equal to 50% of the per share Exchange Amount and does not reflect the
benefit of the per share Cash Component.
(5) No dividends were declared by Mercantile in the years 1992 through 1996.
Recent Developments
During the first quarter of 1997, SierraWest engaged Sheshunoff Management
Services, Inc. ("Sheshunoff") to assist it in identifying opportunities to
reduce SierraWest's operating expenses and to recommend more efficient methods
of operation. The cost of the consulting arrangement with Sheshunoff is
expected to be approximately $600 thousand, most of which will be incurred in
the second quarter of 1997. Sheshunoff's fees will be reduced on a sliding
scale if total identified savings do not exceed $1.5 million on an annualized
basis. Expenses associated with the planned restructuring, which are not
expected to exceed $500 thousand, should primarily be absorbed in the second
quarter of 1997.
The SBA announced that effective May 5, 1997, it would limit the size of
loans made under its 7(a) program to $500 thousand. This change is subject to
review by Congress which has a 15 day comment period. The change is not
expected to have a significant impact on SierraWest earnings for 1997.
For the first quarter of 1997, SierraWest had net income of $1.2 million,
or $.32 per share on a fully diluted basis. Total assets, loans, deposits and
shareholders' equity at March 31, 1997, were $474.0 million, $347.8 million,
$423.6 million and $39.9 million, respectively. Net interest margin declined
from 6.3% for the first quarter of 1996 to 5.9% for the first quarter because of
an increase in the cost of interest bearing transaction deposits. Net loan
chargeoffs for the quarter were $230 thousand, or 0.2% of loans outstanding and
nonperforming assets, as a percentage of total assets, were 1.2% at March 31.
The allowance for loan losses stood at 1.4% of loans outstanding at March 31,
1997.
Mercantile earnings for the first quarter of 1997 were $114 thousand, or
$.34 per share, after expenses of $129 thousand attendant to the Merger. Total
assets, loans, deposits and shareholders' equity were $47.4 million, $30.8
million, $41.9 million and $5.0 million, respectively. Net interest margin
declined from 5.3% for the first quarter of 1996 to 4.9% for the first quarter
of 1997 because of a decrease in the level of interest earning assets and an
increase in the cost of interest bearing deposits. There were no loan charge-
offs for the quarter and nonperforming assets, as a percentage of total assets,
were 3.0% at March 31. The allowance for loan losses stood at 3.5% of loans
outstanding at March 31, 1997.
13
<PAGE>
INVESTMENT CONSIDERATIONS
Certain matters discussed or incorporated by reference in this
Proxy Statement/Prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in "INVESTMENT
CONSIDERATIONS", "SUMMARY", "PROPOSAL ONE: THE MERGER - Reasons for the Merger
and Recommendation; Principal Terms of the Merger -- Exchange Amount",
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS" and "MERCANTILE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
MERCANTILE". Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of SierraWest and Mercantile.
Concentration of Lending Activities
At December 31, 1996, approximately 73% of SierraWest's loans
were secured by real estate. At such date, approximately 41% of SierraWest's
loans consisting of loans generated through SierraWest's United States Small
Business Administration (the "SBA") loan program, were secured by commercial
real estate, including small office buildings, owner-user office/warehouses,
mixed-use residential/commercial properties and retail property. Approximately
25% of such loans are additionally guaranteed by the SBA. Approximately 18% of
the properties which secure SierraWest's loans are located in Nevada with the
remainder of the properties being located in California. The ability of
SierraWest to continue to originate real estate secured loans may be impaired by
adverse changes in local and regional economic conditions in the real estate
market, increasing interest rates, or by acts of nature (including earthquakes,
which may cause uninsured damage and other loss of value to real estate that
secures SierraWest's loans). Due to the concentration of SierraWest's real
estate collateral, such events could have a significant adverse impact on the
value of such collateral or SierraWest's earnings.
Reliance on SBA Loan Sales
In recent years, a substantial portion of SierraWest's
revenues and income have been derived from SBA loan activities. Many of the
terms and conditions of the SBA program are subject to political and business
considerations that could significantly influence SierraWest's future efforts in
this area. Although the SBA program has been in effect since 1954, over the
years a number of proposals to eliminate, consolidate or otherwise alter the SBA
program have been considered in both the Executive Branch and Congress.
Consequently, future income from this program will depend upon, among other
things, the continuation and funding of the SBA program by the Federal
government at or near present levels. In recent years, the budgeted governmental
funding for the SBA program has not met increasing program demands and has
required supplemental appropriations of funds by the Congress. There is no
assurance that future levels of government funding will be adequate to fund the
SBA program at current levels.
The SBA loan program includes certain risks not associated
with traditional bank lending programs, including, but not limited to, possible
loss of the SBA guarantee on individual loans if a loan is found to contain
deficiencies in documentation or servicing which contributed to a greater loss
to the SBA than would otherwise be incurred, additional risk associated with
those SBA loans with terms longer than non-SBA loans made by most banks, and
loan-to-value ratios higher than those normally utilized by SierraWest for
non-SBA loans.
Prepayment Risk
A significant portion of SierraWest's reported income relates
to excess servicing on SBA loans sold in the past. The related Excess Servicing
asset included in SierraWest's Consolidated Financial Statements represents the
recognition of the present value of the Excess Servicing spread, which was based
on certain estimates made by management at the time SBA loans were sold. Such
estimates were made based on management's expectations of future prepayment
rates and other considerations. If actual prepayments with respect to sold SBA
loans occur more quickly than was projected at the time such loans were sold,
the carrying value of the Excess Servicing asset may have to be written down
through a charge to earnings in the period of adjustment.
14
<PAGE>
Environmental Liabilities
In the course of its business, SierraWest has acquired, and
may in the future acquire, through foreclosure, properties securing loans it has
originated or purchased which are in default. Primarily with respect to
commercial properties securing SBA loans and commercial real estate loans made
outside the SBA guaranteed loan program, there is a risk that hazardous
substances or wastes, contaminants or pollutants could be discovered on such
properties after acquisition by SierraWest. In such event, SierraWest might be
required to remove such substances from the affected properties at its sole cost
and expense. There can be no assurance that the cost of such removal would not
substantially exceed the value of affected properties or the loans secured by
the properties, that SierraWest would have adequate remedies against the prior
owner or other responsible parties or that SierraWest would not find it
difficult or impossible to sell the affected properties either prior to or
following any such removal. See Note 8 to SierraWest's Consolidated Financial
Statements.
Growth Strategy
SierraWest intends to pursue a growth strategy focusing on its
SBA lending and general banking activities. This strategy is significantly
dependent upon SierraWest's ability to generate an increasingly larger volume of
deposits and loans at acceptable risk levels and on acceptable terms, and
SierraWest having sufficient regulatory capital to support internal growth or
the acquisition of other entities. There can be no assurance that SierraWest
will be successful in implementing its strategy through internal growth or
acquisitions. There can be no assurance that SierraWest will be successful in
identifying appropriate acquisition targets and obtaining regulatory approval of
such acquisitions. SierraWest's ability to pursue its growth strategy also may
be adversely affected by general economic conditions.
Potential Adverse Climatic and Economic Conditions
A significant portion of SierraWest's banking offices are
located in the Lake Tahoe area in the mountains of the Sierra Nevada. The
economy of its service area is based in large part on tourism. The service area
is also subject to extreme climatic conditions, such as heavy snowfall and cold
temperatures. These conditions occasionally result in damage to major access
highways, closure of airports and other disruptions to tourism. Media reports of
such conditions may also cause potential visitors to the area to defer or cancel
plans to travel to the area, even though other means of access may be available.
Most recently, in January 1997, snow, rainfall and mudslides caused extensive
damage to Highway 50, the primary access road from San Francisco and Sacramento
to South Lake Tahoe. Highway 50 was closed for approximately four weeks.
Customers in South Lake incurred economic losses during this period; however
SierraWest is not expected to suffer any material adverse effect from those
losses. No assurance can be given that similar events in the future will not
have an adverse effect on SierraWest's financial condition or operations.
Impact of New Accounting Pronouncement on Regulatory Capital
In December 1996 the Federal Financial Institutions
Examination Council's ("FFIEC") Task Force on Supervision, acting under
delegated authority, approved revisions to the reporting requirements for the
Reports of Condition and Income ("Call Report") for 1997. These revisions
included changes to provide for call reports to be submitted on a GAAP basis
versus special regulatory capital treatment of servicing assets.
Pursuant to the implementation of SFAS 125, effective January
1, 1997, SierraWest will report the asset formerly classified as "Excess
servicing on SBA loans" as two separate assets, either: (a.)"Contractual
servicing on SBA loans sold"; or, (b.) "Interest only strip on SBA loans sold".
Under the interim guidance, the contractual servicing asset is considered an
intangible asset in the determination of regulatory capital requirements with
no deduction from capital. Prior to December 31, 1996 the excess servicing
asset was deducted net of related taxes and certain discounts from capital.
These changes are not expected to have an adverse impact upon
the regulatory capital position of SierraWest. However, in its pronouncement,
the FFIEC noted that it was unable to provide assurance regarding what the
capital treatment of such assets would be under any final capital rules on
servicing assets. SierraWest cannot determine if the changes to current rules
or subsequent interpretations of current rules will result in an adverse impact
on its capital adequacy levels.
15
<PAGE>
Mercantile - Regulatory Agreement
On August 16, 1995, Mercantile entered into a Memorandum of
Understanding (the "Memorandum") with the FDIC and the Superintendent as a
result of an examination of Mercantile by the FDIC. The Memorandum required
that Mercantile take certain actions within specified periods of time. These
requirements included, among other things, that Mercantile (a) revise and
formalize various policies and procedures with respect to board and management
supervision, lending and funds management, and compliance with laws, rules and
regulations; (b) review and maintain an adequate allowance for loan losses;
and (c) reduce the balance of classified assets to $2,500,000 and $2,000,000 by
December 31, 1995 and June 30, 1996, respectively.
Subsequently, on July 8, 1996, this original Memorandum of
Understanding was terminated and replaced with a new Memorandum with the FDIC
and the Superintendent, which requires Mercantile to, among other things:
(a) retain management acceptable to the FDIC and the Superintendent; (b)
maintain a Tier 1 capital ratio that equals or exceeds 7.5% of total assets;
(c) eliminate all assets classified "Loss" and one-half of the assets classi-
fied "Doubtful" within 10 days of the July 8, 1996 effective date; (d) reduce
the balance of assets classified "Substandard" to $4,200,000, $4,000,000,
$3,000,000, and $2,000,000 by September 30, 1996, December 31, 1996, March 31,
1997, and June 30, 1997, respectively; (e) revise, adopt, and implement
written lending and collection policies; (f) establish and maintain an adequate
Allowance for Loan Losses; (g) adopt and implement a written profit plan;
(h) submit a revised mid-range strategic plan; (i) eliminate and/or correct
all violations of law; (j) develop or revise, adopt, and implement a written
liquidity and funds management policy; and (k) make quarterly reports to the
FDIC and the Superintendent. As a result of the Memorandum, Mercantile is
subject to operating restrictions, including the payment of dividends.
As of September 30 and December 31, 1996 and March 31, 1997
assets classified "Substandard" were approximately $3,848,000, $2,940,000,
and $2,632,000, respectively. Management of Mercantile believes Mercantile is
in substantial compliance with the terms and conditions of the Memorandum. How-
ever, no assurance can be given that Mercantile will meet or continue to be
able to meet the terms and conditions of the Memorandum. See "INFORMATION
ABOUT MERCANTILE - Regulatory Agreement."
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SPECIAL MEETING OF SHAREHOLDERS OF MERCANTILE
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection
with the solicitation by the Board of Directors of Mercantile of proxies to be
voted at the Special Meeting of Shareholders of Mercantile (the "Meeting") and
any adjournments or postponements thereof. This Proxy Statement/ Prospectus also
serves as the Prospectus of SierraWest with regard to the offering of shares of
SierraWest common stock to shareholders of Mercantile.
At the Meeting, the shareholders of Mercantile will be asked
to (1) consider and vote upon the Agreement and the Merger Agreement; and (2)
consider and vote upon such other business as may properly come before the
Meeting, including any adjournment or postponement thereof.
VOTING AND PROXIES
Date, Time and Place of Meeting
The Meeting will be held on May 27, 1997 at 5:00 p.m. local
time at Mercantile's office at 455 Capitol Mall, Sacramento, California.
Record Date and Voting Rights
Only holders of record of Mercantile common stock at the close
of business on April 17, 1997 (the "Record Date") are entitled to notice of and
to vote at the Meeting. At the Mercantile Record Date, there were approximately
113 shareholders of record and 336,980 shares of Mercantile common stock
outstanding and entitled to vote. Directors and executive officers of Mercantile
and their affiliates owned beneficially as of the Record Date an aggregate of
188,565 shares of Mercantile common stock, or approximately 56% of the
outstanding Mercantile common stock. Holders of approximately 56% of the
outstanding shares of Mercantile common stock, including all of the directors,
have agreed to vote their shares in favor of the Merger. Accordingly, no
additional shares are required to approve the transaction.
Each Mercantile shareholder is entitled to one vote for each
share of common stock he or she owns. Under the terms of the Agreement and
California law, approval of the Merger by the Mercantile shareholders requires
the affirmative vote of the holders of a majority of the outstanding shares of
Mercantile common stock.
Voting by Proxy
Shareholders of Mercantile may use the enclosed proxy if they
are unable to attend the Meeting in person or wish to have their shares voted by
proxy even if they attend the Meeting. All proxies that are properly executed
and returned, unless revoked, will be voted at the Meeting in accordance with
the instructions indicated thereon or, if no direction is indicated, in favor of
the Merger. The execution of a proxy will not affect the right of a shareholder
of Mercantile to attend the Meeting and vote in person. A person who has given a
proxy may revoke it any time before it is exercised at the Meeting by filing
with the Secretary of Mercantile a written notice of revocation or a proxy
bearing a later date or by attendance at the Meeting and voting in person.
Attendance at the Meeting will not, by itself, revoke a proxy.
Adjournments
The Meeting may be adjourned, even if a quorum is not present,
by the vote of the holders of a majority of the shares represented at the
Meeting in person or by proxy. In the absence of a quorum at the Meeting, no
other business may be transacted at the Meeting.
Notice of the adjournment of the Meeting need not be given if
the time and place thereof are announced at the Meeting at which the adjournment
is taken, provided that if the adjournment is for more than 45 days, or if after
the adjournment a new record date is fixed for the adjourned Meeting, a notice
of the adjourned Meeting shall be given to each shareholder of record entitled
to vote at the Meeting. At an adjourned Meeting, any business may be transacted
which might have been transacted at the original Meeting.
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<PAGE>
Solicitation of Proxies
The proxy relating to the Mercantile Meeting is being
solicited by the Board of Directors of Mercantile. Mercantile will pay or accrue
up to $10,000 toward the printing costs of the Registration Statement and the
Proxy Materials and the costs of distributing the Proxy Materials and other
information relating to these transactions to shareholders of Mercantile. Copies
of solicitation material will be furnished to brokerage houses, fiduciaries and
custodians holding in their names shares of Mercantile common stock beneficially
owned by others to forward to such beneficial owners.
Mercantile may reimburse such persons representing beneficial
owners of its shares for their expenses in forwarding solicitation material to
such beneficial owners. Solicitation of proxies by mail may be supplemented by
telephone, telegram or personal solicitation by directors, officers or other
regular employees of Mercantile, who will not be additionally compensated
therefor.
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<PAGE>
PROPOSAL ONE: THE MERGER
Certain matters discussed or incorporated by reference in this
Proxy Statement/Prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in "INVESTMENT
CONSIDERATIONS", "SUMMARY", "PROPOSAL ONE: THE MERGER - Reasons for the Merger
and Recommendation; Principal Terms of the Merger - Exchange Amount", "UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS" and "MERCANTILE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MERCANTILE".
Therefore, the information set forth therein should be carefully considered
when evaluating the business prospects of SierraWest and Mercantile.
Background
The terms of the Agreement are the result of arm's-length
negotiations between representatives of SierraWest and Mercantile. The following
is a brief description of the events that led to the execution of the Agreement.
In August, 1996, representatives of SierraWest and Mercantile held preliminary
discussions regarding a potential business combination of the two companies.
Negotiations and due diligence continued through November, 1996, and
negotiations and drafting of a definitive agreement began on or about November
15, 1996. During this time, the parties discussed the appropriate level of the
allowance for loan losses for each company. They also considered establishing a
fixed Exchange Amount rather than a variable Exchange amount that might
fluctuate up until the Effective Date. During that time the Boards of Directors
of Mercantile and SierraWest met separately several times to consider the
Merger. The parties executed the Agreement as of January 23, 1997. The
Mercantile Board of Directors approved the Merger on January 23, 1997. The
SierraWest Board of Directors also approved the Merger in a separate meeting on
January 23, 1997.
Reasons for the Merger and Recommendation
Mercantile's Board of Directors has concluded that the terms
of the Merger are fair to, and in the best interests of, Mercantile's
shareholders. In evaluating the terms of the Merger, the Board of Directors
considered the cash and number of shares of SierraWest common stock to be issued
in exchange for each outstanding share of Mercantile common stock, the impact of
the Merger upon their depositors, customers and employees, the overall
compatibility of their office structures, the long-term prospects for both
organizations in a rapidly changing banking and financial services industry, the
anticipated ability of the combined entity to compete more effectively in its
market area and the tax-free nature of the Merger with respect to the shares of
SierraWest common stock to be issued. Mercantile's Board of Directors also
considered the greater liquidity of SierraWest common stock. Mercantile's Board
of Directors also reviewed, among other things, the method of calculating the
Exchange Amount and the Exchange Ratio in relation to the market value, book
value and earnings per share of Mercantile common stock and SierraWest common
stock, information concerning the financial condition, results of operations and
prospects of SierraWest and Mercantile, the benefits of economies of scale and
the financial terms of other recent business combinations in the California
banking industry.
In addition, the Board of Directors of Mercantile considered
the opinion rendered by Carpenter & Company to the effect that the Merger is
fair to the Mercantile shareholders from a financial point of view as further
described below.
In summary, the Board of Directors of Mercantile, without
assigning any relative or specific weight to the factors considered, concluded
the following: (i) the Exchange Amount represents a fair multiple of Mercantile
per share book value and historical and projected earnings; (ii) the Merger is
intended to be tax-free for Federal and California income tax purposes for the
shareholders of Mercantile (other than the Cash Component and cash paid in
lieu of fractional shares) subject to certain assumptions (See "Certain
Federal Income Tax Consequences"); (iii) SierraWest shares have greater
market liquidity than Mercantile shares; and (iv) the due diligence examination
of SierraWest by Mercantile representatives indicated that SierraWest has
strong management and capital.
The Board of Directors of SierraWest determined that the
Merger is in its best interests and the best interests of its shareholders. It
also considered the method of determining the Exchange Amount and the Exchange
Ratio in relation to its own capital and managerial resources and prospects for
future operations. Among the important factors it considered are the following:
(i) It has conducted a due diligence examination of Mercantile which indicates
that Mercantile is a well capitalized institution; (ii) Mercantile will benefit
from the management expertise, expanded menu of products and services and other
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<PAGE>
resources available through the holding company structure, thereby improving
Mercantile's ability to serve its customers, as well as increasing its potential
for growth and increased earnings; (iii) the geographic markets served by
Mercantile complement the markets served by SierraWest Bank, and encompass areas
into which SierraWest Bank would like to expand its services; (iv) the types of
lending activities engaged in and products offered by Mercantile complement the
lending activities and products of SierraWest Bank; (v) the ability of
SierraWest Bank and Mercantile to cross-market products and services will
benefit consumers by increasing competition in the markets served by each
institution; (vi) the diversification of SierraWest's customer base and loan
portfolio which will result from the Merger will help diversify risk in the
SierraWest organization.
Fairness Opinion
General. Pursuant to an engagement letter dated January 3,
1997 (the "Engagement Letter"), Mercantile engaged Seapower Carpenter Capital,
Inc. dba Carpenter & Company ("Carpenter") to provide a fairness opinion with
respect to the transaction. Carpenter is an investment banking firm specializing
in California financial institutions, and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, private placements and valuations for
corporate and other purposes. Mercantile selected Carpenter to render the
opinion on the basis of its experience and expertise in transactions similar to
the Merger and its reputation in the banking and investment communities. No
limitations were imposed by Mercantile on Carpenter with respect to the
investigations made or procedures followed in rendering its opinion.
At a meeting of the Mercantile Board on January 14, 1997,
Carpenter delivered its oral opinion that the consideration to be received by
the holders of Mercantile Common Stock pursuant to the Merger was fair to such
shareholders from a financial point of view, as of the date of such opinion.
Carpenter's oral opinion was subsequently confirmed in writing as of such date.
The full text of Carpenter's written opinion to the Mercantile
Board, dated January 23, 1997, which sets forth the assumptions made, matters
considered, and limitations of the review, by Carpenter, is attached hereto as
Annex C and is incorporated herein by reference. The following summary of
Carpenter's opinion is qualified in its entirety by reference to the full text
of the opinion, which should be read carefully and in its entirety. In
furnishing such opinion, Carpenter does not admit that it is an expert with
respect to the Registration Statement of which this Joint Proxy
Statement/Prospectus is part within the meaning of the term "experts" as used in
the Securities Act and the rules and regulations promulgated thereunder nor does
it admit that its opinion constitutes a report or valuation within the meaning
of Section 11 of the Securities Act. Carpenter's opinion is directed to the
Mercantile Board, covers only the fairness of the consideration to be received
by holders of Mercantile Common Stock from a financial point of view as of the
date of the opinion and does not constitute a recommendation to any holder of
Mercantile Common Stock as to how such shareholder should vote at the Mercantile
Meeting.
In connection with its Opinion, Carpenter, among other things:
(i) reviewed certain publicly available financial and other data with respect to
Mercantile and SierraWest, including the consolidated financial statements for
recent years and interim periods to November 30, 1996 and certain other relevant
financial and operating data relating to Mercantile and SierraWest made
available to Carpenter from published sources and from the internal records of
Mercantile, (ii) reviewed the Agreement; (iii) reviewed certain publicly
available information concerning the trading of, and the trading market for,
Mercantile Common Stock and SierraWest Common Stock; (iv) compared Mercantile
and SierraWest from a financial point of view with certain other companies in
the banking industry which Carpenter deemed to be relevant; (v) considered the
financial terms, to the extent publicly available, of selected recent business
combinations of companies in the banking industry which Carpenter deemed to be
comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of Mercantile certain information of a
business and financial nature regarding Mercantile, furnished to Carpenter by
them; (vii) made inquiries regarding and discussed the Merger and the Agreement
and other matters related thereto with Mercantile's counsel; and (viii)
performed such other analyses and examinations as Carpenter deemed appropriate.
In connection with its review, Carpenter did not assume any
obligation independently to verify the foregoing information and relied on such
information being accurate and complete in all material respects. Carpenter also
assumed that there were no material changes in Mercantile's or SierraWest's
assets, financial condition, results of operations, business or prospects since
the respective dates of their last financial statements made available to it.
Carpenter relied on advice of counsel to Mercantile as to all legal matters with
respect to Mercantile, the Merger and the Agreement. Mercantile acknowledged
that Carpenter did not discuss with Mercantile's independent accountants any
20
<PAGE>
financial reporting matters with respect to Mercantile, the Merger or the
Agreement. Mercantile informed Carpenter, and Carpenter assumed, that the Merger
would be accounted for as a purchase under generally accepted accounting
principles. Carpenter assumed that the Merger would be consummated in a manner
that complies in all respects with the applicable provisions of the Securities
Act, the Exchange Act and all other applicable federal and state statutes, rules
and regulations.
Carpenter assumed that the allowance for loan losses for each
of Mercantile and SierraWest are in the aggregate adequate to cover such losses.
In addition, Carpenter did not assume responsibility for reviewing any
individual credit files, or making an independent evaluation, appraisal or
physical inspection of any of the assets or liabilities (contingent or
otherwise) of Mercantile or SierraWest, nor was Carpenter furnished with any
such appraisals. Finally, Carpenter's opinion was based on economic, monetary
and market and other conditions as in effect on, and the information made
available to Carpenter as of the date of the opinion. Accordingly, although
subsequent developments may affect Carpenter's opinion, it has not assumed any
obligation to update, revise or reaffirm such opinion.
Set forth below is a brief summary of the report presented by
Carpenter to the Mercantile Board on January 14, 1997 in connection with its
opinion.
Analysis of Selected Merger Transactions. Carpenter reviewed
the consideration paid in recently announced transactions whereby certain banks
were acquired. Specifically, Carpenter reviewed 101 transactions involving
acquisitions of banks based in California announced since January 1, 1992 (the
"California Bank Acquisitions"), and 48 acquisition of banks based in California
with total assets of less than $100 million since the same date (the "Small Bank
Acquisitions)". Carpenter further analyzed 10 transactions in 1996 involving
California banks under $100 million (the "1996 Small Bank Acquisitions). For
each bank acquired or to be acquired in such transactions, Carpenter analyzed
data illustrating, among other things, the ratio of the premium (i.e., purchase
price in excess of tangible book value) to core deposits, purchase price to
tangible book value and purchase price to last 12 months' ("LTM") earnings.
The figures for the California Bank Acquisitions, Small Bank
Acquisitions, and 1996 Small Bank Acquisitions produced, respectively: (i)
median percentage of premium to core deposits of 6.3%, 5.5%, and 6.3%; (ii)
median multiple of purchase price to tangible book value of 163.1x, 137.7x, and
157.2x; and (iii) median multiple of purchase price to LTM earnings of 17.5x,
19.4x, and 13.7x. In comparison, based upon an assumed purchase price of $19.60
for each share of Mercantile Common Stock, Carpenter determined that the
consideration to be received by the holders of Mercantile Common Stock in the
Merger represented a percentage of premium to core deposits of 7.4%, a multiple
of price to tangible book value of 137.8x and a multiple of price to
Mercantile's earnings for the 11 months ended November 30, 1996 (annualized) of
14.1x.
No other company or transaction used in the above analysis as
a comparison is identical to Mercantile or the Merger. Accordingly, an analysis
of the results of the foregoing is not mathematical: rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value and the announced acquisition prices of the companies to which
Mercantile and the Merger are being compared.
Contribution Analysis. Carpenter analyzed the contribution of
each of Mercantile and SierraWest to, among other things, total tangible common
equity, assets, LTM net income, gross loans and core deposits of the pro forma
combined companies at or for the period ended September 30, 1996. This analysis
showed, among other things, that based on pro forma combined balance sheets for
Mercantile and SierraWest at September 30, 1996, Mercantile would have
contributed 13.5% of tangible common equity, 10.5% of assets, 9.6% of loans and
10.5% of core deposits. Pro forma income statements for the nine months ended
September 30, 1996 indicated that Mercantile would have contributed 18.1% of the
net income of the pro forma combined companies. Based upon analysis assuming an
Average Price for SierraWest Common Stock of $16.00 and therefore an exchange
ratio in the Merger of 0.61 of a share of SierraWest Common Stock for each share
of Mercantile Common Stock and $9.79 in cash for each share of Mercantile Common
stock, net of the cash payout holders of Mercantile Common Stock would own
approximately 6.2% of the combined companies based on fully diluted shares
outstanding on the date of the opinion.
The summary set forth above does not purport to be a complete
description of the presentation by Carpenter to the Mercantile Board or of the
analyses performed by Carpenter. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Carpenter
believes that its analyses and the summary set forth above must be considered as
a whole and that selecting a portion of its analyses and factors, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to the Mercantile
Board. In addition, Carpenter may have given various analyses more or less
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weight than other analyses, and may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Carpenter's
view of the actual value of Mercantile or the combined companies. The fact that
any specific analysis has been referred to in the summary above is not meant to
indicate that such analysis was given greater weight than any other analysis.
In performing its analyses, Carpenter made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Mercantile
or SierraWest. The analyses performed by Carpenter are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Carpenter's analysis of the fairness of the
consideration to be received by the holders of Mercantile Common Stock in the
Merger and were provided to the Mercantile Board in connection with the delivery
of Carpenter's opinion. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or any time in the future.
The forecasts utilized by Carpenter in certain of its analyses are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those contemplated in such forecasts.
Pursuant to the Engagement Letter, Mercantile paid Carpenter a
fee of $17,500 upon delivery of the fairness opinion. Mercantile has also agreed
to reimburse Carpenter for its reasonable out-of-pocket expenses. Mercantile has
agreed to indemnify Carpenter, its affiliates, and their respective partners,
directors, officers, agents, consultants, employees and controlling persons
against certain liabilities.
Interests of Certain Persons in the Merger
As of April 17, 1997, the directors and executive officers
of Mercantile owned an aggregate of 188,565 shares of Mercantile common stock
which, if owned by them at the Effective Date, will be converted into cash and
shares of SierraWest common stock with an approximate aggregate market value of
$3,694,000, based on a market price for SierraWest shares of $19.00 per share.
Michael Burkart, president of Mercantile, has a contract with
Mercantile under which he is entitled, upon completion of the Merger, to certain
incentive compensation based on the value paid to Mercantile shareholders. If
the Exchange Amount is at least $6,293,000, his incentive compensation will be
$50,000. He will receive an additional $25,000 for each increment of $484,000 by
which the Exchange Amount exceeds $6,293,000.
The Agreement provides that Mercantile employee Denis Long
will be eligible for employment by SierraWest provided that he and SierraWest
have agreed to the terms of employment on or before the Determination Date;
provided, in the event that he has not reached agreement with SierraWest by such
date, Mercantile will have no obligation to terminate Denis Long prior to the
Effective Date. To resolve any questions as to the rights to the parties under
the agreement and their respective relationships with Denis Long, Mercantile and
SierraWest, with the consent of Denis Long, have entered into a letter agreement
which provides: (1) As of the Effective Date, the employment of Denis Long shall
be terminated and he shall have no further rights under the terms of any employ-
ment contracts that may exist between Denis Long and Mercantile; (2) In
consideration of receipt of an enforeceable release from Denis Long, SierraWest
and Mercantile shall jointly make a payment to him equal to $85,000 (one year's
base salary) less applicable withholdings as full and final severance. Each of
SierraWest and Mercantile shall bear one-half of the severance payment; and (3)
Following the Effective Date, SierraWest will have the right, but not the
obligation, to offer further employment to Denis Long on such terms as may be
agreed.
Principal Terms of the Merger
General. The following description of the principal terms of
the Merger is subject to and qualified in its entirety by reference to the terms
of the Agreement and the Merger Agreement, copies of which are annexed to this
Proxy Statement/Prospectus as Annex A.
Effective Date of Merger. The Agreement provides that the
Merger will be consummated upon the filing of the Merger Agreement with the
California Secretary of State and the Superintendent in accordance with the laws
of California. It is contemplated that the Effective Date will occur on or about
June 30, 1997, or as soon thereafter as practicable, assuming the conditions set
forth in the Merger Agreement are fully satisfied or waived. See "THE
MERGER--Terms of the Merger--Representations and Warranties; Conditions to the
Merger."
Exchange Amount. For purposes of the Agreement, capitalized
terms have the following meanings:
Exchange Amount $6,601,000, adjusted as described below.
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Cash Component Cash portion of the Exchange
Amount equal to $3,300,500, increased or
decreased by one-half of the amount of the
adjustment described below and reduced by
the amount of cash allocated to holders of
shares of Mercantile common stock who
exercise dissenters' rights
Stock Component Newly issued shares of SierraWest
common stock with an aggregate Market
Value equal to the $3,300,500,
increased or decreased by one-half of the
amount of any adjustment described below;
provided however, the total number of
newly issued shares of SierraWest common
stock shall not exceed 250,000.
Per Share Cash Component The aggregate Cash Component divided
by the number of outstanding shares of
Mercantile common stock on the Effective
Date.
Per Share Stock Component The aggregate Stock Component divided by
the number of outstanding shares of
Mercantile common stock on the Effective
Date.
Exchange Ratio The Per Share Stock Component divided by
the Market Value
Market Value The average of the closing prices of
the shares of SierraWest common stock as
reported in the western edition of the
Wall Street Journal for the 20 trading
days preceding the Determination Date
Determination Date The fifth business day preceding the
Effective Date.
Adjustment Date The last day of the month preceding the
Determination Date.
On the Effective Date, the outstanding shares of Mercantile
common stock (other than any shares as to which dissenters' rights have been
perfected) will be converted into the right to receive a combination of cash and
shares of the common stock, no par value, of SierraWest with an aggregate value
equal to the Exchange Amount. The Cash Component shall be one-half of the
Exchange Amount reduced by the amount of cash allocated to holders of shares of
Mercantile common stock who exercise dissenters' rights. The Stock Component
will comprise the balance of the Exchange Amount, provided that the total number
of SierraWest shares to be issued shall not exceed 250,000. In the event that
the Stock Component of the Exchange Amount reaches the maximum number of shares
of SierraWest common stock, the Cash Component shall not be adjusted.
If the Exchange Amount remains $6,601,000, the per share Cash
Component and per share Stock Component will each be $9.795 and the per share
Exchange Amount will be $19.59. The range of the Exchange Ratio is a function of
the Market Value of SierraWest's common stock on the Determination Date. The
resulting number of shares of SierraWest common stock to be issued are shown by
the following tables.
Market Value Number
SierraWest Common Exchange Shares
Stock Ratio Issued
$12.00 0.741884 250,000
13.00 0.741884 250,000
14.00 0.699596 235,750
15.00 0.652957 220,033
16.00 0.612147 206,281
17.00 0.576138 194,147
18.00 0.544131 183,361
19.00 0.515492 173,711
20.00 0.489717 165,025
21.00 0.466398 157,167
22.00 0.445198 150,023
23.00 0.425841 143,500
24.00 0.408098 137,521
25.00 0.391774 132,020
The above table shows the Exchange Ratio for one share of
Mercantile common stock exchanged for one-half cash and one-half SierraWest
common stock. For each share of Mercantile common stock exchanged entirely for
SierraWest common stock, the Exchange Ratio would be twice the amount shown
above.
The Agreement does not impose a floor or ceiling on the Market
Value (other than the limitation resulting from the 250,000 ceiling on the
number of shares of SierraWest common stock that may be issued), so the Market
Value as of the Determination Date may be lower or higher than the lowest and
highest values for Market Value shown in the above table. On April 16, 1997,
last reported sales price of SierraWest common stock as reported by the Nasdaq
National Market was $18.00 per share which equates to an Exchange Ratio of
0.544131 and 183,361 shares issued. As of the Determination Date, the actual
market price of SierraWest common stock may be higher or lower than such price.
There can be no assurance that Mercantile shareholders who receive SierraWest
shares in the Merger will be able to sell SierraWest Shares at prices equal to
the Market Value, as the term is defined for purposes of the Exchange Ratio.
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The following table assumes an Exchange Amount of $6,601,000
and shows the adjusted value of the Exchange Amount, in aggregate dollars,
dollars per share and as a percentage of the unadjusted Exchange Amount, if the
Market Value were to fall below $13.20 and the limit of 250,000 shares of
SierraWest common stock applied.
<TABLE>
Adjusted Percentage of the
Adjusted Value Per Share Unadjusted
Market Value Of Exchange Amount Exchange Amount Exchange Amount
<S> <C> <C> <C>
$13.20 $6,600,500 $19.59 100.0%
13.00 6,550,500 19.44 99.2
12.00 6,300,500 18.70 95.4
11.00 6,050,500 17.96 91.2
10.00 5,800,500 17.21 87.9
9.00 5,550,500 16.47 84.1
8.00 5,300,500 15.73 80.3
</TABLE>
SierraWest and Mercantile do not expect that the Market Value
will fall below $13.20 per share.
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Adjustments to the Exchange Amount.
Core Deposits. The Exchange Amount will be reduced by 7.44% of
the amount by which Mercantile core deposits are less than $22.7 million. Core
deposits include all deposits of Mercantile other than: (i) certificates of
deposit; (ii) brokered deposits, wholesale deposits or deposits of other
depository institutions; (iii) deposits maintained by the officers, directors or
shareholders of Mercantile or their related interests to the extent that such
deposits exceed $1 million in the aggregate; and (iv) deposits opened or renewed
after the date of the Agreement where the rate exceeds the rates established by
SierraWest for similar deposit products. Total Deposits for purposes of this
calculation shall be determined by averaging the Total Deposits reflected on the
books of Mercantile for the 20 business days preceding the Adjustment Date. At
March 31, 1997, Mercantile's core deposits, as defined, were $24.1 million. See
"SUMMARY - Recent Developments".
Shareholders' Equity. The Exchange Amount will be increased or
decreased by the amount by which Mercantile's Adjusted Shareholders' Equity is
greater or less than $4,912,000. Adjusted Shareholder Equity shall be computed
in accordance with GAAP but shall reflect the following adjustments which may
not be in accordance with GAAP: Shareholders' equity will be reduced to reflect:
(a) reserves and/or accruals allocated to certain assets identified by
SierraWest and Mercantile in the Agreement; (b) an increase, if necessary, in
Mercantile's general allowance for loan losses to a level consistent with
Mercantile's calculation methodology in effect as of December 31, 1996; (c) an
increase, if necessary, in Mercantile's general allowance for loan losses that
would be required by SierraWest's loan grading system as described in Section
3.2(i) of the Agreement; and (d) the amount necessary to increase the valuation
reserve reflected on Mercantile's books to offset the effect of any additional
carry-forward tax losses resulting from additions to Mercantile's allowance for
loan losses or operating losses occurring after December 31, 1996. All
adjustments, other than (d), will be net of the related tax benefit or cost. At
March 31, 1996, Mercantile's shareholders' equity under GAAP was approxi-
mately $5,024,000. See "SUMMARY - Recent Developments". No assurance can be
given that actual shareholders' equity or adjusted shareholders' equity will be
higher or lower than this amount as of the Effective Date.
The Agreement limits the Stock Component to 250,000 shares of
SierraWest common stock. If the Exchange Amount remains at $6,601,000 and the
Stock Component remains at $3,300,500, the Exchange Amount will effectively be
reduced by any decrease in the average stock price of SierraWest common stock,
during the measurement period below $13.20 per share. The last reported sale
price for SierraWest common stock on April 16, 1997 was $18.00 per share.
Cash/Stock Election. The Exchange Amount will be allocated to
the Stock Component and the Cash Component in accordance the following election
and procedures (the "Cash/Stock Election").
Each Mercantile shareholder may elect to receive his or her
portion of the Exchange Amount in either all SierraWest shares or all cash. If
no election is made, the shareholder will receive a Cash Component equal to 50%
of such shareholder's pro rata portion of the Exchange Amount and a Stock
Component of 50% of such shareholder's pro rata portion of the Exchange Amount,
subject to the adjustment described in the next paragraph.
The Cash/Stock Election is subject to the limitation that the
aggregate Cash Component for all Mercantile shareholders electing cash may not
be more than $3,300,500, reduced by the amount of cash allocated to holders of
shares of Mercantile common stock who exercise dissenters' rights. If the
aggregate Cash Component is undersubscribed, the unsubscribed portion of the
aggregate Cash Component will be allocated pro rata (by number of shares) among
all Mercantile shareholders electing stock. If the aggregate Cash Component is
oversubscribed, the Cash Component of each Mercantile shareholder electing to
receive cash will be reduced pro rata (by number of shares electing to receive
cash) so that the aggregate Cash Component of all Mercantile shareholders will
equal $3,300,500, as adjusted. The total of the Cash Component and the Stock
Component will always equal the Exchange Amount as adjusted and subject to the
limitation on the total number of shares of SierraWest common stock to be issued
as part of the Exchange Amount.
A Mercantile shareholder may not make a Cash/Stock Election
until after the Effective Date. Immediately following the Effective Date,
SierraWest shall send to each Mercantile shareholder a letter of transmittal
describing the Cash/Stock Election in more detail and providing forms for making
the Cash/Stock Election, as desired.
The Cash/Stock Election, if made, must be made for all shares
held in the name of the Mercantile shareholder. A Mercantile shareholder who
holds shares in two or more capacities or in different names may make a
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different Cash/Stock Election for each name or capacity in which shares are
held. However, shares represented by a single certificate may make only one
Cash/Stock Election.
Mercantile shareholders who make a Cash/Stock Election have no
assurance that they will receive all cash or all stock or any specific
proportion thereof.
Rights of Holders After Effective Date; Dividends. Promptly
after the consummation of the Merger, SierraWest will appoint an exchange agent
(the "Exchange Agent"), who will forward a letter of transmittal to former
shareholders of Mercantile containing detailed instructions for the Cash/Stock
Election and for the surrender of certificates representing Mercantile common
stock. Certificates should not be surrendered by shareholders until the letter
of transmittal is received. For purposes of voting and establishing record of
ownership of SierraWest common stock for the period from and after the Effective
Date, any holder of Mercantile common stock who does not surrender the
certificates representing such shares to the Exchange Agent, as discussed above,
(i) shall be deemed to hold that number of shares of SierraWest common stock
that such holder would otherwise be entitled to receive if such certificates had
been surrendered, and (ii) shall be entitled to vote in regard to any matter
submitted to the SierraWest shareholders for their approval. Persons entitled to
receive certificates for SierraWest common stock will not receive the Cash
Component or any dividends or other distributions of any kind which are declared
payable to shareholders of record of the SierraWest common stock after the
Effective Date until they have surrendered their certificates representing
Mercantile common stock. Upon surrender of their certificates, the holder will
be paid, without interest, the Cash Component of the Exchange Amount and any
dividends or other distributions with respect to the SierraWest common stock as
to which the record date and payment date occurred on or after the Effective
Date. Except as described in this paragraph, after the Effective Date, the
holders of certificates formerly representing Mercantile common stock shall have
no rights with respect to such shares other than any dissenters' rights they
have perfected under California Law.
Exchange of Mercantile Stock Certificates; Fractional
Interests. After the Effective Date, each holder of a certificate or
certificates representing shares of Mercantile common stock immediately prior to
the Merger will, upon the surrender thereof to the Exchange Agent, be entitled
to receive a certificate or certificates representing the number of whole shares
of SierraWest common stock into which shares of Mercantile common stock will
have been converted and a payment in cash with respect to the Cash Component of
the Exchange Amount and fractional shares, if any, determined as described
above.
In lieu of fractional shares, each holder shall receive, at
the time of surrender of the certificate or certificates representing the
holder's Mercantile common stock, an amount in cash equal to the Market Value
per share of the common stock of SierraWest, multiplied by the fraction of a
share of SierraWest common stock to which such holder otherwise would be
entitled. No holder shall be entitled to dividends, voting rights, interest on
the value of, or any other rights in respect of a fractional share.
As promptly as practicable after the Effective Date and
completion of the Cash/Stock Election, letters of transmittal will be mailed to
holders of certificates representing shares of Mercantile common stock for use
in exchanging such certificates for cash and shares of SierraWest common stock.
MERCANTILE SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY HAVE BEEN NOTIFIED THAT THE MERGER HAS BEEN CONSUMMATED AND THEY HAVE
RECEIVED A LETTER OF TRANSMITTAL.
Personnel Matters.
Employment At Effective Date. Not later than 30 days prior to
the Determination Date, SierraWest will notify Mercantile in writing of those
employees who will be eligible for employment by SierraWest or Subsidiary
following the Effective Date. Any Mercantile employee who is not identified by
SierraWest as being eligible for employment will be terminated by Mercantile
immediately prior to the Effective Date. Mercantile will make severance payments
to those employees who are not eligible for employment by SierraWest in the
amount for each such employee of not less than two weeks salary plus one
additional week of salary for each year served. Mercantile may, in its sole
discretion, make additional special bonus payments to retain employees who are
deemed necessary to complete the Merger. All such payments will be included in
the calculation of Adjusted Shareholders' Equity and will be paid or accrued on
or before the Adjustment Date. Such payments will be conditioned upon the
receipt of enforceable releases from such employees. In terminating such
employees, Mercantile must abide by all internal policies and all legal
requirements for termination of employment. From the date of the Agreement
through the Effective Date, Mercantile will consult with the human resources
representative of SierraWest and keep that representative advised as to all
matters related to employment. At any time after the Effective Date, former
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employees of Mercantile who are employed by SierraWest following the Effective
Date may be terminated by SierraWest, with or without cause, for any reason not
prohibited by law.
Notwithstanding the foregoing, the Agreement provides that
Mercantile employee Denis Long will be eligible for employment by SierraWest
provided that he and SierraWest have agreed to the terms of employment on or
before the Determination Date; provided, in the event that he has not reached
agreement with SierraWest by such date, Mercantile will have no obligation to
terminate Denis Long prior to the Effective Date. To resolve any questions as
to the rights to the parties under the agreement and their respective relation-
ships with Denis Long, Mercantile and SierraWest, with the consent of Denis
Long, have entered into a letter agreement which provides: (1) As of the Effect-
ive Date, the employment of Denis Long shall be terminated and he shall have no
further rights under the terms of any employment contracts that may exist be-
tween Denis Long and Mercantile; (2) In consideration of receipt of an enforece-
able release from Denis Long, SierraWest and Mercantile shall jointly make a
pay ment to him equal to $85,000 (one year's base salary) less applicable with-
holdings as full and final severance. Each of SierraWest and Mercantile shall
bear one-half of the severance payment; and (3) Following the Effective Date,
SierraWest will have the right, but not the obligation, to offer further employ-
ment to Denis Long on such terms as may be agreed.
Retirement Benefits. Former employees of Mercantile who are
employed by SierraWest after the Effective Date ("Retained Employees") will be
eligible for participation in the SierraWest 401(k) plan and employee stock
option plan at the earliest normal entry date following the Effective Date as
allowed by applicable law and the provisions of SierraWest's benefit plan, so
long as such employees then meet the eligibility requirements for participation
in the SierraWest plan. Retained Employees will be credited for years of prior
service with Mercantile for vesting (non-forfeitability) of accrued benefits in
the SierraWest plan to the fullest extent such credit for such prior service is
permitted by SierraWest's plan and by the laws, rules and regulations of the
Internal Revenue Service and the Employee Retirement Security Act of 1974, as
amended.
Other Benefit Plans. After the Effective Date, any or all
Mercantile welfare benefit plans will be terminated by SierraWest. Retained
Employees will be eligible for participation in any existing SierraWest plan, so
long as such employee would otherwise be eligible to participate in such plan.
Retained Employees will receive credit for length of service with Mercantile for
determination of eligibility or participation in the SierraWest health service
plans or long-term disability, voluntary accident and life insurance plans.
Retained Employees will retain vacation benefits accrued with
Mercantile prior to the Effective Date, subject to SierraWest's maximum accrual
and carryover limitations for such benefits. They will also retain the amount of
sick leave benefit eligibility on Mercantile's records prior to the Effective
Date, to be available subject to SierraWest's policy for sick leave benefits.
Mercantile will have accrued the cost of such benefits on the books of
Mercantile on or before the Adjustment Date. Following the Effective Date, all
retained employees will be subject to the standard policies of SierraWest for
accrual of such benefits.
Retained Employees will be subject to the severance policies
in effect for all SierraWest employees.
Conduct of Business Prior to the Merger. The Agreement
contains mutual covenants concerning the obligations of each party to use its
best efforts to consummate the Merger, the right of each party to review the
other party's books and records, and other customary matters.
Under the Agreement, Mercantile has agreed to conduct its
businesses in the ordinary course as previously conducted; to preserve its
business and customer goodwill intact; to consult with SierraWest as to of any
decisions or actions in matters other than in the ordinary course; on reasonable
request, to permit a designated representative or representatives of SierraWest
to attend and participate (but not vote) in all loan committee meetings and
board of directors meetings, except as to Merger-related matters or other
privileged matters; to maintain its properties in customary repair; to comply in
all material respects with all laws, regulations, decrees and regulatory orders
applicable to the conduct of its business; to keep in force its present
insurance to the extent practicable; to make all required governmental filings,
returns and reports in a timely manner; to conduct an environmental audit prior
to foreclosure on any property that it knows or should know is contaminated with
any hazardous substance and provide the results of such audit to and consult
with SierraWest prior to the foreclosure on any such property; to not sell,
lease, pledge, assign, encumber or otherwise dispose of any of its assets except
other real estate owned or other property in the ordinary course, in each case
for adequate value, without recourse and consistent with its customary practice;
to not take any action to create, relocate or terminate any branch or other
office or to form any new subsidiary or affiliated entity; to not settle any
litigation or disputes involving a claim of more than $50,000 without the
consent of SierraWest, which consent shall not be unreasonably withheld; to
maintain an adequate allowance for loan losses; not to commit itself to any loan
or renewal or restructure of an existing loan with a principal amount in excess
of $40,000 if unsecured, or in excess of $80,000 and with a loan-to-value ratio
above 75% if secured by real property; not to purchase or sell any investment
security with a maturity in excess of three years; not to issue any certificate
of deposit with a rate of interest in excess of 50 basis points above the rate
sheets provided weekly to Mercantile by SierraWest; and not to enter into or
renew any contract having a duration extending beyond nine months from the date
of the Agreement.
SierraWest has agreed to advise the board of directors of
Mercantile if it determines to undertake any transaction or series of
transactions outside the ordinary course of business prior to the Effective
Date; to preserve its business and customer goodwill; to maintain its
properties; to comply with all laws, regulations, decrees and regulatory orders
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applicable to the conduct of its business; to keep in force its present
insurance to the extent practicable; to make all required governmental filings,
returns and reports in a timely manner; and not to sell, lease, pledge, assign,
encumber or otherwise dispose of any of its assets except for adequate value,
without recourse and consistent with its customary practice.
Representations and Warranties. The Agreement contains
representations and warranties by SierraWest and Mercantile regarding, among
other things, their respective organizations, authorization to enter into the
Agreements, capitalization, financial statements, compliance with applicable
laws, payments of taxes, absence of undisclosed liabilities, loan quality,
employment arrangements, adequacy of its allowance for loan losses and pending
and threatened litigation. The Agreement provides that these representations and
warranties must be true immediately prior to the consummation of the Merger but
will not survive beyond the Effective Date except to the extent they relate to
covenants or obligations to be performed after the Effective Date.
Conditions to the Merger. The Merger will occur only if the
Merger is approved by the requisite vote of Mercantile shareholders.
Consummation of the Merger is subject to satisfaction of certain other
conditions. Such conditions include, but are not limited to, the following,
applicable to both parties: each party's representations and warranties shall be
true and correct; each party shall have substantially complied with its
obligations under the Agreement; neither party shall have suffered a material
adverse change in its business, financial condition or results of operations
since September 30, 1996; each party shall have delivered to the other certain
officers' certificates; SierraWest and Mercantile shall have received certain
opinions from each other's legal counsel; no action or proceeding to enjoin or
impede the Merger shall be pending or threatened; the Registration Statement
shall have been declared effective by the Commission and remain effective; all
necessary regulatory approvals, including those of the FDIC and the
Superintendent, shall have been received without any materially burdensome
conditions (see "Required Regulatory Approvals" below); Mercantile and
SierraWest shall have received an opinion of a law firm or accounting firm to
the effect that the exchange of shares of Mercantile common stock for SierraWest
common stock pursuant to the Merger will be tax-free to the Mercantile
shareholders and SierraWest shareholders, respectively; and SierraWest and
Mercantile shall have exchanged unaudited financial information as of the
month-end before the Effective Date.
In addition, Mercantile's obligations to complete the Merger
are subject to its receipt of an opinion from its financial advisor to the
effect that the Merger is fair to it and its shareholders from a financial point
of view. It is noted that Carpenter has delivered such an opinion. See "Fairness
Opinion."
SierraWest's obligations are subject to the additional
condition that all directors of Mercantile and the Brooks Trust (which in the
aggregate hold approximately 56% of the outstanding shares of Mercantile common
stock) shall have entered into a shareholders' agreement by which such
shareholders agree to vote their shares and any shares over which such
shareholders have voting authority in favor of the Merger and further agreeing,
to the extent permitted by law and the bylaws of Mercantile, to vote in favor of
the Merger by consent solicitation. The directors of Mercantile and the Brooks
Trust have entered into such agreements. Additional conditions to SierraWest's
obligations are that (a) Mercantile's other real estate owned ("OREO"),
non-performing loans ("NPAs") (those loans not accruing interest on Mercantile's
books), loans 90 days or more past due, and other loans under regulatory
requirements classified as substandard or non-performing shall not exceed $2.495
million and the ratio of OREO and NPAs to Shareholder Equity plus Allowance for
Loan Losses ("ALL") shall not exceed 42.5%; (b) Mercantile shall maintain an ALL
of no less than $962,000, less certain reserves, or 2.95% of total loans,
whichever is greater, and a ratio of ALL to NPAs of not less than 38.5%; and (c)
SierraWest shall have received from each of Mercantile's directors an agreement
to comply with Commission Rule 145 concerning sales of SierraWest common stock
after the Effective Date.
The Board of Directors of each party may waive any conditions
to that party's performance of the Agreement unless doing so would violate
applicable law.
Required Regulatory Approvals. The Merger is subject to
approval by the FDIC under the Bank Merger Act and by the Department under the
California Banking Law. The Bank Merger Act provides that no transaction may be
approved which would result in a monopoly or which would be in furtherance of
any combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States, or the effect of which in
any section of the country may be substantially to lessen competition, or to
tend to create a monopoly or which in any other manner might restrain trade,
unless it is determined that the anticompetitive effects of the proposed
transaction are clearly outweighed in the public interest by the probable effect
of the transaction in meeting the convenience and needs of the community to be
served. In conducting a review of any application for approval, the FDIC is
required to consider the financial and managerial resources and future prospects
of the company or companies and the banks concerned and the convenience and
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needs of the community to be served. An application may be denied if it is
determined that the financial or managerial resources of the acquiring entity
are inadequate.
A transaction approved by the FDIC may not be consummated for
15 days after such approval. During such period, the U.S. Department of Justice
may commence legal action challenging the transaction under the antitrust laws.
If, however, the Department of Justice does not commence a legal action during
such 15-day period, it may not thereafter challenge the transaction except in an
action commenced under the antimonopoly provisions of Section 2 of the Sherman
Antitrust Act. The Bank Merger Act provides for the publication of notice and
the opportunity for administrative hearings relating to the application for
approval under the Bank Merger Act and authorizes the FDIC to permit interested
parties to intervene in the proceedings. If an interested party is permitted to
intervene, such intervention could substantially delay the regulatory approval
required for consummation of the Merger.
The Merger also must be approved by the Superintendent
pursuant to the California Banking Law. The California Banking Law requires the
Superintendent to consider factors and standards substantially similar to those
under the Bank Merger Act.
Based on current precedents, the managements of SierraWest and
Mercantile believe that the Merger will be approved by the appropriate
regulatory agencies and will not be subject to challenge by the Department of
Justice under the antitrust laws. However, no assurance can be provided that the
regulatory agencies or the Department of Justice will concur in this assessment
or that any approval by the regulatory agencies will not contain conditions
which are materially burdensome to SierraWest or Mercantile.
Dissenters' Rights of Appraisal. Shareholders of Mercantile
who vote against the Merger may be entitled to certain dissenters' appraisal
rights under Chapter 13 of the California General Corporation Law ("Chapter
13"). Chapter 13 is set forth in full in Annex C to this Proxy
Statement/Prospectus.
Important details concerning these requirements are set forth
below; failure to take these actions in a timely and proper fashion will result
in the loss of dissenters' appraisal rights.
The following discussion is not a complete statement of the
law relating to dissenters' rights and is qualified in its entirety by reference
to Annex C. This discussion and Annex C should be reviewed carefully by any
shareholder of Mercantile who wishes to exercise dissenters' rights or who
wishes to preserve the right to do so, since failure to comply with the
procedures set forth in Chapter 13 will result in the loss of dissenters'
rights.
If the Merger is consummated, those shareholders of Mercantile
who elect to exercise their dissenters' rights and who in a timely and proper
fashion perfect such rights will be entitled to receive the "fair market value"
of their shares in cash. Pursuant to Section 1300(a) of the California General
Corporation Law, such "fair market value" would be determined as of the day
before the first announcement of the terms of the Merger, excluding any
appreciation or depreciation caused by the Merger.
In order to qualify for dissenters' rights, Mercantile
shareholders (i) must make a written demand on Mercantile within 30 days after
Mercantile mails to shareholders the notice of approval of the Merger and the
procedure to be followed, and (ii) must not vote their shares in favor of the
Merger.
A written demand by a Mercantile shareholder should be sent to
Mercantile Bank, 455 Capitol Mall, Sacramento, California 95814, Attention:
Corporate Secretary. The written demand must (i) state the number and class of
shares held of record by such shareholder which the shareholder demands that the
company purchase for cash, and (ii) contain a statement of the amount which the
shareholder claims to be the fair market value of the dissenting shares as of
the day before announcement of the proposed Merger. That statement will
constitute an offer by the shareholder to sell his or her dissenting shares to
the company at that price.
If the Merger is approved, Mercantile will, within ten days
after the Meeting, mail to any shareholder who has a right to require the
company to purchase his or her shares a notice that the required shareholder
approval of the Merger was obtained (the "Notice of Approval"). The Notice of
Approval will set forth the price determined by Mercantile to represent the
"fair market value" of any dissenting shares, and will set forth a brief
description of the procedures to be followed by dissenting shareholders who wish
to pursue further their statutory rights. The dissenting shareholder must
deliver his or her share certificate(s) for receipt by Mercantile within 30 days
after the date on which the Notice of Approval was mailed to such shareholder.
The certificate(s) will be stamped or endorsed with a statement that the shares
are dissenting shares and will be returned to the dissenting shareholder.
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The statements in the Notice of Approval will constitute an
offer by Mercantile to purchase from its shareholders any dissenting shares at
the price stated, but only if the Merger is consummated. However, the
determination by Mercantile of fair market value is not binding on its
shareholders, and if a dissenting shareholder chooses not to accept such offer,
he or she has the right during a period of six months following the mailing of
the Notice of Approval to commence a lawsuit to have the fair market value, as
described in Section 1300(a), determined by a court. The fair market value of
dissenting shares as determined by the court in those circumstances could be
higher or lower than the amount offered by Mercantile in the Notice of Approval
or the consideration provided for in the Agreements, and any such determination
would be binding on the dissenting shareholder or shareholders involved in the
lawsuit and on the company. Any party may appeal the judgment. The court action
to determine the fair market value of shares will be suspended if litigation is
instituted to test the sufficiency or regularity of the votes of the
shareholders in authorizing the Merger. Furthermore, no shareholder who has
appraisal rights under Chapter 13 shall have any right to attack the validity of
the Merger except in an action to test whether the number of shares required to
authorize the Merger has been legally voted in favor of the Merger.
Dissenting Mercantile shares may lose their status as such if
any of the following events occurs: the Merger is abandoned (in which case
Mercantile shall pay on demand to its dissenting shareholders who have initiated
proceedings in good faith as provided under Chapter 13 all necessary expenses
and reasonable attorneys' fees incurred in such proceedings); the dissenting
shares are transferred before being submitted to Mercantile for endorsement; the
dissenting shareholder withdraws his or her demand with the consent of
Mercantile; or, in the absence of agreement between the dissenting shareholder
and the company as to the price of his or her shares, such Mercantile
shareholder fails to file suit against the company or otherwise fails to become
a party to such suit within six months following the mailing of the Notice of
Approval.
The receipt of a cash payment for dissenting shares will result
in recognition of gain or loss for federal and California state income tax
purposes by dissenting shareholders. See "THE MERGER - Certain Federal Income
Tax Consequences."
Non-Solicitation Covenants. Subject to the fiduciary
obligations of its Board of Directors, Mercantile has agreed that neither it nor
any of its officers, directors, affiliates or other agents shall initiate
negotiations toward, or otherwise effect or agree to effect, any proposal for
any merger, sale of capital stock resulting in a change of control, sale of all
or substantially all of the assets, or any other means of acquisition of
substantially all the outstanding capital of any entity (a "Business
Combination") of Mercantile. The Agreement also requires Mercantile to notify
SierraWest immediately of the receipt by it of any unsolicited proposal to
effect a Business Combination with another entity. As of the date of this Proxy
Statement/Prospectus, Mercantile has not received such a proposal since the
announcement of the proposed Merger.
Certain Federal Income Tax Consequences. As a condition to the
consummation of the Merger, SierraWest and Mercantile will receive an opinion
from McCutchen, Doyle, Brown & Enersen, LLP acceptable to them that for federal
and California income tax purposes: (a) the Merger will comply with the require-
ments of Internal Revenue Code Section 368; (b) except for the Cash Component
of the Exchange Amount and any cash received in lieu of any fractional share,
no gain or loss will be recognized by holders of shares of Mercantile common
stock who receive shares of SierraWest common stock in exchange for the shares
of Mercantile common stock which they hold; (c) the holding period of shares
of SierraWest common stock exchanged for shares of Mercantile common stock will
include the holding period of the shares of Mercantile common stock for which
they are exchanged, assuming the shares of Mercantile common stock are capital
assets in the hands of the holder thereof at the Effective Date; and (d) the
basis of the shares of SierraWest common stock received in the exchange will be
the same as the basis of the shares of Mercantile common stock for which they
are exchanged, less any basis attributable to the Cash Component or to
fractional shares for which cash is received. The opinion is based on certain
assumptions discussed below.
A shareholder who perfects dissenters' rights and receives
payment for his or her Mercantile shares will be treated as if such shares were
redeemed. In general, if the shares are held as a capital asset at the Effective
Date, the dissenting shareholder will recognize a capital gain or loss measured
by the difference between the amount of cash received and the basis of the
shares in the hands of the dissenting shareholder. However, if such dissenting
shareholder owns, directly or indirectly through the application of Section 318
of the Code, any shares of common stock as to which dissenters' rights are not
exercised and perfected and which are therefore exchanged for SierraWest common
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stock in the Merger, such shareholder may be treated as having received a
dividend in the amount of cash paid to the shareholder in exchange for the
shares as to which dissenter's rights were perfected. Under Section 318 of the
Code, an individual is deemed to own stock that is actually owned (or deemed to
be owned) by certain members of his or her family (spouse, children,
grandchildren and parents, with certain exceptions) and other related parties,
including, for example, certain entities in which the individual has a direct or
indirect interest (including partnerships, estates, trusts and corporations), as
well as stock that such individual (or a related person) has the right to
acquire upon exercise of an option or conversion right held by such individual
(or a related person). Each SierraWest or Mercantile shareholder who intends to
dissent from the Merger (see "THE MERGER - Dissenters' Rights of Appraisal")
should consult his or her own tax advisor with respect to the application of the
constructive ownership rules to the shareholder's particular circumstances.
The opinion assumes that as of the Effective Date the Stock
Component will be not less than 50% of the Exchange Amount. If the Market Value
of SierraWest common stock is less than $13.20, the Stock Component would
comprise less than 50% of the Exchange Amount, and this assumption may not be
correct. The tax opinion of McCutchen, Doyle, Brown & Enersen, LLP, will not
provide any assurance as to the tax consequences of the Merger in such case.
Although no assurance can be given, SierraWest and Mercantile do not expect that
the Market Value will fall below $13.20 as of the Effective Date. If the Stock
Component were to fall below 50% of the Exchange Amount, McCutchen, Doyle, Brown
& Enersen, LLP has indicated that its ability to render the required form of tax
opinion will depend on the facts and circumstances at the time, including the
actual percentage of the Exchange Amount represented by the Stock Component and
the intent of Mercantile shareholders receiving shares of SierraWest common
stock to hold or dispose of such shares following the Effective Date. SierraWest
and Mercantile will consider whether any revised form of tax opinion is
acceptable to them. If they cannot obtain an acceptable tax opinion, they will
consider whether it is in the best interests of their respective companies and
shareholders to proceed with the Merger notwithstanding the absence of a tax
opinion, to revise the Agreement to increase the Stock Component (but not the
value of the Exchange Amount otherwise payable) in order to satisfy the
conditions and assumptions stated in the tax opinion or to abandon the Merger.
For federal tax purposes, the highest marginal tax rate for
individuals on ordinary income is 39.6%, compared to 28% for capital gain, and
the highest marginal tax rate for corporations is 35% on ordinary income and
capital gain. Capital losses are treated differently than ordinary losses.
Essentially, a capital loss for any taxable year may be deducted by a
corporation in that year only to the extent of capital gain, and by an
individual in that year only to the extent of capital gain plus up to $3,000 of
ordinary income. Capital losses not deductible in the year they occur may be
carried forward indefinitely by individuals and may be carried back up to three
years and forward up to five years by corporations.
This Proxy Statement/Prospectus does not provide information
about the tax consequences of the Merger under any state, local or foreign tax
laws. The shareholders of Mercantile are urged to consult their own tax advisors
with respect to all tax consequences of the Merger. Expenses incurred by any
shareholder arising from disputes with the IRS or any state or foreign tax
agency over the tax consequences of the Merger will not be borne by Mercantile
or SierraWest.
Accounting Treatment. The management of Mercantile and
SierraWest expect that the Merger will be subject to the purchase method of
accounting. Under this method of accounting, Mercantile's assets and liabilities
will be reflected on SierraWest's future financial statements at their fair
market value, and the excess of the aggregate Exchange Amount, if any, above the
fair market value of acquired assets and liabilities are allocated between core
deposit intangibles and goodwill. The core deposit intangible will be amortized
on a straight line basis over 7 years and goodwill will be amortized over 15
years.
The pro forma results of this accounting treatment are shown
in the unaudited pro forma financial data included elsewhere in this Proxy
Statement/Prospectus.
Termination and Amendment; Termination Payment. The Agreement
may be terminated any time prior to the Effective Date as follows: (a) by the
mutual consent of the Boards of Directors of both SierraWest and Mercantile
before consummation of the Merger; (b) by the Board of Directors of SierraWest
on or after June 30, 1997, if any of the conditions to the obligations of
SierraWest have not been fulfilled or waived by SierraWest; (c) by the Board of
Directors of SierraWest if (i) it has become aware of any facts or circumstances
of which it was not aware on the date of the Agreement and which materially
adversely affect Mercantile or its properties, operations or financial
condition, (ii) a materially adverse change shall have occurred since September
30, 1996, in the business, financial condition, results of operations or
properties of Mercantile, or (iii) there has been material failure or
prospective material failure on the part of Mercantile to comply with its
obligations under the Agreement, or any material failure or prospective failure
to comply with any of the conditions set forth in Section 7 of the Agreement;
(d) by the Board of Directors of SierraWest in the event that Mercantile enters
31
<PAGE>
into a transaction or series of transactions with a third person or group
providing for the acquisition of all or a substantial part of Mercantile,
whether by way of merger, exchange or purchase of stock, sale of assets or
otherwise; (e) by the Board of Directors of Mercantile on or after June 30,
1997, if (i) any of the conditions to the obligations of Mercantile have not
been fulfilled or waived by Mercantile, provided, however, that if SierraWest is
engaged at the time in litigation (including an administrative appeal procedure)
relating to an attempt to obtain one or more of the required regulatory
approvals or if SierraWest shall be contesting in good faith any litigation
which seeks to prevent consummation of the transactions contemplated hereby,
such nonfulfillment shall not give Mercantile the right to terminate the
Agreement until the later of (A) June 30, 1997, and (B) 60 days after the
completion of such litigation and of any further regulatory or judicial action
pursuant thereto, including any further action by a governmental agency as a
result of any judicial remand, order or directive or otherwise or any waiting
period with respect thereto provided such date shall not occur beyond December
31, 1997; (f) by the Board of Directors of Mercantile if (i) it has become aware
of any facts or circumstances of which it was not aware on the date of the
Agreement and which can or do materially adversely affect SierraWest or its
properties, operations or financial condition, (ii) a materially adverse change
shall have occurred since September 30, 1996 in the business, financial
condition, results of operations or assets of SierraWest, or (iii) there has
been a material failure or prospective material failure on the part of
SierraWest to comply with its obligations under the Agreement or the Merger
Agreement, or any material failure or prospective material failure to comply
with any condition set forth in Section 8 of the Agreement; or (g) by the Board
of Directors of Mercantile in the event SierraWest or its affiliates enter into
a business combination with any other entity which does not expressly
contemplate the performance by SierraWest or its successor in interest of
SierraWest's obligations under the Agreement and SierraWest indicates it will
not consummate the Agreement.
If SierraWest terminates the Agreement because of a willful
breach of the Agreement by Mercantile or because Mercantile has entered into a
transaction or series of transactions with a third person or group providing for
the acquisition of all or a substantial part of Mercantile, Mercantile shall pay
to SierraWest, on demand, the sum of $350,000. If Mercantile terminates this
Agreement because of a willful breach of the Agreement by SierraWest or because
SierraWest has entered into an agreement for a business combination that does
not expressly contemplate the performance by SierraWest or its successor in
interest of SierraWest's obligations under the Agreement and SierraWest
indicates it will not consummate the Agreement, SierraWest shall pay to
Mercantile, on demand, the sum of $350,000. These payments are deemed
consideration or liquidated damages for expenses incurred and the lost
opportunity cost for time devoted to the transactions contemplated by the
Agreement. In addition, each party remains liable for its other expenses as set
forth in Section 10 of the Agreement.
Expenses. Each party agrees to pay the costs incurred incident
to the performance of its obligations under the Agreement, including costs
related to the Registration Statement and these Proxy Materials, their
respective financial statements and the fees of its counsel, accountants,
consultants and financial advisors. Mercantile will pay or accrue up to $10,000
toward the printing costs of the Registration Statement and the Proxy Materials
and the costs of distributing the Proxy Materials and other information relating
to these transactions to shareholders of Mercantile. All fees payable pursuant
to state "blue-sky" securities laws, fees related to obtaining a tax opinion,
and the fee required to be paid to the Commission to register the shares of
Sierra common stock will be shared equally by the parties. For purposes of
determining Adjusted Shareholders' Equity, all expenses of Mercantile in
connection with the Merger will be treated as if they have been paid by and
accrued on the books of Mercantile as of the Determination Date.
Resales of SierraWest Common Stock. The shares of SierraWest
common stock to be issued to Mercantile shareholders in connection with the
Merger have been registered under the 1933 Act. Such shares will be freely
transferable under the 1933 Act, except for shares issued to each person who may
be deemed to be an "affiliate" of Mercantile within the meaning of Rule 145
under the 1933 Act (each an "Affiliate"). The shares of SierraWest common stock
received by Affiliates may not be sold without additional registration under the
1933 Act unless an exemption (including the exemption provided by Rule 145) from
such registration requirement is available. The Affiliates have entered into
agreements concerning the foregoing restrictions on transfer with respect to the
shares of SierraWest common stock they will receive in connection with the
Merger. The exemption under Rule 145 permits sale of shares if the issuer is
current in its filings required under the 1934 Act, the Affiliate does not sell
more than the greater of 1% of the issuer's outstanding shares or the number of
shares equal to the weekly average trading volume over the preceding four weeks
in any three-month period, all sales are conducted as "broker's transactions" or
with a market maker and, in the case of persons who become Affiliates of
SierraWest after the Merger, the Affiliate files Form 144 with the Commission
upon placing a sell order.
Conduct of Business of SierraWest and Mercantile Following the
Merger. When the Merger is consummated, the directors and officers of SierraWest
32
<PAGE>
and the Bank will continue to be the directors and officers of SierraWest and
the Bank. After the Merger, Mercantile will be merged into the Bank and
Mercantile's separate existence will cease. The former head office of Mercantile
will continue to operate as a branch of the Bank.
33
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Certain matters discussed or incorporated by reference in this
Proxy Statement/Prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in "INVESTMENT
CONSIDERATIONS", "SUMMARY", "PROPOSAL ONE: THE MERGER - Reasons for the Merger
and Recommendation; Principal Terms of the Merger -- Exchange Amount",
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS" and "MERCANTILE MANAGE-
MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF MERCANTILE". Therefore, the information set forth therein should be care-
fully considered when evaluating the business prospects of SierraWest and
Mercantile.
The following unaudited pro forma combined financial
statements give effect to the Merger of SierraWest and Mercantile on the basis
of the purchase method of accounting. This method requires that the purchase
price be allocated to the acquired assets and liabilities of Mercantile on the
basis of their estimated fair values as of the date of acquisition. Therefore,
on the Effective Date, SierraWest will establish a new accounting and reporting
basis for the acquired assets and liabilities which will be reflected in future
consolidated financial statements of SierraWest. The unaudited pro forma
combined balance sheet assumes the Merger took place on December 31, 1996. The
unaudited pro forma combined statement of income assumes the Merger was
consummated as of the beginning of the first period presented and includes
adjustments directly attributable to the Merger and expected to have a
continuing impact on the combined entity. Share information was calculated
using, an aggregate Cash Component of $3,300,500 and an Exchange Ratio of
0.515492, which corresponds to a SierraWest Market Value of $19.00 per share.
These unaudited pro forma combined financial statements should
be read in conjunction with the historical consolidated financial statements and
the related notes thereto of SierraWest and the historical financial statements
and related notes thereto of Mercantile incorporated by reference or included in
this Proxy Statement/Prospectus. The unaudited pro forma statements of income
are not necessarily indicative of operating results which would have been
achieved had the Merger been consummated as of the beginning of the first period
presented and should not be construed as representative of future operations.
<TABLE>
SierraWest and Mercantile
Pro Forma Combined Balance Sheet (unaudited) (1)
(In thousands)
December 31, 1996
Adjustments
Pro Forma
SierraWest Mercantile Debit Credit Combined
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 58,634 $ 10,109 $3,400 (3) $ 65,343
Securities 35,216 3,507 38,723
Loans 323,366 31,893 355,259
Allowance for loan losses (4,546) (1,092) (5,638)
------- ------ -------
Net loans 318,820 30,801 349,621
Premises and equipment, net 12,358 123 12,481
Excess servicing on SBA loans 14,338 0 14,338
Other assets 8,523 1,836 10,359
Intangible assets 0 0 $ 1,789 (6) 1,789
------- ------ ---------- ------- ------
Total assets $447,889 $ 46,376 $ 1,789 $3,400 $492,654
======== ======== ========= ====== ========
</TABLE>
34
<PAGE>
<TABLE>
SierraWest and Mercantile
Pro Forma Combined Balance Sheet (unaudited) (1)
(In thousands)
December 31, 1996
Adjustments
Pro Forma
SierraWest Mercantile Debit Credit Combined
<S> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing demand $ 80,525 $ 8,368 $ 88,893
Savings and interest-bearing demand 133,706 13,187 146,893
Time certificates 185,420 19,691 205,111
------- ------ -------
Total deposits 399,651 41,246 440,897
Other liabilities 5,802 199 6,001
Convertible debentures 8,520 0 8,520
----- ------ -------
Total liabilities 413,973 41,445 455,418
Preferred stock 0 0 0
Common stock 12,291 2,844 2,844 (5) 3,320 (1) 15,611
Retained earnings 21,654 2,090 2,090 (5) 21,654
Net unrealized gain (loss) on available for
sale securities (29) (3) 3 (5) (29)
---- ----- -------- -------- ------
Total shareholders' equity 33,916 4,931 4,934 3,323 37,236
------ ----- ----- ----- ------
Total liabilities and shareholders' equity 447,889 $46,376 $4,934 $3,323 $492,654
======= ======= ======= ====== ========
Shares outstanding 2,771 337 337 174 (4) 2,945
</TABLE>
35
<PAGE>
<TABLE>
Pro Forma Combined Statements of Income (unaudited) (1)
(In thousands, Except Per Share Amounts)
Year Ended
December 31, 1996
Adjustments Pro Forma
SierraWest Mercantile Debit Credit Combined
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $30,506 $3,457 $33,963
Interest on securities 1,712 220 $ 170 (3) 1,762
Other interest income 1,051 370 1,421
----- --- ------ -----
Total interest income 33,269 4,047 170 37,146
Interest on deposits 11,735 1,689 13,424
Interest on convertible debentures 760 0 760
--- - ---- ---
Total interest expense 12,495 1,689 0 14,184
Net interest income 20,774 2,358 170 22,962
Provision for loan losses 1,010 428 1,438
----- --- --- -----
Net interest income after
provision for loan losses 19,764 1,930 170 21,524
Service charges on deposit accts. 1,722 220 1,942
Other operating income 5,616 204 5,820
----- --- -----
Total noninterest income 7,338 424 7,762
Salaries and employee benefits 12,086 797 12,883
Occupancy and equipment
expense 3,486 202 3,688
Other operating expense 6,125 699 6,824
Amortization of intangibles 0 0 179 (6) 179
------- ----- ------ -----
Total noninterest expense 21,697 1,698 179 23,574
------ ----- --- ------
Income before provision
for taxes 5,405 656 349 5,712
Provision for taxes 2,077 298 $140 (1) 2,235
----- --- --- ------- -----
Net income $ 3,328 $ 358 $ 349 $140 $ 3,477
======== ====== ===== ==== =======
Net income per share, primary (7) $1.19 $1.15 $ 1.17
Weighted average common shares
outstanding, primary (1) 2,802 312 312 486 2,976
Net income per share, fully diluted (7) $1.01 $1.15 $0.89
Weighted average common shares
outstanding, fully diluted (1) 3,747 312 312 486 3,921
</TABLE>
Notes to Pro Forma Combined Financial Statements
1. The pro forma combined balance sheet reflects the issuance
of 173,711 shares of SierraWest common stock, no par value, upon the
cancellation of 336,980 shares of Mercantile common stock, no par value,
outstanding at December 31, 1996, based upon the pro forma Exchange Ratio of
0.515492 shares (based on a SierraWest Market Value of $19.00 per share) of
SierraWest common stock for each share of Mercantile common stock and payment by
SierraWest of $9.795 per share in cash on account of the Cash Component.
SierraWest anticipates that the cash consideration will be drawn from internal
resources and net interest income has been reduced to reflect this adjustment.
Total cost to be incurred by SierraWest in connection with the Merger are
estimated to be approximately $100,000. These costs, relating to legal,
printing, accounting, and other direct expenses, will be incorporated in the
total purchase price of the transaction. Additional expenses of approximately
$150,000 will be incurred by Mercantile. The effect of this expense has not been
reflected in the above unaudited pro forma financial statements. Income tax
expense has been adjusted to reflect historical tax expense to the pro forma
adjustments using an effective rate of 40%.
2. The pro forma combined per share data for net income has
been calculated using SierraWest's weighted average number of common shares
increased by such shares of Mercantile outstanding at December 31, 1996 (after
adjustment using the Exchange Ratio of 0.515492 SierraWest shares for each
36
<PAGE>
Mercantile share) as if these shares were outstanding for each period presented.
Such pro forma per share data assumes no dissenting Mercantile shareholders and
excludes the exercise of outstanding SierraWest stock options.
3. The pro forma adjustments that represent cash expenditures
of $3.4 million and intangible assets of $1.8 million were necessary to allocate
the purchase price to be paid to acquire Mercantile, as well as pro forma
adjustments necessary to show how the acquisition would have affected the
historical financial statements if it had been consummated at January 1, 1996.
The difference between fair value of assets and liabilities acquired and
historical book value was not considered to be material and therefore no fair
value adjustments have been made.
4. Total consideration is based on a purchase price of $6.6
million, of which $3.3 million is to be paid in cash and the balance of $3.3
million is to be paid in SierraWest common stock equal to173,711 shares based on
a pro forma Market Value of $19.00 per share.
5. Mercantile's shareholders' equity ($2.8 million in
common stock and $2.1 million in retained earnings) is eliminated.
6. The difference between the purchase price of $6.6 million
and the net equity of Mercantile of $4.9 million has been allocated to core
deposit intangibles and goodwill which are amortized on a straight-line basis
over 7 years and 15 years, respectively, or approximately $170 thousand per
year.
7. Pro forma combined per share data for net income has been
calculated using SierraWest's weighted average number of common shares
outstanding increased by 173,711 shares to be issued using an Exchange Amount of
$6.6 million, a Stock Component of $3.3 million, a Cash Component of $3.3
million, a pro forma Market Value of $19.00 per share for SierraWest common
stock and no dissenting Mercantile shareholders.
------------------------------------------------
The purchase price allocation and resulting core deposit
intangible and goodwill are as follows:
Purchase price
Cash Component $3,300,500
Stock Component 3,300,500
Total 6,601,000
Cash expenditures
Professional fees 100,000
Total consideration $6,701,000
Mercantile shareholders' equity $4,912,000
Core deposit intangible and goodwill $1,789,000
Shareholders' equity is shown above as required by the
Agreement at the Effective Date.
37
<PAGE>
INFORMATION ABOUT SIERRAWEST
SierraWest was incorporated under the name Sierra Tahoe
Bancorp under the laws of the State of California on December 5, 1985, as a bank
holding company. SierraWest owns 100% of the stock of SierraWest Bank, formerly
known as Truckee River Bank. The activities of SierraWest are subject to the
supervision of the FRB. SierraWest may engage, directly or through subsidiary
corporations, in those activities closely related to banking which are
specifically permitted under the Bank Holding Company Act of 1956, as amended.
SierraWest Bank was incorporated under the laws of the State
of California on March 19, 1980, and, with the approval of the Superintendent of
Banks of the State of California, opened for business in 1981. SierraWest
commenced operations in Truckee, California, a small tourist-based town located
in the County of Nevada and situated in the High Sierra about 12 miles north of
Lake Tahoe. The Bank changed its name to SierraWest Bank on October 1, 1996. It
currently maintains eleven branches offices in the following communities:
Truckee (two branches), South Lake Tahoe, Tahoe City, Kings Beach, Grass Valley
(two branches), Auburn and Sacramento, California and Reno and Carson City,
Nevada. In addition, SierraWest Bank maintains seven separate lending offices,
primarily for its SBA lending activities, in the following communities: Truckee,
San Francisco, Sacramento, Fresno, and Chico, California, and Reno and Las
Vegas, Nevada.
The offices and operations of SierraWest Bank include those of
the former Sierra Bank of Nevada. Sierra Bank of Nevada was incorporated under
the laws of the State of Nevada on January 12, 1989, and, with the approval of
the Nevada Department of Commerce, Division of Financial Institutions, opened
for business in Reno, Nevada, on January 9, 1990. On October 29, 1990,
SierraWest acquired 100% of the outstanding shares of Sierra Bank of Nevada in a
one-for-one exchange of its stock for the stock of Sierra Bank of Nevada. On
October 1, 1996, Sierra Bank of Nevada merged with and into SierraWest Bank.
Sierra Tahoe Mortgage Company was incorporated on April 19,
1982 and operated a traditional single-family mortgage banking operation as a
subsidiary of SierraWest Bank until July, 1995, when operations were
discontinued. SierraWest and the Bank now comprise the operations of the
company.
For additional information see Item 1 of the 1996 SierraWest
Annual Report on Form 10-K incorporated herein by reference. Also, see "Summary
- - "Recent Developments".
38
<PAGE>
INFORMATION ABOUT MERCANTILE
The following information is based upon financial results
through December 31, 1996. See also "Summary - "Recent Developments".
General
Mercantile is a California banking corporation incorporated in
1975. It is licensed by the California State Banking Department as a commercial
bank. Its headquarters is in Sacramento, California. It conducts a general
commercial banking business from its office in Sacramento. At December 31, 1996,
Mercantile had assets of approximately $46.4 million and shareholders' equity of
approximately $4.9 million. See "Summary - Recent Developments".
As a California state-licensed bank, Mercantile is subject to
regulation, supervision and periodic examination by the Superintendent and the
FDIC. Mercantile is not a member of the FRB System, but is nevertheless subject
to certain regulations of the FRB. Mercantile's deposits are insured by the FDIC
to the maximum amount permitted by law, which is currently $100,000 per
depositor in most cases.
The regulations of these state and federal bank regulatory
agencies govern most aspects of Mercantile's business and operations, including
but not limited to, the scope of its business, its investments, its reserves
against deposits, the nature and amount of any collateral for loans, the timing
of availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the maximum rates of interest allowed on certain
deposits. Mercantile is also subject to the requirements and restrictions of
various consumer laws and regulations.
Mercantile is subject to the FDIC's regulations governing
capital adequacy for nonmember banks. The federal banking agencies have proposed
regulations which would impose additional capital requirements on banks based on
the market risk in foreign exchange and commodity activities and in the trading
of debt and equity investments.
Nonmember banks are required to maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8% at least one-half of
which must be in the form of Tier 1 capital. Risk-based capital ratios are
calculated with reference to risk-weighted assets, including both on and
off-balance sheet exposures, which are multiplied by certain risk weights
assigned to those assets.
The FDIC has established a minimum leverage ratio of 3% Tier 1
capital to total assets for nonmember banks that have received the highest
composite regulatory rating and are not anticipating or experiencing any
significant growth. All other institutions are required to maintain a leverage
ratio of at least 100 to 200 basis points above the 3% minimum for a minimum of
4% or 5%. In addition, Mercantile is subject to the 7.5% Tier 1 capital
requirement imposed by the Memorandum.
For information concerning Mercantile's regulatory capital,
see - "Regulatory Capital Requirements."
From time to time, Mercantile is involved in litigation as an
incident to its business. In the opinion of management, no pending or threatened
litigation is likely to have a material adverse effect on Mercantile's financial
condition or results of operations.
Regulatory Agreement
On August 16, 1995, Mercantile entered into a Memorandum of
Understanding with the FDIC and the Superintendent as a result of an examination
of Mercantile by the FDIC. The Memorandum required that Mercantile take certain
actions within specified periods of time. These requirements included, among
other things, that Mercantile (a) revise and formalize various policies and
procedures with respect to board and management supervision, lending and funds
management, and compliance with laws, rules and regulations; (b) review and
maintain an adequate allowance for loan losses; and (c) reduce the balance of
classified assets to $2,500,000 and $2,000,000 by December 31, 1995 and June 30,
1996, respectively. See "SUMMARY -- Recent Developments".
39
<PAGE>
Subsequently, on July 8, 1996, this original Memorandum of
Understanding was terminated and replaced with a new Memorandum of Understanding
(the"Memorandum") with the FDIC and the Superintendent, which requires
Mercantile to, among other things: (a) retain management acceptable to the FDIC
and the Superintendent; (b) maintain a Tier 1 capital ratio that equals or
exceeds 7.5% of total assets; (c) eliminate all assets classified "Loss" and
one-half of the assets classified "Doubtful" within 10 days of the July 8, 1996
effective date; and, (d) reduce the balance of assets classified "Substandard"
to $4,200,000, $4,000,000, $3,000,000, and $2,000,000 by September 30, 1996,
December 31, 1996, March 31, 1997, and June 30, 1997, respectively; (e) revise,
adopt, and implement written lending and collection policies; (f) establish and
maintain an adequate Allowance for Loan Losses; (g) adopt and implement a
written profit plan; (h) submit a revised mid-range strategic plan; (i)
eliminate and/or correct all violations of law; (j) develop or revise, adopt,
and implement a written liquidity and funds management policy; and (k) make
quarterly reports to the FDIC and the Superintendent. As a result of the
Memorandum, Mercantile is subject to operating restrictions, including the
payment of dividends.
As of September 30, December 31, 1996, and March 31, 1997,
assets classified "Substandard" were approximately $3,848,000, $2,940,000, and
$2,632,000 respectively. Management of Mercantile believes Mercantile is in
substantial compliance with the terms and conditions of the Memorandum. How-
ever, no assurance can be given that Mercantile will meet or continue to be
able to meet the terms and conditions of the Memorandum. See "SUMMARY -
Recent Developments".
Lending Overview
Mercantile grants commercial, real estate construction and
other real estate loans primarily in the greater Sacramento area. Generally, the
loans are secured by business assets and/or real property.
Distribution of Loans
The distribution of Mercantile's loan portfolio, as of the
dates indicated, is shown in the following table (in thousands):
<TABLE>
December 31,
Type of Loan: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans (includes loans secured primarily by real estate):
Construction and land development... $ 5,859 $ 4,988 $ 5,904 $ 5,838 $ 7,278
Equity lines of credit ............. 997 1,265 1,232 141 128
Other real estate secured........... 11,969 16,208 14,252 12,481 8,721
-------- -------- --------- -------- --------
Total Real Estate Loans............... 18,825 22,461 21,388 18,460 16,127
Commercial and industrial loans....... 12,461 13,798 12,729 16,350 16,486
Individual and other loans............ 607 344 520 568 628
-------- -------- --------- -------- --------
Total Loans........................... 31,893 36,603 34,637 35,378 33,242
Less allowance for possible loan losses 1,092 908 1,035 577 515
-------- -------- -------- -------- --------
Total Net Loans....................... $ 30,801 $ 35,695 $ 33,602 $ 34,801 $ 32,727
======== ======== ========= ======== ========
</TABLE>
40
<PAGE>
Loan Commitments
At December 31, 1996, Mercantile had $7.4 million in
undisbursed loan commitments compared with $8.8 million at December 31, 1995. In
addition, standby letters of credit totaled $643 thousand and $594 thousand for
the years ended December 31, 1996 and 1995, respectively.
Credit Risk Management
Mercantile seeks to mitigate the risks inherent in its loan
portfolio by adhering to certain underwriting practices, including analysis of
prior credit histories, financial statements, tax returns and cash flow
projections of its potential borrowers.
Mercantile also has an internal loan review system as well as
periodic external reviews. Collection of delinquent loans is generally the
responsibility of the originating loan officer. The Board of Directors reviews
the status of delinquent and problem loans on a monthly basis. Mercantile's
underwriting and review practices notwithstanding, in the normal course of
business, Mercantile expects to incur loan losses in the future.
Asset Quality
The following table sets forth the amount of Mercantile's
nonperforming assets as of the dates indicated (dollars in thousands).
<TABLE>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans................... $ 619 $ 914 $ 686 $1,037 $ 400
Other real estate owned............ 770 700 700 280 751
------- ------ ------- ------ -------
Total nonperforming assets..... $ 1,389 $1,614 $ 1,386 $1,317 $ 1,151
======= ====== ======= ====== =======
Accruing loans past due 90
days or more..................... $ 261 $ 457 $ 7 $ 90 $ 188
Restructured loans (in compliance
with modified terms)............. $ 505 $ 595 $ 200 $ 353 $ 17
Nonperforming assets to
total assets..................... 3.0% 3.1% 3.2% 2.9% 2.7%
Allowance for possible loan
losses to nonaccrual loans....... 176.4% 99.3% 150.9% 55.6% 128.8%
</TABLE>
Mercantile generally places loans on nonaccrual status when
interest or principal payments become 90 days or more past due unless the
outstanding principal and interest is adequately secured and, in the opinion of
management, is deemed in the process of collection and accrued but unpaid
interest is reversed against the current year's income. Interest income on
nonaccrual loans is recorded on a cash basis. Subsequent payments may be treated
as interest income or return of principal depending upon management's opinion of
the ultimate risk of loss on the individual loan. Cash payments are treated as
interest income where management believes the remaining principal balance is
fully collectible. Additionally, loans not 90 days past due may also be placed
on nonaccrual status if management reasonably believes the borrower will not be
able to comply with the contractual loan repayment terms and collection of
principal or interest is in question.
Interest income on loans on nonaccrual status during the year
ended December 31, 1996, that would have been recognized during that same year
if the loans had been current in accordance with their original terms was not
material.
As of December 31, 1996 and 1995, Mercantile had outstanding
balances in impaired loans of approximately $619 thousand and $914 thousand,
respectively, which had valuation allowances of $206 thousand and $183 thousand
respectively. The average outstanding balance of impaired loans was $767
thousand and $800 thousand for the years ended December 31, 1996 and 1995,
respectively. Impaired loans are loans for which it is probable that Mercantile
will not be able to collect all amounts due.
41
<PAGE>
Except for loans which are disclosed above, there are no
assets as of December 31, 1996, where known information about possible credit
problems of borrower causes management to have serious doubts as to the ability
of the borrower to comply with the present loan repayment terms and which may
become nonperforming assets. However, it is possible that current credit
problems exist that may not have been discovered by management.
The following table shows the loans outstanding, actual
charge-offs, recoveries on loans previously charged off, the allowance for
possible loan losses and pertinent ratios during the periods and as of the dates
indicated (dollars in thousands).
<TABLE>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans....................... $ 34,162 $ 34,526 $ 34,220 $ 33,144 $ 31,777
Total loans at end of period........ 31,893 36,603 34,637 35,378 33,241
Allowance for possible loan losses:
Balance beginning of period......... $ 908 $ 1,035 $ 577 $ 515 $ 495
Actual charge-offs:
Commercial and industrial......... 81 353 524 64 0
Real estate....................... 201 139 0 0 65
Installment....................... 0 9 12 4 0
--------- -------- --------- --------- ---------
Total........................... 282 501 536 68 65
Less recoveries:
Commercial and industrial......... 38 4 4 8 7
Real estate....................... 0 77 0 0 0
Installment....................... 0 0 0 0 0
--------- -------- --------- --------- ---------
Total........................... 38 81 4 8 7
Net charge-offs..................... 244 420 532 60 58
Provision for possible loan
losses............................ 428 293 990 122 78
--------- -------- --------- --------- ---------
Balance end of period............... $ 1,092 $ 908 $ 1,035 $ 577 $ 515
========= ======== ========= ========= =========
Ratios:
Net loans charged off to average
loans outstanding.............. 0.71% 1.22% 1.55% 0.18% 0.18%
Net loans charged off to total loans
at end of period............... 0.77 1.15 1.54 0.17 0.17
Provision for possible loan
losses to average loans........ 1.25 0.85 2.89 0.37 0.25
Provision for possible loan
losses to total loans at end of period 1.34 0.80 2.86 0.34 0.23
Net loans charged off to end of
period allowance for possible
loan losses................... 22.34 46.26 51.40 10.40 11.26
</TABLE>
The provision for possible loan losses represents management's
determination of the amount necessary to be added to the allowance for possible
loan losses to bring it to a level which is considered adequate in relation to
the risk of foreseeable losses inherent in the loan portfolio. Upon
determination of a specific loss in the portfolio, an adjustment to the
allowance for possible loan losses is made.
In making this determination, management takes into
consideration the overall growth trend in the loan portfolio, examinations of
supervisory authorities, internal and external credit reviews, prior loan loss
experience for Mercantile, concentrations of credit risk, delinquency trends,
general and local economic conditions and the interest rate environment.
The allowance for loan losses does not represent a specific
judgment that loan charge-offs of that magnitude will necessarily occur. It is
always possible that future economic or other factors may adversely affect
Mercantile's borrowers, and thereby cause loan losses to exceed the current
allowance.
42
<PAGE>
The following table sets forth management's historical
allocation of the allowance for possible loan losses by loan category and
percentage of loans in each category. Percentage amounts are the percentage of
loans in each category to total loans at the dates indicated (dollars in
thousands).
<TABLE>
December 31,
1996 1995
Amount Percentage Amount Percentage
<S> <C> <C> <C> <C>
Commercial and industrial loans.................. $ 332 39% $ 398 38%
Real estate loans................................ 750 59 500 61
Consumer loans to individuals(1)................. 10 2 10 1
------ ---- ------ ---
Total........................................ $1,092 100% $ 908 100%
====== === ====== ===
</TABLE>
(1) Includes equity lines of credit.
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the distribution by maturity
date of certain of Mercantile's loan categories (in thousands) as of December
31, 1996. In addition, the table shows the distribution between total loans with
predetermined (fixed) interest rates and those with variable (floating) interest
rates (in thousands). Floating rates generally fluctuate with changes in the
prime rate of leading banking institutions.
<TABLE>
Year Ended
December 31, 1996
After One
Within But Within After
One Year(1) Five Years Five Years Total
<S> <C> <C> <C> <C>
Real estate - construction.................. $ 5,236 $ 315 $ 308 $ 5,859
Commercial.................................. 11,137 669 654 12,460
Distribution between fixed
and floating interest rate:
Fixed interest rates..................... 1,099 1,713 1,675 4,487
Floating interest rates.................. 12,480 13,321 1,605 27,406
(1) Demand loan and overdrafts are shown as "Within One Year"
</TABLE>
43
<PAGE>
Average Assets, Liabilities and Shareholders' Equity; Interest Income and
Expense
The following table presents, for the periods indicated,
Mercantile's distribution of average assets, liabilities and shareholders'
equity, as well as the total dollar amount of interest income from average
interest-earning assets and resultant yields and the dollar amounts of interest
expense and average interest-bearing liabilities and resultant rates (in
thousands except percentage amounts):
<TABLE>
Year Ended December 31,
1996 1995 1994
- ------------------------------------------------------- ------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Yield/ Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest Balance Rate Interest
Assets:
Interest-earning assets:
Loans(1)........... $ 34,162 10.12% $ 3,457 $ 34,526 11.14% $ 3,847 $ 34,220 9.82% $ 3,362
Investment securities 3,722 5.91 220 3,724 5.69 212 3,540 5.37 190
Federal funds sold 5,725 5.19 297 5,862 5.65 331 2,013 3.83 77
Other deposits..... 1,293 5.65 73 1,199 5.92 71 1,348 4.30 58
--------- --------- -------- --------- --------- -------
Total interest-earning
assets......... 44,902 9.01 4,047 45,311 9.85 4,461 41,121 8.97 3,687
Allowance for possible
loan losses......... (978) (930) (572)
Non-earning assets:
Cash and due from
banks.......... 2,319 2,779 2,545
Premises and equipment,
net............ 133 104 47
Other assets..... 2,053 1,416 1,108
--------- -------- ---------
Total assets.... $ 48,429 $ 48,680 $ 44,249
========= ========= =========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Transaction accounts $ 14,533 2.92% $ 424 $ 13,885 4.31% $ 598 $ 12,436 3.60% $ 448
Savings accounts 378 2.65 10 423 3.55 15 410 3.66 15
Certificates of deposit 21,447 5.85 1,255 22,670 6.19 1,404 20,130 4.83 973
----------- ---- ------- -------- ---- --------- --------- ---- ------
Total interest-bearing
liabilities...... 36,358 4.64 1,689 36,978 5.45 2,017 32,976 4.35 1,436
Non-interest-bearing liabilities:
Transaction accounts 7,035 7,227 7,062
Other liabilities 331 308 116
--------- ------- --------
Total liabilities 43,724 44,513 40,154
Shareholders' equity:
Common stock..... 2,658 2,414 2,414
Retained earnings 2,060 1,797 1,709
Unrealized loss on
securities....... (13) (44) (28)
--------- -------- ---------
Total shareholders'
equity......... 4,705 4,167 4,095
--------- -------- ---------
Total liabilities and
shareholders'
equity......... $ 48,429 $ 48,680 $ 44,249
========= -------- ======== ------- =========
Net interest income. $ 2,358 $ 2,444 $ 2,251
======== ========= =======
Interest income as a
percentage of interest -
earning assets 9.01% 9.85% 8.97%
Interest expense as a
percentage of interest -
earning assets..... (3.76) (4.45) (3.49)
----- ----- -----
Net interest margin.. 5.25% 5.40% 5.48%
==== ==== ====
</TABLE>
(1) Includes nonaccrual loans with an average balance of $767 thousand,
$800 thousand, and $422 thousand for the years ended December 31, 1996,
1995 and 1994, respectively.
44
<PAGE>
Investment Securities
The following table summarizes the amounts and the
distribution of Mercantile's investment securities (in thousands):
<TABLE>
December 31,
1996 1995 1994
- --------------------------------------------------------------------- -------------------- ---------------------
Market Market Market
Cost Value (1) Cost Value (1) Cost Value (1)
----- ---------- ---- ---------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 198 $ 200 $ 198 $ 202 $ 198 $ 199
Securities of U.S. government
agencies.................................. 3,313 3,307 3,445 3,451 3,445 3,277
------- -------- ----- -------- -------- --------
Total....................................... $ 3,511 $ 3,507 $ 3,643 $ 3,653 $ 3,643 $ 3,476
======= ======== ======== ======= ======== ========
</TABLE>
(1) All securities are available for sale and are recorded at market.
Maturity of Investment Securities
The following table presents the maturities for Mercantile's
investment portfolio as of December 31, 1996 (dollars in thousands).
<TABLE>
December 31, 1996
Book Average Market
Value Rate Value
<S> <C> <C> <C>
U.S. Treasury securities:
Within 1 year................................................................. $ 198 4.02% $ 200
-------- --------
U.S. government agencies:
Within 1 year................................................................... 452 5.70 450
After 1 year but within 5 years................................................. 2,611 6.32 2,605
After 5 years but within 10 years............................................... 250 6.45 252
--------- ---------
Total U.S. Government agencies................................................ 3,313 3,307
--------- ---------
Total............................................................................. $ 3,511 $ 3,507
======== =========
</TABLE>
Deposits
The following table indicates the maturity of Mercantile's CDs
of $100 thousand or more as of December 31, 1996 (dollars in thousands):
<TABLE>
December 31, 1996
Percentage
Balance of Total
<S> <C> <C>
Three months or less................................................................... $ 4,175 40.4%
Over three months through six months................................................... 3,368 32.6
Over six months through twelve months.................................................. 972 9.4
Over twelve months..................................................................... 1,811 17.6
---------- ------
Total.................................................................................. $ 10,326 100.0%
========= =====
</TABLE>
45
<PAGE>
Repricing of Interest Earning Assets and Interest-Bearing Liabilities
The following table sets forth the distribution of repricing
opportunities of Mercantile's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap and the cumulative gap as a percentage of total assets, as of
December 31, 1996. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice earlier in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates. This table should,
therefore, be used only as a guide as to the possible effect changes in interest
rates might have on the net margins of Mercantile (amounts in thousands except
percentage amounts).
<TABLE>
December 31, 1996
Next Day Over Three One Year
to Three Months Through Through Over
Immediately Months Twelve Months Five Years Five Years Total
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold............... $ 4,855 $ 0 $ 0 $ 0 $ 0 $ 4,855
Certificates of deposit.......... 0 891 595 0 0 1,486
Taxable investment securities.... 0 650 0 2,611 250 3,511
Loans............................ 27,406(2) 396 703 1,713 1,675 31,893
---------- ------ ------ -------- -------- -------
Total interest-earning assets 32,261 1,937 1,298 4,324 1,925 41,745
---------- --------- --------- --------- -------- -------
Liabilities:
Savings deposits(1).............. 13,187 0 0 0 0 13,187
Time Deposits.................... 0 7,596 8,814 3,281 0 19,691
--------- ---------- --------- ------- ------- -------
Total interest-bearing liabilities 13,187 7,596 8,814 3,281 0 32,878
--------- ---------- --------- ------- ------- -------
Net interest earning assets (liabilities) $ 19,074 $ (5,659) $(7,516) $ 1,043 $1,925 $ 8,867
========= ======== ======= ======== ====== =========
Cumulative net interest earning assets
(liabilities) ("GAP")............ $ 19,074 $ 13,415 $ 5,899 $ 6,942 $8,867
========= ========= ========== ========= =======
Cumulative GAP as a percentage of
total interest-earning assets.... 45.7% 32.1% 14.1% 16.7% 21.2%
======== ======== ========= ======== ======
</TABLE>
(1) Savings deposits include interest-bearing transaction accounts.
(2) Includes loans which matured on or prior to December 31, 1996.
At December 31, 1996, Mercantile had $35.5 million in assets
and $29.6 million in liabilities repricing within one year. This means that $5.9
million more in interest rate sensitive assets than interest rate sensitive
liabilities will change to the then current rate (changes occur due to the
instruments being at a variable rate or because the maturity of the instrument
requires its replacement at the then current rate). Interest income is likely to
be affected to a greater extent than interest expense for any changes in
interest rates during the Immediately to Twelve Month periods. If rates fall
during this period, interest income would decline by a greater amount than
interest expense and net income would be reduced. Conversely, if rates were to
rise, the reverse would apply.
46
<PAGE>
Regulatory Capital Requirements
The following tables present the capital ratios for
Mercantile, computed in accordance with its applicable regulatory guidelines,
compared to the standards for minimum capital adequacy, for well-capitalized
depository institutions and for the leverage ratio requirements under the
Memorandum as of December 31, 1996 (dollars in thousands).
<TABLE>
To Be Well
Capitalized Under Capital
For Capital Prompt Corrective Required Under
Actual Adequacy Purposes: Action Provisions: Memorandum
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital (to
Risk Weighted Assets) $5,351 15.14% $2,828 8.0% $3,535 10.0% - -
Tier I Capital (to Risk
Weighted Assets) $4,901 13.86% $1,414 4.0% $2,121 6.0% - -
Tier I Capital (to Average
Assets) $4,901 10.58% $1,853 4.0% $2,316 5.0% $3,474 7.5%
</TABLE>
Shareholdings of Certain Beneficial Owners and Management
Management of Mercantile knows of no person who owns, beneficially or
of record, either individually or together with associates, five percent or
more of the outstanding shares of Mercantile's common stock, except as set forth
in the table below. This table also sets forth, as of April 17, 1997, the
number and percentage of shares of Mercantile's outstanding common stock
beneficially owned, directly or indirectly, by each of Mercantile's directors,
executive officers and principal shareholders, and by the directors and execu-
tive officers of Mercantile as a group.
<TABLE>
Shares Owned with Shares Owned with
Sole Voting and Shared Voting and Percent of
Beneficial Owner Investment Power Investment Power Total Shares Class
<S> <C> <C> <C> <C>
_____________________________________________________________________________________________________________________
Directors and Executive Officers:
Robert F. Gaines 13,500 5,000 18,500 5.49%
Arlen J. Opper 8,958 0 8,958 2.66%
Robert C. Cook 16,985 0 16,985 5.04%
Monte R. Doris 20,638 0 20,638 6.12%
Wesley B. Lasher and Inez Lasher
Revocable Trust 0 17,195 17,195 5.10%
Denis Long 7,650 0 7,650 2.27%
Total for Directors and Executive
Officers as a Group: 67,731 22,195 89,926 26.69%
Principal Shareholders
Bruce D. Brooks & Betty J. Brooks
Family Revocable Trust
c\o Capitol Oil Corporation
3838 Watt Ave. Sacramento, CA. 0 104,841 104,841 31.11%
</TABLE>
47
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data for
Mercantile as of and for each of the five years in the period ended December 31,
1996. The statements of operations data and statements of financial condition
data for each of the five years in the period ended December 31, 1996 are
derived from the financial statements of Mercantile and the notes thereto. The
information below is qualified in its entirety by the detailed information
included elsewhere herein and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Financial Statements and Notes thereto included elsewhere herein. Average
assets and equity are computed as the average of daily balances (in thousands,
except per share amounts).
<TABLE>
At or for the Year Ended
December 31,
---------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Total interest income.................................. $ 4,047 $ 4,461 $ 3,687 $ 3,379 $ 3,449
Total interest expense................................. 1,689 2,017 1,436 1,320 1,685
-------- --------- --------- --------- ---------
Net interest income.................................... 2,358 2,444 2,251 2,059 1,764
Provision for possible loan losses..................... 428 293 990 122 78
-------- --------- --------- --------- ---------
Net interest income after provision for possible
loan losses.......................................... 1,930 2,151 1,261 1,937 1,686
Total noninterest income............................... 424 133 126 127 222
Total noninterest expense.............................. 1,698 2,235 1,399 1,391 1,396
Provision for income taxes............................. 298 26 (23) 220 151
-------- --------- ---------- --------- ---------
Net income............................................. $ 358 $ 23 $ 11 $ 453 $ 361
======== ========= ========= ========= =========
Statements of Financial Condition Data
Total assets........................................... $ 46,376 $ 52,265 $ 43,603 $ 44,819 $ 42,156
Loans, net(1).......................................... 30,801 35,695 33,602 34,801 32,727
Allowance for possible loan losses..................... 1,092 908 1,035 577 515
Total deposits......................................... 41,246 47,227 39,459 40,401 38,316
Shareholders' equity................................... 4,931 4,151 4,026 4,132 3,659
Per Share Data(2)
Book value............................................. $ 14.64 $ 14.65 $ 14.20 $ 14.58 $ 12.91
Net income:............................................ 1.15 0.08 0.04 1.60 1.28
Shares used to compute net income
per share:............................................ 337 283 283 283 283
Dividend payout ratio (4):............................. N/A N/A N/A N/A N/A
Selected Ratios
Return on average assets............................... 0.74% 0.04% 0.02% 1.04% 0.81%
Return on average shareholders' equity................. 7.60 0.55 0.27 11.60 10.42
Net interest margin(3)................................. 5.25 5.40 5.48 5.03 4.19
Average shareholders' equity to average assets......... 9.72 8.56 9.25 8.86 7.76
</TABLE>
48
<PAGE>
<TABLE>
At or for the Year Ended
December 31,
---------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for possible loan losses to total loans......... 3.4% 2.5% 3.0% 1.6% 1.5%
Allowance for possible loan
losses to nonaccrual loans............................. 176.4 99.3 150.9 55.6 128.8
Net charge-offs to average loans outstanding.............. 0.7 1.2 1.6 0.2 0.2
Nonaccrual and restructured performing loans to total loans 3.5 4.1 2.6 3.9 1.3
Nonperforming assets to total assets...................... 3.0 3.1 3.2 2.9 2.7
</TABLE>
(1) The term "Loans, net" means total loans less the allowance for possible loan
losses.
(2) Book value per share is calculated as total shareholders' equity
divided by the number of shares outstanding at the end of the period.
(3) Ratio of net interest income to total average earning assets.
(4) No cash dividends were paid in the years 1992 through 1996.
49
<PAGE>
- -------------------------------------------------------------------------------
MERCANTILE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MERCANTILE
Certain matters discussed or incorporated by reference in this
Proxy Statement/Prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in "INVESTMENT
CONSIDERATIONS", "SUMMARY", "PROPOSAL ONE: THE MERGER - Reasons for the Merger
and Recommendation; Principal Terms of the Merger -- Exchange Amount",
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS" and "MERCANTILE MANAGE-
MENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF MERCANTILE". Therefore, the information set forth therein should be care-
fully considered when evaluating the business prospects of SierraWest and
Mercantile.
The following discussion and analysis is designed to provide a
better understanding of the significant changes and trends related to
Mercantile's financial condition, operating results, liquidity and capital
resources. The following discussion should be read in conjunction with the
Financial Statements of Mercantile and the Notes thereto.
Results of Operations For the Years Ended December 31, 1996, 1995 and 1994
Net income for the year ended December 31, 1996 increased
1,457% from $23 thousand for 1995 to $358 thousand for 1996 and increased 109%
for the year ended December 31, 1995 when compared to the year ended December
31, 1994. Net income for 1994 was $11 thousand. Net income for 1995 was
negatively affected by an accrual for a potential operating loss of $700
thousand related to an unauthorized overdraft by a customer. Net income for 1994
was negatively affected by a higher than normal loan loss provision of $990
thousand relating to potential losses on Mercantile's loans.
The following table summarizes the operating results for the
years ended December 31, 1996, 1995, and 1994 (dollars in thousands):
<TABLE>
December 31, 1996 over 1995 1995 over 1994
- --------------------------------------------------------------------- ---------------------- ------------------
1996 1995 1994 Amount Percentage(1) Amount Percentage(1)
---- ---- ---- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income........... $ 4,047 $ 4,461 $ 3,687 $ (414) (9.3)% $ 774 21.0%
Total interest expense.......... 1,689 2,017 1,436 (328) (16.3) 581 40.5
-------- ------- ------- ------- ------
Net interest income............. 2,358 2,444 2,251 (86) (3.5) 193 8.6
Provision for possible
loan losses................. 428 293 990 135 46.1 (697) (70.4)
-------- ------- ------- ------- ------
Net interest income after
provision for possible
loan losses................. 1,930 2,151 1,261 (221) (10.3) 890 70.6
Total other operating income.... 424 133 126 291 218.8 7 5.6
Total other operating
expense..................... 1,698 2,235 1,399 (537) (24.0) 836 59.8
-------- ------- ------- ------- -----
Income (loss) before provision
for taxes................... 656 49 (12) 607 1,238.8 61 508.0
Provision (benefit) for income taxes 298 26 (23) 272 1,046.2 49 213.0
-------- ------- ------- -------
Net Income...................... $ 358 $ 23 $ 11 $ 335 1,456.5 $ 12 109.1
======== ======= ======= ======= ======
</TABLE>
(1) Increase (decrease) over previous year's amount.
Net Interest Income: Net interest income is influenced by a number of factors
such as the volume and distribution of interest earning assets, the rate charged
on loans for interest and fees, the rate earned on investments and federal funds
sold and the rate paid for deposits and other liabilities.
50
<PAGE>
The following table sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from changes in volume
and from changes in rates. For purposes of this table, any change not solely
attributable to volume or rate has been allocated to change due to volume.
<TABLE>
1996 over 1995 1995 over 1994
- --------------------------------------------------------------------------------- ------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income:
Loans.........................................$ (37) $ (353) $ (390) $ 34 $ 451 $ 485
Investment securities.......................... 0 8 8 10 12 22
Federal funds sold............................. (7) (27) (34) 217 37 254
Other deposits................................. 5 (3) 2 (9) 22 13
-------- ---------- --------- ---------- --------- ----------
Total.......................................... (39) (375) (414) 252 522 774
--------- ---------- ---------- --------- --------- ----------
Increase (Decrease) in Interest Expense:
Deposits:
Transaction accounts......................... 19 (193) (174) 62 88 150
Savings accounts............................. (1) (4) (5) 0 0 0
Certificates of deposits..................... (72) (77) (149) 157 274 431
--------- ---------- ---------- --------- --------- ----------
Total.......................................... (54) (274) (328) 219 362 581
--------- ---------- ---------- --------- --------- ----------
Increase in net interest income................ $ 15 $ (101) $ (86) $ 33 $ 160 $ 193
======== ========== ========== ========= ========= ======
</TABLE>
As disclosed in the above table Mercantile's net interest
income increased in 1995 over 1994 and declined in 1996 over 1995. The volume
increase in 1995 is attributable to an increase in the assets of Mercantile by
10.0% from an average balance of $44.2 million in 1994 to $48.7 million in 1995.
The increase in assets was caused by an increase in average deposits of $4.0
million most of which was invested in federal funds sold.
Average loans between 1994 and 1995 remained relatively
stable, increasing only 0.9% in 1995. Loan demand in 1995 was restrained
following changes to Mercantile's underwriting procedures caused by increasing
concerns over loan quality. On August 16, 1995 Mercantile entered into a
Memorandum Of Understanding ("MOU") with the FDIC and the Superintendent which
among other items required Mercantile to revise its loan policies and procedures
and to improve the quality of its loan portfolio. (See "INVESTMENT
CONSIDERATIONS -- Memorandum of Understanding" and "Information about
Mercantile")
In 1996 the average balances for both deposits and loans
declined slightly from the levels achieved in 1995.
Approximately 86% of Mercantile's loans at December 31, 1995,
were tied to the average prime rate for leading banks. The average prime rate
for 1996 was 8.27% compared to 8.83% for 1995. This decrease equates to a
negative rate variance for average loans of $186 thousand. The difference of
$186 thousand between this calculated variance and the actual negative rate
variance of $353 thousand was due to continued competitive pressures on loan
pricing.
Price variances for federal funds sold and other deposits were
related to changes in rates between the respective periods. The duration of the
investment portfolio has not changed significantly between 1994 and 1996. The
rate variances were related primarily to changes in prevailing yields between
the periods.
The average prime rate for 1995 was 8.83% compared to 7.13% in
1994. This increase equates to a positive price variance of $500 thousand. The
difference of $69 thousand between this calculated variance and the actual price
variance of $451 thousand was due in part to an increase in non accrual loans,
which accounted for $13 thousand of the difference, and in part to more
aggressive pricing of new loans .
The average balance and average rate paid on interest bearing
transaction deposit accounts during 1996 and 1995 are as follows:
51
<PAGE>
<TABLE>
Year Ended December 31,
1996 1995
------------------------------------------------
Money Money
NOW Market NOW Market
<S> <C> <C> <C> <C>
Average Balance.................... $ 3,211 $ 11,322 $ 2,620 $ 11,266
Rate paid.......................... 2.15% 3.13% 3.32% 4.54%
</TABLE>
The increase in deposits in 1995 relates to Mercantile's
posting above market rates for both its interest bearing transaction accounts
and its CDs. Average rate paid on transaction accounts for 1995 was 4.3%
compared to 3.6% paid in 1994. The market norm for both periods was in the 2.0%
to 2.5% range. The average rate paid for CD's in 1995 was 6.2% compared to 4.8%
in 1994. The market norm in 1995 was below 6.0%.
A volume increase of 4.7% in 1996 for interest bearing
transaction accounts was offset by a decrease of 5.7% in CD's. The rate paid in
1996 remained above the market norm which continued at the 1995 level of from
2.0% to 2.5% and accounts for the continued increase in these deposits. The
average rate paid for CD's declined from 6.19% in 1995 to 5.85% in 1996. This
reflects offering rates that were more in line with market rates for replacement
CD's and accounts for the decline in average CD balances.
Provision for Loan Losses:
The following table sets forth the ratio of the allowance for
possible loan losses to nonperforming loans, the ratio of the allowance for
possible loan losses to total loans and the ratio of nonperforming loans to
total loans as of the dates indicated.
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses to nonperforming assets...................78.6% 56.3% 74.7%
Allowance for possible loan losses to total loans ............................3.4% 2.5% 3.0%
Nonperforming assets to total loans ..........................................4.4% 4.4% 4.0%
</TABLE>
In 1996 Mercantile loan losses declined to $244 thousand (net
of recoveries) or 0.7% of average loans. In 1996 Mercantile revised its
methodology for calculating its allowance for loan losses to a more conservative
approach which included an allowance based upon its entire portfolio versus a
focus on substandard loans as had been the prior practice. As a result of these
changes the allowance for loan losses was increased in 1996 to 3.4% of loans
outstanding. The provision for 1996 increased to $428 thousand compared to $293
thousand for 1995.
The provision for loan losses in 1995 was $293 thousand
compared to $990 thousand in 1994. In response to concerns raised by the FDIC,
Mercantile increased its provision for loan losses effective December 31, 1994.
It also charged off additional loans in response to FDIC concerns which
increased the total loans charged off for 1994 to $532 thousand (net of
recoveries) or 1.55% of average loans for 1994. Additionally, in early 1995,
Mercantile revised its procedures for calculation of its allowance for possible
loan losses to a quantitative analysis which was based on a rating of all
substandard loans. Mercantile then began a process of reducing the amount of its
substandard loans. It did this through liquidating collateral or declining
renewals.
While Mercantile is unable to predict the intensity and
duration of future uncertain economic conditions it believes that its allowance
for loan losses as of December 31, 1996 was adequate to provide for potential
losses inherent in the portfolio at that date.
The reduced provision for 1995 reflected management's belief
that it had identified the troubled loans in 1994 and made adequate provision
for them. At the end of 1994, the allowance was 3.0% of outstanding loans
compared with 1.6% at the end of the previous year. In 1995, $420 thousand was
charged off (net of recoveries).
52
<PAGE>
Other operating income:
The following table summarizes the principal elements of other
operating income and discloses the increases (decreases) and percent of
increases (decreases) for 1996 and 1995 (dollars in thousands):
<TABLE>
Increase (Decrease)
Year Ended December 31, 1996 over 1995 1995 over 1994
1996 1995 1994 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges.................. $ 79 $ 114 $ 107 $ (35) (30.7)% $ 7 6.5%
Securities (losses)/gains........ 4 0 1 4 - (1) (100.0)
Net gain on sale of SBA loans.... 68 0 0 68 - 0 -
Net gain on sale of other real estate 18 0 0 18 - 0 -
Recovery against 1995 overdraft loss 200 0 0 200 - 0 -
Other income..................... 55 19 18 36 189.4 1 5.6
------- ------ ------ ------ ------
$ 424 $ 133 $ 126 $ 291 218.8% $ 7 5.6%
======== ====== ====== ====== ======
</TABLE>
The decline in service charges to customers' accounts between
1995 and 1996 was due to lower collections on overdrafts in 1996 than in 1995.
Mercantile tightened its controls over overdrafts in 1996 and this resulted in
lower overdraft penalties.
In 1996 Mercantile sold the guaranteed portion of one SBA loan
at a premium and recorded a gain on the sale of $68 thousand. There are no
additional planned sales of SBA loans. Additionally, Mercantile sold other real
estate owned in 1996 and realized a gain over the carrying value of $18
thousand.
In 1995 Mercantile incurred a loss of $700 thousand from an
unauthorized customer overdraft. The customer made payments against its
obligation to Mercantile of $200 thousand in 1996 and $40 thousand through March
1, 1997. While there can be no guarantee of further payments Mercantile
anticipates that further repayments will be received.
The increase in other income of $36 thousand in 1996 was due
to reimbursement by the SBA of its share of expenses relating to the liquidation
of an SBA loan which expense had been charged against income for 1995.
Other operating expense:
The following table computes the ratio of major other
operating expense categories to total average assets (dollars in thousands):
<TABLE>
Salaries Occupancy
and and Other
Year Ended Average Related Equipment Operating
December 31, Assets Benefits(1) Expenses Expenses
<S> <C> <C> <C> <C>
1996 $48,429 1.65% .42% 1.44%
1995 48,680 1.58 .31 2.71
1994 44,249 1.66 .34 1.16
</TABLE>
(1) Excludes profit sharing payments. Including this item, percentages
would be 1.77%, 1.78% and 1.88% for the years ended December 31,
1996, 1995 and 1994, respectively.
Salaries and related expenses increased between 1994 and 1996
at a rate that approximated the rate of inflation. The decline in the percentage
of salaries and related benefits to average assets between 1994 and 1995 was due
to the increase in average assets.
The increase in occupancy and equipment expense in 1996 was
caused by additional depreciation for data processing equipment related to a PC
banking product that Mercantile introduced for its customers.
The following table summarizes the principal elements of
operating expenses and discloses the increases (decreases) and percent of
increases (decreases) for 1996 and 1995 (dollars in thousands):
53
<PAGE>
<TABLE>
Increase (Decrease)
Year Ended December 31, 1996 over 1995 1995 over 1994
1996 1995 1994 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and related benefits.. $ 797 $ 767 $ 734 $ 30 3.9% $ 33 4.5%
Occupancy and equipment........ 202 150 150 52 34.7 0 0
Insurance...................... 51 44 45 7 15.9 (1) (2.2)
Postage........................ 16 18 14 (2) (11.1) 4 28.6
Stationery and supplies........ 45 44 46 1 2.3 (2) (4.3)
Telephone...................... 12 10 9 2 20.0 1 11.1
Legal fees..................... 62 104 18 (42) (40.4) 86 477.8
Audit and accounting fees...... 61 68 15 (7) (10.3) 53 353.3
Directors' fees and expenses... 33 36 25 (3) (8.3) 11 44.0
FDIC assessments............... 9 53 92 (44) (83.0) (39) (42.4)
OREO expense................... 326 163 118 163 100.0 45 38.1
Overdraft loss................. 0 700 0 (700) (100.0) 700 --
Other.......................... 84 78 133 6 7.7 (55) (41.4)
-------- ------- ------- ------- --------
$ 1,698 $ 2,235 $ 1,399 $ (537) (24.0)% $ 836 59.8%
======= ======= ======= ======== =======
</TABLE>
Insurance cost increases in 1996 related to increased property
insurance on OREO.
The increase in the legal fees for 1995 versus 1994 related
primarily to collection costs for loans in liquidation and development of OREO.
Legal fees of $28 thousand incurred in 1996 related to the $700 thousand
unauthorized customer overdraft discovered in late 1995.
Audit and accounting expenses increased in 1995 because of
work done by Mercantile's external auditors in investigating the unauthorized
customer overdraft. In 1996, Mercantile employed an external loan review firm to
conduct comprehensive loan reviews.
OREO expenses included costs associated with a land
development project of $70 thousand, $120 thousand and $42 thousand for 1994,
1995 and 1996 respectively. This property was disposed of by December, 1996. In
1996 Mercantile provided $205 thousand as a reserve for a decline in the market
value of its OREO properties. OREO expenses without these items were $48
thousand, $43 thousand and $79 thousand for 1994, 1995 and 1996 respectively.
The $700 thousand Overdraft loss was the result of an
unauthorized customer overdraft.
Provision for income taxes:
Mercantile's provision for income taxes was an expense of $298
thousand in 1996 and $26 thousand in 1995, and a benefit of $23 thousand in
1994. The effective income tax rate was 45.4% in 1996 as compared with 52.9% in
1995 and (188.5%) in 1994. See Footnote 8 of the Mercantile 1996 audited
financial statements included in this Proxy Statement/Prospectus for further
discussion of the change in the provision for income taxes.
Liquidity and Financial Condition
Liquidity refers to Mercantile's ability to maintain adequate
cash flows to fund operations and meet obligations and other commitments on a
timely basis. Mercantile's liquidity management policies are structured so as to
maximize the probability of funds being available to meet present and future
financial obligations and to take advantage of business opportunities. Financial
obligations arise from withdrawals of deposits, repayment on maturity of
purchased funds, extensions of loans or other forms of credit, purchase of
loans, payment of interest on deposits and borrowings, payment of operating
expenses, and capital expenditures.
54
<PAGE>
Mercantile has various sources of liquidity. Increases in
liquidity result from the maturity or sale of assets. Other than cash itself,
short-term investments such as federal funds sold are the most liquid assets.
Also, investment securities available for sale can be sold prior to maturity as
part of prudent asset/liability management in response to changes in interest
rates and/or prepayment risk as well as to meet liquidity needs. Additionally,
liquidity is provided by loan repayments. Deposits such as demand deposits,
savings deposits and retail time deposits also provide a source of liquidity.
They tend to be stable sources of funds. Mercantile maintains an adequate level
of cash and cash equivalents to meet its day-to-day needs and in addition, at
December 31, 1996, Mercantile had an unsecured line of credit totaling $1.5
million with a correspondent bank.
Cash and due from banks and federal funds sold as a percentage
of total deposits were 20.9% at December 31, 1996 as compared to 20.2% at
December 31, 1995. Cash and due from banks totaled $3.8 million at December 31,
1996 as compared to $3.1 million at December 31, 1995, and federal funds sold
totaled $4.9 million at December 31, 1996 as compared to $6.5 million at
December 31, 1995. Federal funds sold represent overnight deposits with major
banks and are predominantly uninsured. The uninsured portion of these deposits
together with the uninsured portion of cash deposited with other institutions
totaled $4.7 million as of December 31, 1996. In the event of a failure of any
of these institutions, Mercantile could lose all or part of its deposits.
Mercantile increased its CD deposits with other financial
institutions from $1.2 million at December 31, 1995 to $1.5 million at December
31, 1996. All of these deposits are covered by FDIC insurance. Longer term
liquidity is provided by Mercantile's investment portfolio. At December 31, 1996
Mercantile held $3.5 million in U.S. Government obligations compared to $3.7
million at December 31, 1995.
Loans outstanding at December 31, 1996 declined by 13.1% or
$4.8 million to $32.0 million compared to loans outstanding of $36.8 million at
December 31, 1995. Of the decline $3.7 million was in real estate loans. During
1996 Mercantile continued a program to improve on the overall quality of its
portfolio. It declined to renew a number of loans which no longer met its credit
standards. Additionally Mercantile continued to apply more conservative
standards to new lending opportunities. These factors combined with increasing
competition for loans in Mercantile's marketplace contributed to the decline in
outstanding loans.
Mercantile's deposits declined by 12.7% or $6.0 million
between December 31, 1995 and 1996. Deposits at December 31, 1996 were $41.2
million compared to $47.2 million at December 31, 1995. Money market accounts
declined by $3.6 million or 28.4% to $9.2 million between these dates and CD's
declined by $3.2 million or 13.9% to $19.7 million. The declines in money market
accounts and CD's relate to reductions in rates paid on these products.
Other liabilities at December 31, 1996 were $199 thousand
compared to $887 thousand at December 31, 1995. At December 31, 1995 other
liabilities included an accrual of $700 thousand for a potential loss associated
with an unauthorized overdraft. The related overdraft was included in loans at
December 31, 1995. The accrual was offset against the related overdraft in 1996.
Capital Resources
At December 31, 1996, Mercantile had shareholders' equity of
$4.9 million as compared to $4.2 million at December 31, 1995. Between December
31, 1992 and December 31, 1996 Mercantile's capital grew at a compound annual
rate of 7.7%. The growth in capital came primarily from earnings of Mercantile
and the exercise of stock options. In 1996, 53,600 shares were issued pursuant
to the exercise of stock options for $430 thousand.
Between December 31, 1992 and December 31, 1995 Mercantile's
total assets grew at a compound annual rate of 7.4% to $52.2 million. Between
December 31, 1995 and December 31, 1996 total assets declined 11.3% to $46.4
million. Throughout this period Mercantile's regulatory capital levels remained
above well capitalized levels as defined by Mercantile's regulators.
On January 23, 1997 Mercantile entered into a definitive
agreement, subject to regulatory and shareholder approval, with SierraWest
providing for a merger of Mercantile with and into SierraWest's bank subsidiary,
SierraWest Bank, for cash and stock equal to $6.6 million, subject to certain
possible adjustments. (See "PROPOSAL ONE: THE MERGER".)
55
<PAGE>
No dividends have been paid over the past five years and no
dividends are projected to be paid in the future. The Memorandum, currently in
place, prohibits the payment of dividends unless approved in advance by the FDIC
and the Superintendent.
56
<PAGE>
DESCRIPTION OF SIERRAWEST CAPITAL STOCK
General
The authorized capital stock of SierraWest consists of
10,000,000 shares of common stock, no par value, and 10,000,000 shares of
preferred stock, including 200,000 shares of Series A preferred stock. At
December 31, 1996, SierraWest had $8,520,000 of debentures convertible into
852,000 shares of SierraWest common stock. At this same date, there were
2,771,139 shares of SierraWest common stock outstanding and no shares of
preferred stock or Series A preferred stock outstanding. Also, as of such date,
options to acquire 392,959 shares of SierraWest common stock had been issued and
were outstanding, and an additional 375,000 shares of the authorized SierraWest
common stock were available for grant under the 1996 Stock Option Plan.
SierraWest has also reserved 150,000 shares for issuance in connection with its
Deferred Compensation and Stock Award Plan.
Common Stock
Holders of SierraWest Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders. Shareholders have the right to cumulate their votes for the
election of directors. Shareholders are entitled to receive ratably such
dividends as may be legally declared by SierraWest's Board of Directors. There
are legal and regulatory restrictions on the ability of SierraWest to declare
and pay dividends. See "MARKET PRICE AND DIVIDEND INFORMATION." In the event of
a liquidation, shareholders are entitled to share ratably in all assets
remaining after payment of liabilities. Shareholders have no preemptive or
conversion rights. Shares are not subject to further call or assessment. The
transfer agent and registrar for SierraWest Common Stock is American Stock
Transfer and Trust Company.
Preferred Stock
The Board of Directors of SierraWest is authorized to fix the
preferences, limitations, relative rights, qualifications and restrictions of
the preferred stock and may establish series of preferred stock and determine
the variations between series. If and when any preferred stock is issued, the
holders of preferred stock may have a preference over holders of SierraWest
Common Stock upon the payment of dividends, upon liquidation of SierraWest, in
respect of voting rights and in the redemption of the capital stock of
SierraWest.
With respect to SierraWest's Series A preferred stock, see
"Certain Differences in Rights of Shareholders - Shareholders Protection Plan."
Convertible Debentures
On February 8, 1994, SierraWest sold to the public $10,000,000
of 8 1/2% optional convertible subordinated debentures, convertible at the
option of the holder at $10.00 per share. These debentures mature on February 1,
2004 and are redeemable on or after February 1, 1997 in whole or in part at the
option of SierraWest.
As of April 16, 1997 the outstanding balance had been
reduced to $3,669,000, as a result of voluntary conversions into common stock.
57
<PAGE>
DESCRIPTION OF MERCANTILE CAPITAL STOCK
The authorized capital stock of Mercantile consists of
1,000,000 shares of Mercantile common stock, no par value and 1,000,000 shares
of Mercantile preferred stock. As of April 17, 1997, there were 336,980 shares
of Mercantile common stock outstanding. No shares of Mercantile preferred stock
have been issued or are outstanding.
Holders of Mercantile common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders, except that shareholders may cumulate their votes in the election
of directors. Shareholders are entitled to receive ratably such dividends as may
be legally declared by Mercantile's Board of Directors. There are legal and
regulatory restrictions on the ability of Mercantile to declare and pay
dividends. See "MARKET PRICE AND DIVIDEND INFORMATION." In the event of a
liquidation, shareholders are entitled to share ratably in all assets remaining
after payment of liabilities. Shareholders have no preemptive or conversion
rights. Shares are not subject to further call or assessment, except as provided
in Section 662 of the California Banking Law. The transfer agent and registrar
for Mercantile common stock is U.S. Stock Transfer Corporation.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
General
SierraWest is incorporated under and subject to all the
provisions of the General Corporation Law of California. Mercantile is
incorporated under and subject to all of the provisions of the California
Banking Law and substantially all of the provisions of the California General
Corporation Law. Upon consummation of the Merger, except for those persons, if
any, who dissent from the Merger and perfect appraisal rights under the
California Law or receive all cash in the Merger, the shareholders of Mercantile
will become shareholders of SierraWest.
The following is a general discussion of the material
differences between the rights of SierraWest shareholders under the SierraWest
Articles and Bylaws and the rights of Mercantile shareholders under the
Mercantile Articles and Bylaws and applicable California law.
Declaration of Dividends
Under California Law, the directors of SierraWest may declare
and pay dividends upon the shares of its capital stock either (i) out of its
retained earnings, or (ii) out of capital, provided the company would, after
making the distribution, meet two conditions, which generally stated are as
follows: (i) the corporation's assets must equal at least 125% of its
liabilities; and (ii) the corporation's current assets must equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, then the corporation's current assets must equal at least 125% of its
current liabilities.
Under the California Banking Law, Mercantile may pay a
dividend equal to its retained earnings or its net income from the last three
years, less any dividends paid during such period, whichever is less, or, with
the prior approval of the Superintendent, it may pay dividends up to the
greatest of its retained earnings, its net income for its last fiscal year or
its net income for its current fiscal year. The Memorandum, currently in
place, prohibits the payment of dividends unless approved by the FDIC and the
Superintendent.
58
<PAGE>
Assessability of Shares
The shares of SierraWest common stock are fully paid and
nonassessable. Under the California Banking Law, the shares of Mercantile common
stock are subject to assessment by the Superintendent if the Superintendent
determines that its capital is impaired. A bank's capital is impaired whenever
it has deficit retained earnings exceeding 40% of its contributed capital. An
assessment creates a lien on the shares, and the shares may not be transferred
until the assessment has been satisfied. In case of assessment, the holder has
no personal liability, but the shares are subject to involuntary sale or
forfeiture if the assessment plus a 5% penalty is not paid within 60 days of the
date it is levied.
Cumulative Voting
Shareholders of both SierraWest and Mercantile are entitled to
cumulate their votes for the election of directors. Cumulative voting allows a
shareholder to cast a number of votes equal to the number of directors to be
elected multiplied by the number of shares held in the shareholder's name on the
record date. This total number of votes may be cast for one nominee or may be
distributed among as many candidates as the shareholder desires. The candidates
(up to the number of directors to be elected) receiving the highest number of
votes are elected.
A California corporation that is a "listed corporation" may,
by amending its articles or bylaws, eliminate cumulative voting for directors.
Because SierraWest's common stock is quoted on the Nasdaq National Market, it
qualifies as a listed corporation. Such an amendment requires the approval of
holders of a majority of the outstanding shares of SierraWest common stock.
SierraWest has no present plan to propose an amendment to eliminate cumulative
voting.
Classified Board of Directors
At present, the SierraWest Bylaws and the Mercantile Bylaws
provide directors will be elected for a one-year term at each annual meeting of
shareholders. A California corporation that is a "listed corporation" may, by
amending its articles or bylaws, provide for a staggered or classified Board of
Directors. Such an amendment requires the approval of holders of a majority of
the outstanding shares of SierraWest common stock. Because SierraWest common
stock is quoted on the Nasdaq National Market, it qualifies as a listed
corporation. SierraWest has no present plan to propose an amendment to provide
for a classified Board of Directors.
Dissenters' Rights in Mergers and Other Reorganizations
Under California Corporation Law, a dissenting shareholder of
a corporation participating in certain business combinations may, under varying
circumstances, receive cash in the amount of the fair market value of his or her
shares in lieu of the consideration he or she would otherwise receive under the
terms of the transaction. The California Corporation Law generally does not
require dissenters' rights of appraisal with respect to shares which,
immediately prior to the merger, are (i) listed on any national securities
exchange certified by the Commissioner or (ii) listed on the list of
over-the-counter margin stock issued by the FRB. SierraWest common stock is
listed on the list of over-the-counter margin stocks issued by the FRB.
SierraWest shareholders generally have more limited dissenters' rights in
connection with business combinations than do Mercantile shareholders.
Dissenters' rights are not available to the shareholders of a corporation
surviving a merger if no vote of the shareholders of the surviving corporation
is required. Dissenters' rights are not available to shareholders of a Califor-
nia bank if the bank is a surviving bank in a merger of banks.
Shareholders Protection Plan
In December 1995, the Board of Directors of SierraWest
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock. Each Right entitles the registered holder to
purchase from SierraWest one one-hundredth of a share of Series A Preferred
Stock, no par value (the "Preferred Shares"), of SierraWest at a price of $40
59
<PAGE>
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment.
Initially, the Rights will be attached to all certificates
representing common shares then outstanding or later issued. The Rights will
separate from the common shares and a Stock Acquisition Date will occur upon the
earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons have acquired beneficial ownership of 10% or
more of the outstanding common shares (other than a person or such a group who
obtains the prior written approval of the Board of Directors) (an "Acquiring
Person"), or (ii) 10 business days (or later as determined by the Board of
Directors) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result in
the beneficial ownership by a person or group of 10% or more of such outstanding
common shares (unless SierraWest's Board of Directors has approved the offer).
Until the Stock Acquisition Date, the Rights will be
transferred with and only with the common shares. As soon as practicable
following the Stock Acquisition Date, separate certificates evidencing the
Rights ("Right Certificates") will be mailed to holders of record of the common
shares. The Rights are not exercisable until the Stock Acquisition Date. The
Rights will expire on January 16, 2006 (the "Final Expiration Date"), unless the
Rights are earlier redeemed or exchanged by SierraWest, in each case as
described below. The Purchase Price payable, and the number of Preferred Shares
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time under certain circumstances to prevent
dilution. Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-hundredth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one common share.
Following a Stock Acquisition Date, each holder of a Right,
other than Rights beneficially owned by an Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of common shares (or, in the event that there are insufficient
authorized common shares, substitute consideration such as cash, property, or
other securities of SierraWest, such as Preferred Stock) having a market value
of two times the exercise price of the Right. In the event that SierraWest is
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power are sold, each holder of a Right will
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right.
At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 10% or more of the
outstanding common shares and prior to the acquisition by such person or group
of 50% or more of the outstanding common shares, the Board of Directors of
SierraWest may exchange the Rights (other than Rights owned by such person or
group which have become void), in whole or in part, at an exchange ratio of one
common share, or one one-hundredth of a Preferred Share (or of a share of a
class or series of SierraWest's preferred stock having equivalent rights,
preferences and privileges), per Right (subject to adjustment).
At any time before a person becomes an Acquiring Person, the
Board of Directors of SierraWest may redeem the Rights in whole, but not in
part, at a price of $0.001 per Right (the "Redemption Price"). After the
redemption period has expired, SierraWest's rights of redemption may be
reinstated if, prior to completion of certain recapitalizations, mergers or
other business combinations, an Acquiring Person reduces its beneficial
ownership to less than 10% of the outstanding common shares in a transaction or
series of transactions not involving SierraWest. The terms of the Rights may be
amended by the Board of Directors of SierraWest without the consent of the
holders of the Rights, except that from and after such time as any person
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
A copy of the Rights Agreement describing the Rights has been
filed with the Commission as an exhibit to a Form 8-K. A copy of the Rights
Agreement is available free of charge from SierraWest. This summary description
of the Rights does not purport to be complete and is qualified in its entirety
by reference to the Rights Agreement, which is hereby incorporated herein by
reference.
Mercantile has not adopted any shareholders protection plan.
60
<PAGE>
Limitation of Directors' Monetary Liability
The SierraWest articles of incorporation eliminate the
liability of directors of SierraWest for monetary damages to the fullest extent
permissible under California law. Applicable law generally does not permit
elimination of monetary liability for acts arising out of gross negligence or
willful misconduct or from which the director derived a personal benefit. The
Mercantile articles of incorporation do not currently provide for a similar
limitation on directors' monetary liability.
MARKET PRICE AND DIVIDEND INFORMATION
Market Quotations
SierraWest common stock is quoted on the Nasdaq National
Market under the symbol SWBS. As of April 16, 1997, there were 943 shareholders
of record, although management believes there are approximately 2,200 beneficial
holders of SierraWest common stock.
Mercantile's common stock is privately traded. At April 17,
1997, management believes there were approximately 113 holders of Mercantile
common stock. There are limited and sporadic quotations for Mercantile common
stock and consequently there is no established public trading market. The actual
high and low sale prices of Mercantile's common stock of which Mercantile's
management has knowledge are shown below.
The following table sets forth for SierraWest common stock,
the high and low sale prices, as reported on the Nasdaq National Market, and for
actual sales reported to Mercantile by various sources, but not verified by
Mercantile.
<TABLE>
SierraWest Mercantile
Common Stock Common Stock
---------------------------------- ----------------------------------
High Low High Low
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1995
First Quarter $9.25 $7.50 * *
Second Quarter 9.50 8.25 $8.00 $8.00
Third Quarter 11.25 8.25 10.00 8.00
Fourth Quarter 12.00 10.50 * *
1996
First Quarter 13.13 10.63 8.00 8.00
Second Quarter 15.38 12.50 8.25 8.00
Third Quarter 15.00 12.88 * *
Fourth Quarter 15.75 14.13 * *
1997
First Quarter 19.63 15.38 9.00 8.00
Second Quarter (through
April 16, 1997) 18.25 17.50 * *
</TABLE>
*Mercantile is unaware of any sales occurring in this quarter.
61
<PAGE>
The following table sets forth the per share cash dividends
declared by SierraWest and by Mercantile during each quarter since January 1,
1995.
<TABLE>
SierraWest Mercantile
----------------- ----------------
<S> <C> <C>
1995
First Quarter $.12 --
Second Quarter -- --
Third Quarter $.12 --
Fourth Quarter -- --
1996
First Quarter -- --
Second Quarter $.15 --
Third Quarter $.15 --
Fourth Quarter -- --
1997
First Quarter $.16 --
Second Quarter (through
April 16, 1997) -- --
</TABLE>
SierraWest's Board of Directors will consider the advisability
and amount of proposed dividends each year. Future dividends will be determined
in light of SierraWest's earnings, financial condition, future capital needs,
regulatory requirements and such other factors as the Board of Directors may
deem relevant. SierraWest's primary source of funds for payment of dividends to
its shareholders will be the receipt of dividends from its subsidiary. The
payment of dividends by banks is subject to various legal and regulatory
restrictions.
EXPERTS
The consolidated financial statements incorporated in this
Proxy Statement/Prospectus by reference from SierraWest Bancorp's Annual Report
on Form 10-K for the year ended December 31, 1996, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Mercantile as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31,
1996, included in this Proxy Statement/Prospectus, have been audited by KPMG
Peat Marwick LLP, independent auditors, as stated in their reports which is
included herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing. The
report on the 1995 financial statements of Mercantile Bank reflected the
adoption of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by Statement No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". Representatives of KPMG Peat
Marwick LLP will be present at the Mercantile Meeting and will have the oppor-
tunity to make a statement if they wish and will be available to respond to
appropriate questions.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Since January 1, 1995 there have been no changes in and
Mercantile's management has had no disagreements on accounting and financial
disclosures with Mercantile's auditors.
62
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to SierraWest, including
the validity of the SierraWest common stock to be issued in connection with the
Merger, will be passed upon for SierraWest by McCutchen, Doyle, Brown & Enersen,
LLP, San Francisco, California. Certain legal matters with respect to Mercantile
will be passed upon by Lillick & Charles, LLP, San Francisco, California.
OTHER MATTERS
The Board of Directors of Mercantile know of no other matters
which will be brought before the Meeting, but if such matters are properly
presented to the Meeting, proxies solicited hereby relating to the Meeting will
be voted in accordance with the judgment of the persons holding such proxies.
All shares represented by duly executed proxies will be voted at the appropriate
Meeting.
A copy of SierraWest's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, accompanies this Proxy
Statement/Prospectus. An additional copy can be obtained without charge (except
for certain exhibits) by contacting David Broadley, EVP/Chief Financial Officer,
SierraWest Bancorp, 10181 Truckee-Truckee Airport Road, Truckee, California
96160, telephone 916-582-3000.
63
<PAGE>
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
MERCANTILE BANK
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
64
<PAGE>
(Letterhead of KPMG Peat Marwick LLP)
Independent Auditors' Report
The Board of Directors
Mercantile Bank:
We have audited the accompanying balance sheets of Mercantile Bank as of
December 31, 1996 and 1995, and the related statements of income, stockholders'
equity, and cash flows for the years then ended. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercantile Bank as of December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank changed its method
of accounting for impaired loans in 1995 to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by Statement No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures.
/S/ KPMG Peat Marwick LLP
February 21, 1997
65
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
MERCANTILE BANK
Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 2) $ 3,768,394 3,066,984
Federal funds sold 4,855,000 6,473,000
Certificates of deposit with banks 1,486,000 1,189,000
Investment securities available for sale, at fair value
(note 3) 3,506,883 3,653,300
Loans, net (note 4) 30,800,715 35,695,073
Other real estate owned 770,000 700,000
Bank premises and equipment, net (note 5) 123,080 122,893
Accrued interest receivable and other assets 1,065,982 1,364,429
--------------- --------------
Total assets $ 46,376,054 52,264,679
=============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6):
Noninterest bearing $ 8,368,276 8,076,800
Interest bearing 32,877,933 39,149,869
--------------- --------------
Total deposits 41,246,209 47,226,669
Accrued interest payable and other liabilities 198,506 886,690
--------------- --------------
Total liabilities 41,444,715 48,113,359
--------------- --------------
Stockholders' equity (note 7):
Common stock - no par value; authorized 1,000,000
shares, issued and outstanding 336,980 and 283,380
shares in 1996 and 1995, respectively 1,750,820 1,472,150
Additional paid-in capital 1,093,192 941,737
Unrealized (loss) gain on investment securities, net
(notes 3 and 8) (2,492) 5,645
Retained earnings (note 11) 2,089,819 1,731,788
--------------- --------------
Total stockholders' equity 4,931,339 4,151,320
--------------- --------------
Commitments and contingencies (note 10)
Total liabilities and stockholders' equity $ 46,376,054 52,264,679
=============== ==============
</TABLE>
See accompanying notes to financial statements.
66
<PAGE>
<TABLE>
MERCANTILE BANK
Statements of Income
Years Ended December 31, 1996 and 1995
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans including fees $ 3,457,149 3,847,492
Investment securities 220,324 211,746
Certificates of deposit in banks 72,557 70,651
Federal funds 296,981 331,411
----------- ------------
Total interest income 4,047,011 4,461,300
Interest expense on deposits 1,689,196 2,017,274
----------- ------------
Net interest income 2,357,815 2,444,026
Provision for loan losses (note 4) 427,967 293,265
----------- ------------
Net interest income after provision for loan losses 1,929,848 2,150,761
----------- ------------
Noninterest income:
Service charges on deposit accounts 79,175 113,842
Other customer fees and charges 140,387 18,738
Recovery on unauthorized overdraft (note 13) 200,000 -
Gains on sales of investment securities 4,116 -
----------- -----------
Total noninterest income 423,678 132,580
----------- ------------
Noninterest expense:
Salaries and employee benefits 797,078 766,960
Occupancy 104,000 93,026
Furniture and equipment 98,312 57,097
Loss on unauthorized overdraft (note 13) - 700,471
Other 698,500 617,292
----------- ------------
Total noninterest expense 1,697,890 2,234,846
----------- ------------
Income before income taxes 655,636 48,495
Income tax expense (note 8) (297,605) (25,674)
----------- ------------
Net income $ 358,031 22,821
============ ============
Earnings per share (note 1i):
Net income per common share equivalent $ 1.15 .08
===== ====
</TABLE>
67
<PAGE>
- ----------------------------------------------------------------------------
See accompanying notes to financial statements.
- ----------------------------------------------------------------------------
<TABLE>
MERCANTILE BANK
Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1995
Unrealized
Additional Gain (Loss) Total
Common Stock Paid-In on Investment Retained Stockholders'
Shares Amount Capital Securities, Net Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 283,380 $ 1,472,150 941,737 (97,076) 1,708,967 4,025,778
Net income - - - - 22,821 22,821
Change in
unrealized gain
on investment
securities, net
of related
income tax
expense of
$74,184 - - - 102,721 - 102,721
-------- ---------- ---------- --------- ---------- ----------
Balance,
December 31,
1995 283,380 1,472,150 941,737 5,645 1,731,788 4,151,320
Net income - - - - 358,031 358,031
Stock options
exercised 53,600 278,670 151,455 - - 430,125
Change in
unrealized gain
on investment
securities, net
of related
income tax
benefit of
$5,173 - - - (8,137) - (8,137)
-------- ---------- ---------- --------- ---------- ----------
Balance,
December 31,
1996 336,980 $ 1,750,820 1,093,192 (2,492) 2,089,819 4,931,339
======== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
68
<PAGE>
<TABLE>
MERCANTILE BANK
Statements of Cash Flows
Years Ended December 31, 1996 and 1995
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 358,031 22,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan origination fees (196,398) (211,170)
Net accretion of investment securities, net (3,484) (466)
Provision for loan losses 427,967 293,265
Provision for real estate owned losses 110,000 -
(Gain) loss on real estate owned (16,251) 30,114
Depreciation and amortization of premises and equipment 55,664 39,630
Provision for deferred income taxes 118,258 (260,099)
Decrease (increase) in accrued interest receivable
and other assets 188,253 (87,181)
(Decrease) increase in accrued interest payable
and other liabilities (690,354) 768,429
------------ ------------
Net cash provided by operating activities 351,686 595,343
------------ ------------
Cash flows provided by (used in) investing activities:
Net decrease (increase) in loans 3,642,789 (2,484,165)
Proceeds from sale of real estate owned 856,251 279,108
Proceeds from maturities of investment securities 1,885,870 750,000
Purchases of investment securities (1,750,000) (750,000)
(Increase) decrease in certificates of deposit at
other financial institutions (297,000) 183,000
Purchases of premises and equipment (55,851) (112,556)
------------ ------------
Net cash provided by (used in) investing activities 4,282,059 (2,134,613)
------------ ------------
Cash flows (used in) provided by financing activities:
Net (decrease) increase in deposits (5,980,460) 7,767,703
Proceeds from stock options exercised 430,125 -
------------ -----------
Net cash (used in) provided by financing activities (5,550,335) 7,767,703
------------ ------------
(Decrease) increase in cash and cash equivalents (916,590) 6,228,433
Cash and cash equivalents at beginning of year 9,539,984 3,311,551
------------ ------------
Cash and cash equivalents at end of year $ 8,623,394 9,539,984
============ ============
Supplemental Disclosures of Cash Flow Information:
Income tax payments $ 56,000 228,000
============ ============
Interest paid on deposits and other borrowings $ 1,686,959 1,989,823
============ ============
Noncash Transactions:
Net transfer to other real estate owned $ 1,020,000 309,222
============ ============
</TABLE>
See accompanying notes to financial statements.
69
<PAGE>
- ----------------------------------------------------------------------------
MERCANTILE BANK
- ----------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
Mercantile Bank (the Bank) is a state chartered bank incorporated under
the laws of the State of California. The accounting and reporting
policies of Mercantile Bank conform with generally accepted accounting
principles and prevailing practices within the banking industry. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and
expenses for the period. Actual results could differ from those
estimates applied in the preparation of the accompanying financial
statements. A summary of the significant accounting policies applied in
the preparation of the accompanying financial statements follows:
(a) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include
cash on hand and due from banks and Federal funds sold.
(b) Investment Securities
The Bank applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investment in Debt and
Equity Securities. At the time of purchase of a security, the Bank
designates the security as held-to-maturity or available for sale based
on the Bank's investment objectives, operational needs, and intent to
hold. Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with
unrealized holding gains and losses, net of the related tax effect,
reported as a separate component of stock equity. The Bank does not
hold securities for trading purposes.
A decline in the fair value below cost that is deemed other than
temporary results in a charge to earnings and the corresponding
establishment of a new cost for the security. No such declines have
occurred. Premiums and discounts are amortized or accreted over the
life of the security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining the
cost of securities sold.
70
<PAGE>
(c) Loans
Loans are stated at the principal amount outstanding, net of unearned
income and the allowance for loan losses. During 1995, the Bank adopted
the provisions of SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures (SFAS No. 114).
A loan within the scope of SFAS No. 114 is considered impaired when,
based on current information and events, it is probable that the Bank
will be unable to collect all amounts due according to the contractual
terms of the loan agreement, including scheduled interest payments. For
a loan that has been restructured, the contractual terms of the loan
agreement refer to the contractual terms specified by the original loan
agreement, not the contractual terms specified by the restructuring
agreement. An impaired loan is measured based upon the present value of
future cash flows discounted at the loan's effective rate, the loan's
observable market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized on a
cash basis. SFAS No. 114 does not apply to large groups of small
balance homogeneous loans that are collectively evaluated for
impairment. If the measurement of the impaired loan is less than the
recorded investment in the loan, an impairment is recognized by
adjusting the allowance for loan losses. SFAS No. 114 does not change
the timing of charge-offs of loans to reflect the amount ultimately
expected to be collected.
Interest on loans is calculated by using the simple interest method on
the daily balance of the principal amount outstanding.
Loan origination fees are recognized as an adjustment of the yield over
the life of the loan by the interest method, which results in a
constant rate of return. Certain direct costs of originating the loan
are deferred and recognized over the life of the loan as a reduction of
the yield. Loan commitment fees received by the Bank are also deferred.
Commitment fees meeting certain criteria are recognized over the life
of the loan if a loan is granted or at the expiration of the commitment
if the commitment expires unexercised.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal or when a loan becomes
contractually past due by ninety days or more with respect to interest
or principal. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest
71
<PAGE>
and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
Restructured loans are loans on which concessions in terms have been
granted because of the borrowers' financial difficulties. Interest is
generally accrued on such loans in accordance with the new terms.
(d) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans and
commitments to extend credit, based on evaluations of the
collectibility and prior loss experience of loans and commitments to
extend credit. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, commitments, and
current and anticipated local economic conditions that may affect the
borrower's ability to pay. While management uses these evaluations to
recognize the provision for loan losses, future provisions may be
necessary based on changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance for
loan losses are particularly susceptible to significant change in the
near term. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, the Federal
Deposit Insurance Corporation (FDIC), as an integral part of its
examination process, periodically reviews the Bank's allowance for loan
losses. The FDIC may require the Bank to recognize additions to the
allowance based on their judgment about information available to them
at the time of their examination.
(e) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation of equipment is computed on
the straight-line method over the estimated useful life of each type of
asset for financial statement reporting purposes. Estimated useful
lives of equipment are from three to 10 years. Once equipment becomes
fully depreciated, its cost and associated accumulated depreciation are
removed from the general ledger.
Leasehold improvements (Bank premises) are capitalized and
amortized over the shorter of their estimated useful lives or over
the term of the lease. Repairs, maintenance and minor
improvements are charged to operations as incurred. When
72
<PAGE>
property is sold or otherwise disposed of, the cost of such assets and
the related accumulated depreciation are removed from their respective
accounts and any resulting gain or loss is recognized.
(f) Other Real Estate Owned
Real estate acquired by foreclosure, is carried at the lower of the
recorded investment in the property or its fair value less estimated
selling costs. Prior to foreclosure, the value of the underlying loan
is written down to the fair value of the real estate to be acquired by
a charge to the allowance for loan losses, if necessary. Fair value of
other real estate owned is generally determined based on an appraisal
of the property. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of
related income, and gains and losses on their disposition are included
in other operating expenses. A net loss of $326,091 and $162,719 was
recorded for the years ended December 31, 1996 and 1995, respectively.
Revenue recognition on the disposition of real estate is dependent upon
the transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale. Under certain circumstances,
revenue recognition may be deferred until these criteria are met.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Bank adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount which the
carrying value exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a
material impact on the Bank's financial position, results of
operations, or liquidity.
73
<PAGE>
(h) Income Taxes
The Bank accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(i) Earnings Per Share
Earnings per share is calculated on the basis of the weighted-average
number of shares and common share equivalents outstanding during the
year.
(j) Stock Option Plan
Prior to January 1, 1996, the Bank accounted for its Stock Option Plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant, only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Bank adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense, over the vesting period, the fair
value of all stock-based awards on the date of the grant. SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and
future years, as if the fair-value-based method defined in SFAS No. 123
had been applied. The Bank has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 for stock option grants. The Bank has not
made any stock option grants since 1991, therefore, a pro forma
disclosure is not required.
(2) Cash and Due From Banks
The Bank is required to maintain daily reserve balances in accordance
with Federal Reserve Board requirements. The average reserve balance
maintained in accordance with such requirements for the years ended
December 31, 1996 and 1995 was $163,000 and $153,000, respectively.
74
<PAGE>
(3) Investment Securities
The amortized cost and estimated fair value of available for sale
investment securities are as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury
securities
and
obligations
of U.S.
government
corporations
and agencies $ 3,511,180 6,220 (10,517) 3,506,883
============= ========= ======== =============
</TABLE>
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury
securities
and
obligations
of U.S.
government
corporations
and agencies $ 3,643,566 19,216 (9,482) 3,653,300
============= ========= ======== =============
</TABLE>
The amortized cost and estimated fair value of available for sale
investment securities at December 31, 1996 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 prepayment penalties.
<TABLE>
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 650,062 650,202
Due after one year through five years 2,611,118 2,604,708
Due after five years 250,000 251,973
-------------- --------------
$ 3,511,180 3,506,883
============== ==============
</TABLE>
75
<PAGE>
(4) Loans
The Bank grants commercial, installment, real estate construction, and
other real estate loans to customers primarily in Sacramento County.
Generally, the loans are secured by business assets and/or real
property.
The composition of the Bank's loan portfolio at December 31 is as
follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Commercial and industrial $ 12,460,397 13,798,300
Real estate 18,934,451 22,695,514
Consumer 607,505 344,190
-------------- --------------
32,002,353 36,838,004
Less:
Deferred loan fees (109,777) (235,143)
Allowance for loan losses (1,091,861) (907,788)
-------------- --------------
$ 30,800,715 35,695,073
============== ===========
</TABLE>
Loans which were sold and being serviced by the Bank totaled
approximately $3,456,200 and $3,575,600 at December 31, 1996 and 1995,
respectively.
Nonaccrual loans total approximately $619,300 and $913,600 at December
31, 1996 and 1995, respectively. If interest on nonaccrual loans had
been accrued, such income would have approximated $70,692 and $54,400
for the years ended December 31, 1996 and 1995, respectively.
Impaired loans are loans for which it is probable that the Bank will
not be able to collect all amounts due. As of December 31, 1996 and
1995, the Bank had outstanding balances in impaired loans of
approximately $619,300 and $913,600, respectively, which had valuation
allowances of $205,996 and $182,700, respectively. The average
outstanding balance of impaired loans was $766,500 and $799,600 for the
years ended 1996 and 1995, respectively.
76
<PAGE>
Changes in the allowance for loan losses for the years ended December
31 are as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 907,788 1,035,385
Recoveries on loans charged off 37,730 80,682
Provision for loan losses 427,967 293,265
Loans charged off (281,624) (501,544)
---------- --------
Balance, end of year $1,091,861 907,788
========== =========
</TABLE>
(5) Bank Premises and Equipment
The Bank's premises and equipment consisted of the following at
December 31:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements $ 33,373 33,373
Furniture and fixtures 50,697 28,858
Equipment 311,130 277,115
--------- --------
395,200 339,346
Less accumulated depreciation
and amortization (272,120) (216,453)
-------- --------
$ 123,080 122,893
========= ========
</TABLE>
Depreciation and amortization charged to expense amounted to
$55,664 and $39,630 in 1996 and 1995, respectively.
<TABLE>
(6) Deposits
Deposits consisted of the following at December 31:
1996 1995
---- ----
<S> <C> <C>
Noninterest bearing, demand $ 8,368,276 8,076,800
Interest bearing savings 415,308 387,154
NOW accounts 3,582,494 3,049,014
Money Market 9,188,828 12,833,040
Time 19,691,303 22,880,661
---------- ----------
$41,246,209 47,226,669
=========== ==========
</TABLE>
77
<PAGE>
As of December 31, 1996 and 1995, the Bank had time certificates of
deposit in denominations of $100,000 or more totaling $10,326,153 and
$11,343,905, respectively. Interest paid on these deposits was $642,204
in 1996 and $658,637 in 1995.
As of December 31, 1996, the aggregate maturities for time deposits in
excess of one year are as follows:
Year ended
December 31,
1997 $ 16,410,053
1998 2,804,345
1999 121,968
2000 254,937
2001 100,000
--------------
Total $ 19,691,303
==============
(7) Stock Option Plan
In 1991, the Bank granted 50,000 stock options to Directors and 23,500
stock options to key employees who had substantial responsibility for
the successful operation of the Bank. The 23,500 options granted to
employees were "incentive stock options" as defined in Internal Revenue
Service Code Section 422A. Options were granted at an exercise price
not less than the fair market value of the stock at the date of grant
and become exercisable over varying periods of time. The option price
for Directors was $8.25 and $7.50 for employees. As of December 31,
1995, 71,220 of the total options granted were exercisable and 53,600
options were exercised during 1996. All of the remaining stock options
expired in June, 1996.
78
<PAGE>
(8) Income Taxes
The provision for income taxes consists of the following for the years
ended December 31:
1996 1995
---- ----
Current:
Federal $ 111,879 223,346
State 67,468 62,427
----------- -----------
Total current expense 179,347 285,773
----------- -----------
Deferred:
Federal 109,982 (200,579)
State 8,276 (59,520)
----------- -----------
Total deferred expense 118,258 (260,099)
----------- -----------
$ 297,605 25,674
=========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1996 and 1995 are presented below:
1996 1995
---- ----
Deferred tax assets:
State franchise taxes $ 23,384 23,091
Provision for loan losses 373,671 404,219
Deferred loan fees 17,952 58,591
Fixed asset depreciation 8,197 22,352
Investment unrealized
securities losses 1,085 -
Other 332,904 369,285
----------- -----------
Total gross deferred tax assets 757,193 877,538
Less valuation allowance (40,000) (40,000)
----------- -----------
Deferred tax assets 717,193 837,538
Deferred tax liabilities:
Investment unrealized
securities gains - (4,088)
Other - (3,172)
----------- ----------
Total gross deferred
tax liabilities - (7,260)
----------- ----------
Net deferred tax assets $ 717,193 830,278
=========== ===========
Net deferred tax assets are included in accrued interest receivable and
other assets in the accompanying balance sheets.
79
<PAGE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the valuation allowance is sufficient to cover
that portion that will not be fully realized. The net change in the
total valuation allowance for the years ended December 31, 1996 and
1995 was $0 and an increase of $40,000, respectively.
Income tax expense attributable to operations was $297,605 and $25,674
for the years ended December 31, 1996 and 1995, respectively, and
differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent to pretax income from operations as a result of
the following:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" tax expense 34.0% 34.0%
State franchise tax, net of Federal
tax benefit 7.6% 4.0%
Change in the beginning-of-the-year
allowance for deferred tax assets
allocated to income tax expense 0% 82.5%
Other 4.9% (9.5)%
Refund of prior year federal and state
taxes paid 0% (54.6)%
Increase in state franchise tax rate (1.1)% (3.5)%
---- -----
Effective income tax rate 45.4% 52.9%
==== =====
</TABLE>
(9) Transactions with Related Parties
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and their affiliates. In the
opinion of management, these transactions, which include borrowings
from the Bank, are made under substantially the same terms, including
interest rates and collateral, as loans to unaffiliated parties and did
not involve more than the normal risk of collectibility or present
other unfavorable conditions. Loan activity with related parties during
1996 was as follows:
Loans at December 31, 1995 $ 2,293,273
Loan originations 151,472
Loan payments (1,008,311)
-------------
Loans at December 31, 1996 $ 1,436,434
=============
At December 31, 1996 and 1995, the Bank had deposits due to directors,
officers and employees totaling $1,089,141 and $2,639,497,
respectively.
80
<PAGE>
(10) Commitments and Contingencies
(a) Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Bank is a party to certain
financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit in the form of loans
or through standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the balance sheet. The contract amounts of
those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
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, 1996, financial instruments whose contract amounts
represent credit risk are as follows:
Commitments to extend credit $ 7,365,164
=============
Standby letters of credit $ 642,916
=============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment, and income-producing or other real estate.
81
<PAGE>
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Collateral obtained, if deemed necessary, is varied. The credit risk
characteristics involved in commitments to extend credit and issuing
letters of credit are essentially the same as those involved in
outstanding loans (see note 4).
SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments, requires certain disclosures for
off-balance sheet derivative financial instruments. As of December 31,
1996, the Bank has no off-balance sheet derivatives requiring
additional disclosure under the provisions of SFAS No. 119.
(b) Operating Leases
The Bank leases its office premises under operating leases. The minimum
annual lease payments are as follows:
1997 $ 81,955
1998 68,296
----------
Total future minimum lease payments $ 150,251
==========
Lease rental expense amounted to $95,532 and $93,026 in 1996 and 1995,
respectively.
(c) Litigation
The Bank is involved in legal actions arising in the normal course of
business. In the opinion of management, after consultation with its
legal counsel, the ultimate disposition of these matters will not have
a material adverse effect on the Bank's financial condition or results
of operations.
(11) Capital Adequacy and Restriction on Dividends
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate 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
82
<PAGE>
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).
First, a bank must meet a minimum Tier I (as defined in the
regulations) Capital ratio ranging from 3% to 5% based upon the bank's
CAMEL (capital adequacy, asset quality, management, earnings and
liquidity) rating.
Second, a bank must meet minimum Total Risk-Based Capital to
risk-weighted assets ratio of 8%. Risk-based capital and asset
guidelines vary from Tier I capital guidelines by redefining the
components of capital, categorizing assets into different risk classes,
and including certain off-balance sheet items in the calculation of the
capital ratio. The effect of the risk-based capital guidelines is that
banks with high exposure will be required to raise additional capital
while institutions with low risk exposure could, with the concurrence
of regulatory authorities, be permitted to operate with lower capital
ratios. In addition, a bank must meet minimum Tier I Capital to average
assets ratio.
Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject. As of December
31, 1996, the most recent notification, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must meet the minimum ratios as set
forth below. There are no conditions or events since that notification
that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1996
are as follows:
<TABLE>
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>
Total Risk-Based
Capital (to Risk
Weighted Assets) $ 5,351,000 15.14% $2,828,000 8.0% $3,535,000 10.0%
Tier I Capital
(to Risk
Weighted Assets) $ 4,901,000 13.86% $1,414,000 4.0% $2,121,000 6.0%
Tier I Capital
(to Average
Assets) $ 4,901,000 10.58% $1,853,000 4.0% $2,316,000 5.0%
</TABLE>
83
<PAGE>
Cash dividends are restricted under California state banking laws to
the lesser of the Bank's retained earnings or the Bank's net income for
the latest three fiscal years, less dividends previously declared
during that period. The Bank paid no dividends in 1996 and 1995.
(12) Regulatory Matters
On August 16, 1995, the Bank entered into a Memorandum of Understanding
(Memorandum) with the Federal Deposit Insurance Corporation (FDIC) and
the California Superintendent of Banks (Superintendent) as a result of
an examination of the Bank by the FDIC. The Memorandum required that
the Bank take certain actions within specified periods of time. These
requirements included, among other things, that the Bank (a) revise and
formalize various policies and procedures with respect to board and
management supervision, lending and funds management, and compliance
with laws, rules and regulations; (b) review and maintain an adequate
allowance for loan losses; and (c) reduce the balance of classified
assets to $2,500,000 and $2,000,000 by December 31, 1995 and June 30,
1996, respectively.
Subsequently, on July 8, 1996, this original Memorandum was terminated
by the FDIC and replaced with a new Memorandum, which requires the Bank
to, among other things: a) maintain a Tier 1 capital that equals or
exceeds 7.5% of total assets; b) eliminate all assets classified "Loss"
and one-half of the assets classified "Doubtful" within 10 days of the
July 8, 1996 effective date; and, c) reduce the balance of assets
classified "Substandard" to $4,200,000, $4,000,000, $3,000,000, and
$2,000,000 by September 30, 1996, December 31, 1996, March 31, 1997,
and June 30, 1997, respectively.
As of September 30 and December 31, 1996, assets classified
"Substandard" were approximately $3,504,000 and $2,800,000,
respectively. Management believes the Bank is in substantial compliance
with the terms and conditions of the Memorandum entered into on July 8,
1996.
(13) Loss on Unauthorized Overdraft
In January 1996, the Bank incurred a $700,471 loss as a result of an
unauthorized overdraft by a customer. As the customer's activities
leading up to the overdraft were occurring during 1995, the entire loss
was accrued as of December 31, 1995. In March 1996, the Bank negotiated
a repayment schedule with the customer. As of December 31, 1996, the
Bank had recovered $200,000.
84
<PAGE>
(14) Subsequent Events
On January 23, 1997, the Bank and SierraWest Bancorp, a bank holding
company, entered into an agreement that would result in a merger of the
Bank into SierraWest Bancorp. The proposed acquisition is subject to
numerous conditions and to shareholder and regulatory approval. No
adjustments have been made to the financial statements as a result of
the proposed acquisition.
(15) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments are a reasonable
estimate of fair value.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments. (See note 3).
Loans receivable: For variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based
on carrying values. The fair values for other loans (e.g.,
commercial and industrial loans and consumer loans) are estimated
using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality.
Commitments to extend credit and standby letters of credit: The fair
value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
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 letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and noninterest checking, passbook savings, and
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are
estimated
85
<PAGE>
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets, property, plant, equipment
and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in may of the estimates.
86
<PAGE>
The estimated fair values of the Bank's financial instruments are as follows:
1996
----
Carrying Fair
Amount Value
Financial assets:
Cash and short-term investments $ 10,109,394 10,109,394
============ ==========
Investment securities $ 3,506,883 3,506,883
============ ==========
Loans:
Fixed rate:
Commercial and industrial $ 4,404,420 4,394,416
Consumer 82,580 82,120
------------ ----------
Total fixed rate 4,487,000 4,476,536
Variable rate 27,515,353 27,515,353
------------ ----------
Less allowance for loan losses (1,091,861) (1,091,861)
Net deferred origination fees (109,777) (109,777)
------------ ----------
Net loans $ 30,800,715 30,790,251
============= ==========
Financial liabilities:
Deposits:
Demand $ 21,554,906 21,554,906
Certificates of deposit 19,691,303 19,856,000
------------- ----------
Total deposits $ 41,246,209 41,410,906
============= ==========
Contract Carrying Fair
Amount Amount Value
Unrecognized financial instruments:
Commitments to extend credit $7,365,000 - 51,500
========== =============== ======
Standby letters of credit $ 643,000 - 32,100
========== =============== ======
87
<PAGE>
The estimated fair values of the Bank's financial instruments are as follows:
- ---------------------------------------------------------------------------
<TABLE>
1995
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 10,728,984 10,728,984
=============== ==============
Investment securities $ 3,653,300 3,653,300
=============== ==============
Loans:
Fixed rate:
Commercial and industrial $ 2,681,446 2,680,700
Consumer 312,401 312,600
--------------- --------------
Total fixed rate 2,993,847 2,993,300
Variable rate 33,844,157 33,844,157
--------------- --------------
Less allowance for loan losses (907,788) (907,788)
Net deferred origination fees (235,143) (235,143)
--------------- --------------
Net loans $ 35,695,073 35,694,526
=============== ==============
Financial liabilities:
Deposits:
Demand $ 24,346,008 24,346,008
Certificates of deposit 22,880,661 23,169,000
--------------- --------------
Total deposits $ 47,226,669 47,515,008
=============== ==============
</TABLE>
<TABLE>
Contract Carrying Fair
Amount Amount Value
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $ 8,835,000 - 44,000
============= =============== ==============
Standby letters of credit $ 594,000 - 29,700
============= =============== ==============
</TABLE>
88
<PAGE>
MERCANTILE BANK
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
89
<PAGE>
(Letterhead of KPMG Peat Marwick LLP)
Independent Auditors' Report
The Board of Directors
Mercantile Bank:
We have audited the accompanying balance sheets of Mercantile Bank as of
December 31, 1995 and 1994, and the related statements of income, stockholders'
equity, and cash flows for the years then ended. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercantile Bank as of December
31, 1995 and 1994 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank changed its method
of accounting for impaired loans in 1995 to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures.
/S/ KPMG Peat Marwick LLP
February 23, 1996
90
<PAGE>
<TABLE>
MERCANTILE BANK
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 2) $ 3,066,984 3,311,551
Federal funds sold 6,473,000 -
Certificates of deposit with banks 1,189,000 1,372,000
Investment securities, at fair value (note 3) 3,653,300 3,475,728
Loans, net (note 4) 35,695,073 33,602,225
Other real estate owned 700,000 700,000
Bank premises and equipment, net (note 5) 122,893 49,967
Accrued interest receivable and other assets (note 8) 1,364,429 1,091,534
--------------- --------------
Total assets $ 52,264,679 43,603,005
=============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6):
Noninterest bearing $ 8,076,800 7,080,240
Interest bearing 39,149,869 32,378,726
--------------- --------------
Total deposits 47,226,669 39,458,966
Accrued interest payable and other liabilities (notes 10 and
12) 886,690 118,261
--------------- --------------
Total liabilities 48,113,359 39,577,227
--------------- --------------
Stockholders' equity (note 7):
Common stock - no par value; authorized 1,000,000
shares, issued and outstanding 283,380 shares in
1995 and 1994 1,472,150 1,472,150
Additional paid-in capital 941,737 941,737
Unrealized gain (loss) on investment securities, net
(notes 3 and 8) 5,645 (97,076)
Retained earnings (note 11) 1,731,788 1,708,967
--------------- --------------
Total stockholders' equity 4,151,320 4,025,778
--------------- --------------
Commitments and contingencies (note 10)
Total liabilities and stockholders' equity $ 52,264,679 43,603,005
=============== ==============
</TABLE>
See accompanying notes to financial statements.
91
<PAGE>
<TABLE>
MERCANTILE BANK
Statements of Income
Years Ended December 31, 1995 and 1994
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans including fees $ 3,847,492 3,361,534
Investment securities 211,746 189,993
Certificates of deposit in banks 70,651 58,022
Federal funds 331,411 77,481
----------- ------------
Total interest income 4,461,300 3,687,030
Interest expense on deposits 2,017,274 1,435,899
----------- ------------
Net interest income 2,444,026 2,251,131
Provision for loan losses (note 4) 293,265 990,000
----------- ------------
Net interest income after provision for loan losses 2,150,761 1,261,131
----------- ------------
Noninterest income:
Service charges on deposit accounts 113,842 106,895
Other customer fees and charges 18,738 18,508
Gains on sales of investment securities - 953
----------- ------------
Total noninterest income 132,580 126,356
----------- ------------
Noninterest expense:
Salaries and employee benefits 766,960 734,276
Occupancy 93,026 95,677
Furniture and equipment 57,097 54,170
Loss on unauthorized overdraft (note 12) 700,471 -
Other 617,292 515,611
----------- ------------
Total noninterest expense 2,234,846 1,399,734
----------- ------------
Income (loss) before income taxes 48,495 (12,247)
Income tax (expense) benefit (note 8) (25,674) 23,082
----------- ------------
Net income $ 22,821 10,835
=========== ============
Earnings per share (note 1h):
Net income per common share equivalent $ .08 .04
===== =====
</TABLE>
See accompanying notes to financial statements.
92
<PAGE>
<TABLE>
MERCANTILE BANK
Statements of Stockholders' Equity
Years Ended December 31, 1995 and 1994
Unrealized
Additional Gain (Loss) Total
Common Stock Paid-In on Investment Retained Stockholders'
Shares Amount Capital Securities, Net Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1993 283,380 $ 1,472,150 941,737 20,500 1,698,132 4,132,519
-------- ---------- --------- --------- ---------- ----------
Net income - - - - 10,835 10,835
Change in
unrealized loss
on investment
securities, net
of related
income taxes
(benefit) of
($90,797) - - - (117,576) - (117,576)
-------- ---------- --------- --------- ---------- ----------
Balance,
December 31,
1994 283,380 1,472,150 941,737 (97,076) 1,708,967 4,025,778
-------- ---------- --------- --------- ---------- ----------
Net income - - - - 22,821 22,821
Change in
unrealized gain
on investment
securities, net
of related
income tax
expense of
$74,184 - - - 102,721 - 102,721
-------- ---------- --------- --------- ---------- ----------
Balance,
December 31,
1995 283,380 $ 1,472,150 941,737 5,645 1,731,788 4,151,320
======== ========== ========= ========= ========== ==========
</TABLE>
See accompanying notes to finacial statments.
93
<PAGE>
<TABLE>
MERCANTILE BANK
Statements of Cash Flows
Years Ended December 31, 1995 and 1994
1995 1994
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents: Cash flows from operating
activities:
<S> <C> <C>
Net income $ 22,821 10,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan origination fees (211,170) (266,466)
Accretion and amortization of investment
securities, net (466) 647
Provision for loan losses 293,265 990,000
Losses on real estate owned 30,114 68,930
Depreciation and amortization of premises and
equipment 39,630 36,286
Provision for deferred income taxes (260,099) (251,952)
Increase in accrued interest receivable and other
assets (87,181) (146,079)
Increase (decrease) in accrued interest payable
and other liabilities 768,429 (147,422)
----------- -----------
Net cash provided by operating activities 595,343 294,779
----------- -----------
Cash flows (used in) provided by investing activities:
Net increase in loans (2,484,165) (294,766)
Proceeds from sale of real estate owned 279,108 281,424
Proceeds from maturities of investment securities 750,000 1,000,000
Purchases of investment securities (750,000) (1,287,189)
Decrease (increase) in certificates of deposit at
other financial institutions 183,000 (197,000)
Purchases of premises and equipment (112,556) (47,568)
----------- -----------
Net cash used by investing activities (2,134,613) (545,099)
----------- -----------
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 7,767,703 (941,534)
----------- -----------
Increase (decrease) in cash and cash equivalents 6,228,433 (1,191,854)
Cash and cash equivalents at beginning of year 3,311,551 4,503,405
----------- -----------
Cash and cash equivalents at end of year $ 9,539,984 3,311,551
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Income tax payments $ 228,000 443,000
=========== ===========
Interest paid on deposits and other borrowings $ 1,989,823 1,428,017
=========== ===========
Noncash Transactions:
Net transfer to other real estate owned $ 309,222 770,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
94
<PAGE>
MERCANTILE BANK
Notes to Financial Statements
December 31, 1995 and 1994
(1) Summary of Significant Accounting Policies
Mercantile Bank (the Bank) is a state chartered bank incorporated under
the laws of the State of California. The accounting and reporting
policies of Mercantile Bank conform with generally accepted accounting
principles and prevailing practices within the banking industry. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and
expenses for the period. Actual results could differ from those
estimates applied in the preparation of the accompanying financial
statements. A summary of the significant accounting policies applied in
the preparation of the accompanying financial statements follows:
(a) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include
cash on hand and due from banks and Federal funds sold.
(b) Investment Securities
Investment securities, which include only debt securities, are
classified as "available-for-sale" securities and carried at fair value
at December 31, 1995 and 1994. Unrealized gains or losses are excluded
from earnings and reported net of income taxes, as a separate component
of stockholders' equity.
A decline in the fair value below cost that is deemed other than
temporary results in a charge to earnings and the corresponding
establishment of a new cost for the security. No such declines have
been recorded.
(c) Loans
Loans are stated at the principal amount outstanding, net of unearned
income and the allowance for loan losses. During 1995, the Bank adopted
the provisions of Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by
Statement No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures (SFAS 114). A loan within the
scope of
95
<PAGE>
SFAS 114 is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement,
including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the
contractual terms specified by the restructuring agreement. An impaired
loan is measured based upon the present value of future cash flows
discounted at the loan's effective rate, the loan's observable market
price, or the fair value of collateral if the loan is collateral
dependent. Interest on impaired loans is recognized on a cash basis.
SFAS 114 does not apply to large groups of small balance homogeneous
loans that are collectively evaluated for impairment. If the
measurement of the impaired loan is less than the recorded investment
in the loan, an impairment is recognized by adjusting the allowance for
loan loss. SFAS 114 does not change the timing of charge-offs of loans
to reflect the amount ultimately expected to be collected.
Interest on loans is calculated by using the simple interest method on
the daily balance of the principal amount outstanding.
Loan origination fees are recognized as an adjustment of the yield over
the life of the loan by the interest method, which results in a
constant rate of return. Certain direct costs of originating the loan
are deferred and recognized over the life of the loan as a reduction of
the yield. Loan commitment fees received by the Bank are also deferred.
Commitment fees meeting certain criteria are recognized over the life
of the loan if a loan is granted or at the expiration of the commitment
if the commitment expires unexercised.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal or when a loan becomes
contractually past due by ninety days or more with respect to interest
or principal. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal
and when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest. Restructured loans
are loans on which concessions in terms have been granted because of
the borrowers' financial or legal difficulties. Interest is generally
accrued on such loans in accordance with the new terms.
96
<PAGE>
(d) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans and
commitments to extend credit, based on evaluations of the
collectibility and prior loss experience of loans and commitments to
extend credit. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, commitments, and
current and anticipated local economic conditions that may affect the
borrower's ability to pay. While management uses these evaluations to
recognize the provision for loan losses, future provisions may be
necessary based on changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance for
loan losses are particularly susceptible to significant change in the
near term. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, the Federal
Deposit Insurance Corporation (FDIC), as an integral part of its
examination process, periodically reviews the Bank's allowance for loan
losses. The FDIC may require the Bank to recognize additions to the
allowance based on their judgment about information available to them
at the time of their examination.
(e) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation of equipment is computed on
the straight-line method over the estimated useful life of each type of
asset for financial statement reporting purposes. Estimated useful
lives of equipment are from three to 10 years. Once equipment becomes
fully depreciated, its cost and associated accumulated depreciation are
removed from the general ledger.
Leasehold improvements (Bank premises) are capitalized and amortized
over the shorter of their estimated useful lives or over the term of
the lease. Repairs, maintenance and minor improvements are charged to
operations as incurred. When property is sold or otherwise disposed of,
the cost of such assets and the related accumulated depreciation are
removed from their respective accounts and any resulting gain or loss
is recognized.
97
<PAGE>
(f) Other Real Estate Owned
Real estate acquired by foreclosure, is carried at the lower of the
recorded investment in the property or its fair value less estimated
selling costs. Prior to foreclosure, the value of the underlying loan
is written down to the fair value of the real estate to be acquired by
a charge to the allowance for loan losses, if necessary. Fair value of
other real estate is generally determined based on an appraisal of the
property. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income,
and gains and losses on their disposition are included in other
operating expenses.
Revenue recognition on the disposition of real estate is dependent upon
the transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale. Under certain circumstances,
revenue recognition may be deferred until these criteria are met.
(g) Income Taxes
The Bank accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(h) Earnings Per Share
Earnings per share is calculated on the basis of the weighted-average
number of shares and common share equivalents outstanding during the
year.
(i) Reclassifications
Certain reclassifications have been made to 1994 amounts to conform to
1995 presentation. These reclassifications have no effect on net income
or equity as previously reported.
98
<PAGE>
(2) Cash and Due From Banks
The Bank is required to maintain daily reserve balances in accordance
with Federal Reserve Board requirements. The average reserve balance
maintained in accordance with such requirements for the years ended
December 31, 1995 and 1994 was $153,000 and $143,000, respectively.
(3) Investment Securities
The amortized cost and estimated fair value of available for sale
investment securities are as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury
securities
and
obligations
of U.S.
government
corporations
and agencies $ 3,643,566 19,216 (9,482) 3,653,300
============= ========= ======== =============
</TABLE>
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury
securities
and
obligations
of U.S.
government
corporations
and agencies $ 3,643,100 - (167,372) 3,475,728
============= ========= ======== =============
</TABLE>
99
<PAGE>
The amortized cost and estimated fair value of available for sale
investment securities at December 31, 1995 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 prepayment penalties.
<TABLE>
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 1,249,918 1,244,962
Due after one year through five years 2,143,648 2,153,290
Due after five years 250,000 255,048
--------------- --------------
$ 3,643,566 3,653,300
=============== ==============
</TABLE>
(4) Loans
The Bank grants commercial, installment, real estate construction, and
other real estate loans to customers primarily in Sacramento County.
Generally, the loans are secured by business assets and/or real
property.
The composition of the Bank's loan portfolio at December 31 is as
follows:
<TABLE>
1995 1994
<S> <C> <C>
Commercial and industrial $ 13,798,300 12,733,800
Real estate 22,695,514 21,634,517
Consumer 344,190 514,672
--------------- --------------
36,838,004 34,882,989
Less:
Deferred loan fees (235,143) (245,379)
Allowance for loan losses (907,788) (1,035,385)
--------------- --------------
$ 35,695,073 33,602,225
=============== ==============
</TABLE>
Loans which were sold and being serviced by the Bank totaled
approximately $3,575,600 and $4,236,700 at December 31, 1995 and 1994,
respectively.
Nonaccrual loans total approximately $913,600 and $685,600 at December
31, 1995 and 1994, respectively. If interest on nonaccrual loans had
been accrued, such income would have approximated $54,400 and 41,000
for the years ended December 31, 1995 and 1994, respectively.
100
<PAGE>
Impaired loans are loans for which it is probable that the Bank will
not be able to collect all amounts due. As of December 31, 1995, the
Bank had outstanding balances of approximately $913,600 in impaired
loans which had valuation allowances of $182,700. The average
outstanding balance of impaired loans for the year ended December 31,
1995 was $799,600, of which interest income recognized was not
material.
Changes in the allowance for loan losses for the years ended December
31 are as follows:
<TABLE>
1995 1994
------ ---------
<S> <C> <C>
Balance, beginning of year $ 1,035,385 577,275
Recoveries on loans charged off 80,682 3,869
Provision for loan losses 293,265 990,000
Loans charged off (501,544) (535,759)
------------- -----------
Balance, end of year $ 907,788 1,035,385
============= ===========
</TABLE>
(5) Bank Premises and Equipment
The Bank's premises and equipment consisted of the following at
December 31:
<TABLE>
1995 1994
<S> <C> <C>
Leasehold improvements $ 33,373 33,373
Furniture and fixtures 28,858 28,858
Equipment 277,115 164,562
---------- -----------
339,346 226,793
Less accumulated depreciation and amortization (216,453) (176,826)
---------- -----------
$ 122,893 49,967
========== ======
</TABLE>
Depreciation and amortization charged to expense amounted to
$39,630 and $36,286 in 1995 and 1994, respectively.
101
<PAGE>
(6) Deposits
<TABLE>
Deposits consisted of the following at December 31:
1995 1994
<S> <C> <C>
Noninterest bearing, demand $ 8,076,800 7,080,240
Interest bearing savings 387,154 426,223
NOW accounts 3,049,014 2,717,530
Money Market 12,833,040 8,706,738
Time 22,880,661 20,528,235
--------------- ----------
$ 47,226,669 39,458,966
=============== ==========
</TABLE>
As of December 31, 1995 and 1994, the Bank had time certificates of
deposit in denominations of $100,000 or more totaling $11,343,905 and
$8,885,547, respectively. Interest paid on these deposits was $658,637
in 1995 and $384,144 in 1994.
(7) Stock Option Plan
In 1991, the Bank granted 50,000 stock options to Directors and 23,500
stock options to key employees who had substantial responsibility for
the successful operation of the Bank. The 23,500 options granted to
employees were "incentive stock options" as defined in Internal Revenue
Service Code Section 422A. Options were granted at an exercise price
not less than the fair market value of the stock at the date of grant
and become exercisable over varying periods of time. The option price
for Directors was $8.25 and $7.50 for employees. As of December 31,
1995 and 1994, 71,220 and 67,840, respectively, of the total options
granted were exercisable. There were no options exercised during 1995
or 1994.
102
<PAGE>
(8) Income Taxes
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
1995 1994
<S> <C> <C>
Current:
Federal $ 223,346 189,928
State 62,427 38,942
---------- -----------
Total current expense 285,773 228,870
---------- -----------
Deferred:
Federal (200,579) (209,254)
State (59,520) (42,698)
---------- -----------
Total deferred benefit (260,099) (251,952)
---------- -----------
$ 25,674 (23,082)
========== ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
1995 1994
<S> <C> <C>
Deferred tax assets:
State franchise taxes $ 23,091 20,860
Provision for loan losses 404,219 408,433
Deferred loan fees 58,591 65,200
Section 481 adjustment - 6,157
Fixed asset depreciation 22,352 25,664
Investment unrealized securities losses - 70,297
Other 369,285 51,131
---------- -------
Total gross deferred tax assets 877,538 647,742
Less valuation allowance (40,000) -
---------- -------
Deferred tax assets 837,538 647,742
Deferred tax liabilities:
Investment unrealized securities gains (4,088) -
Other (3,172) (3,178)
---------- -------
Total gross deferred tax liabilities (7,260) (3,178)
---------- -------
Net deferred tax assets $ 830,278 644,564
========== =======
</TABLE>
103
<PAGE>
Net deferred tax assets are included in accrued interest receivable and
other assets in the accompanying balance sheets.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the valuation allowance is sufficient to cover
that portion that will not be fully realized. The net change in the
total valuation allowance for the years ended December 31, 1995 and
1994 was an increase of $40,000 and a decrease of $13,465,
respectively.
Income tax expense (benefit) attributable to operations was $25,674 and
($23,082) for the years ended December 31, 1995 and 1994, respectively,
and differed from the amounts computed by applying the U.S. federal
income tax rate of 34 percent to pretax income from operations as a
result of the following:
<TABLE>
1995 1994
<S> <C> <C>
Computed "expected" tax expense 34.0% (34.0)%
State franchise tax, net of Federal
tax benefit 4.0% (7.6)%
Change in the beginning-of-the-year
allowance for deferred tax assets
allocated to income tax expense 82.5% (109.9)%
Other (9.5)% (11.8)%
Refund of prior year federal and state
taxes paid (54.6)% -
Increase in state franchise tax rate (3.5)% (25.2)%
--------- --------
Effective income tax rate 52.9% (188.5)%
========= ========
</TABLE>
104
<PAGE>
(9) Transactions with Related Parties
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and their affiliates. In the
opinion of management, these transactions, which include borrowings
from the Bank, are made under substantially the same terms, including
interest rates and collateral, as loans to unaffiliated parties and did
not involve more than the normal risk of collectibility or present
other unfavorable conditions. Loan activity with related parties during
1995 was as follows:
Loans at December 31, 1994 $ 895,709
Loan originations 2,330,500
Loan payments (932,936)
----------
Loans at December 31, 1995 2,293,273
==========
At December 31, 1995 and 1994, the Bank had deposits due to directors,
officers and employees totaling $2,639,497 and $782,333, respectively.
(10) Commitments and Contingencies
(a) Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Bank is a party to certain
financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit in the form of loans
or through standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the balance sheet. The contract amounts of
those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
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.
105
<PAGE>
At December 31, 1995, financial instruments whose contract amounts
represent credit risk are as follows:
Commitments to extend credit $ 8,835,000
=============
Standby letters of credit $ 594,000
=============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment, and income-producing or other real estate.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Collateral obtained, if deemed necessary, is varied. The credit risk
characteristics involved in commitments to extend credit and issuing
letters of credit are essentially the same as those involved in
outstanding loans (see note 4).
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments (SFAS 119), effective for
financial statements issued for fiscal years ending after December 15,
1994. This statement requires certain disclosures for off-balance sheet
derivative financial instruments. As of December 31, 1995, the Bank has
no off-balance sheet derivatives requiring additional disclosure under
the provisions of SFAS No. 119.
(b) Operating Leases
The Bank leases its office premises under operating leases. The minimum
annual lease payments are as follows:
1996 $ 80,919
1997 80,919
1998 67,432
----------
Total future minimum lease payments $ 229,270
==========
Lease rental expense amounted to $93,026 and $92,916 in 1995 and 1994,
respectively.
106
<PAGE>
(c) Litigation
The Bank is involved in legal actions arising in the normal course of
business. In the opinion of management, after consultation with its
legal counsel, the ultimate disposition of these matters will not have
a material adverse effect on the Bank's financial condition.
(11) Regulatory Matters
The Federal Deposit Insurance Corporation (FDIC) has specified
guidelines for purposes of evaluating a bank's capital adequacy. Banks
are required to satisfy two separate capital requirements.
First, a bank must meet a minimum leverage capital ratio ranging from
three to five percent based upon the bank's CAMEL (capital adequacy,
asset quality, management, earnings, and liquidity) rating. At December
31, 1995, the Bank's leverage capital ratio was 8.46%.
Second, a bank must meet a minimum risk-based capital ratio of 8.0%.
Risk-based capital guidelines vary from leverage capital guidelines by
redefining the components of capital, categorizing assets into
different risk classes, and including certain off-balance sheet items
in the calculation of the capital ratio. The effect of the risk-based
capital guidelines is that banks with high risk exposure will be
required to raise additional capital while institutions with low risk
exposure could, with the concurrence of regulatory authorities, be
permitted to operate with the lower capital ratios. At December 31,
1995, the Bank's risk-based capital ratio was 8.23%.
The amount of dividends that may be paid without the express prior
approval of the Bank's regulatory authority is limited to the Bank's
current year net income combined with its retained net income for the
preceding two years. The Bank paid no dividends in 1995 and 1994.
107
<PAGE>
On August 16, 1995, the Bank entered into a Memorandum of Understanding
(the "Memorandum") with the Federal Deposit Insurance Corporation (the
"FDIC") and the California Superintendent of Banks (the
"Superintendent") as a result of an examination of the Bank by the
FDIC. The Memorandum requires that the Bank take certain actions within
specified periods of time. These requirements include, among other
things, that the Bank (a) revise and formalize various policies and
procedures with respect to board and management supervision, lending
and funds management, and compliance with laws, rules and regulations;
(b) review and maintain an adequate allowance for loan losses; and (c)
reduce the balance of classified assets to $2,500,000 and $2,000,000 by
December 31, 1995 and June 30, 1996, respectively.
As of December 31, 1995, classified assets were approximately
$2,147,000, compared to $3,082,000 at the time of the examination,
representing a reduction of 30%. The level of loan loss reserves
represented 2.5% of total loans at December 31, 1995, which management
believes to be adequate.
(12) Subsequent Events
Subsequent to year end, the Bank incurred a $700,471 loss as a result
of an unauthorized overdraft by a customer. As the customer's
activities leading up to the overdraft were occurring during 1995, the
entire loss was accrued as of December 31, 1995 and is included in
other liabilities in the accompanying balance sheets. Management, with
the advice of legal counsel, is seeking to recover the amount from the
customer. Due to the circumstances surrounding the customer's
activities, collectibility is uncertain.
(13) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments are a reasonable
estimate of fair value.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments. (See note 3).
108
<PAGE>
Loans receivable: For variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based
on carrying values. The fair values for other loans (e.g.,
commercial and industrial loans and consumer loans) are estimated
using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality.
Commitments to extend credit and standby letters of credit: The fair
value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
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 letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and noninterest checking, passbook savings, and
money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). The fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Limitations: Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, deferred tax
liabilities, property, plant, equipment and goodwill. In addition,
the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value
estimates and have not been considered in may of the estimates.
109
<PAGE>
<TABLE>
The estimated fair values of the Bank's financial instruments are as
follows:
Carrying Fair
Amount Value
<S> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 10,728,984 10,728,984
=============== ==============
Investment securities $ 3,653,300 3,653,300
=============== ==============
Loans:
Fixed rate:
Commercial and industrial $ 2,681,446 2,680,700
Consumer 312,401 312,600
--------------- --------------
Total fixed rate 2,993,847 2,993,300
Variable rate 33,844,157 33,844,157
--------------- --------------
Less allowance for loan losses (907,788) (907,788)
Net deferred origination fees (235,143) (235,143)
--------------- --------------
Net loans $ 35,695,073 35,694,526
=============== ==============
Financial liabilities:
Deposits:
Demand $ 24,346,008 24,346,008
Certificates of deposit 22,880,661 23,169,000
--------------- --------------
Total deposits $ 47,226,669 47,515,008
=============== ==============
Contract Carrying Fair
Amount Amount Value
Unrecognized financial instruments:
Commitments to extend credit $ 8,835,000 - 44,000
========== =============== ==============
Standby letters of credit $ 594,000 - 29,700
========== =============== ==============
</TABLE>
110
<PAGE>
(14) Prospective Accounting Pronouncements
Long-Lived Assets
In March 1995, 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 (SFAS 121). The provisions of SFAS 121 are effective for
financial statements issued for years beginning after December 15,
1995. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Additionally, this statement requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the
lower of the carrying amount or fair value less cost to sell. It is
Management's opinion that applying the provisions of these statements
will not have a significant effect on the Bank's financial position.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation (SFAS 123). This statement is effective for
fiscal years beginning after December 15, 1995. SFAS 123 defines a fair
value method of accounting for employee stock options issued and
encourages all entities to adopt that method of accounting. However, it
also allows an entity to continue to measure compensation cost for
stock option plans using the intrinsic value based method of accounting
as presented by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under this method, the Bank
makes pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting as defined by SFAS 123 had
been applied. It is management's intention to account for stock options
under APB Opinion No. 25.
111
<PAGE>
Annex A Plan of Acquisition and Merger dated January 23, 1997
Annex B Fairness Opinion of Carpenter & Company
Annex C Excerpts of Chapter 13 of the California Corporations Code
regarding Dissenters Rights
112
<PAGE>
ANNEX A
PLAN OF ACQUISITION AND MERGER
BY AND BETWEEN
SIERRAWEST BANCORP
SIERRAWEST BANK
AND
MERCANTILE BANK
113
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C> <C> <C>
Section 1. THE MERGER........................................................................1
1.1 Effective Date....................................................................1
1.2 Effect of the Merger..............................................................1
Section 2 CONVERSION AND CANCELLATION OF SHARES.............................................2
2.1 Exchange Amount; Conversion of Shares of Mercantile Common Stock..................2
2.2 Cash/Stock Election...............................................................3
2.3 Fractional Shares.................................................................4
2.4 Surrender of Mercantile Shares....................................................4
2.5 No Further Transfers of Mercantile Shares.........................................5
2.6 Adjustments.......................................................................5
2.7 Personnel Matters.................................................................5
Section 3 COVENANTS OF THE PARTIES..........................................................6
3.1 Mutual Covenants..................................................................6
(a) Government Approvals.....................................................6
(b) Notification of Breach of Representations, Warranties and
Covenants................................................................6
(c) Financial Statements.....................................................6
(d) Press Releases...........................................................7
(e) Access to Properties, Books and Records; Confidentiality.................7
(f) Additional Agreements....................................................7
(g) Advice of Changes........................................................8
(h) Legal Conditions to Merger...............................................8
3.2 Covenants of Mercantile...........................................................8
(a) Approval by Shareholders.................................................8
(b) Compensation.............................................................8
(c) Conduct of Business in the Ordinary Course...............................9
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(d) No Merger or Solicitation...............................................11
(e) Changes in Capital Stock; Dividends.....................................11
(f) Employee Welfare Benefit Plans..........................................11
(g) Shareholder Lists and Other Information.................................11
(h) Capital Commitments and Expenditures....................................12
(i) Asset Review............................................................12
3.3 Covenants of Sierra..............................................................12
(a) Conduct of Business in the Ordinary Course..............................12
(b) Dividends...............................................................13
(c) Indemnification; Insurance..............................................13
Section 4 REPRESENTATIONS AND WARRANTIES OF MERCANTILE. ...................................14
4.1 Corporate Status and Power to Enter Into Agreements..............................14
4.2 Articles, Bylaws, Books and Records..............................................15
4.3 Compliance With Laws, Regulations and Decrees....................................15
4.4 Capitalization...................................................................15
4.5 Equity Interest in Any Entity....................................................15
4.6 Financial Statements, Regulatory Reports.........................................15
4.7 Tax Returns......................................................................16
4.8 Material Adverse Change..........................................................16
4.9 No Undisclosed Liabilities.......................................................16
4.10 Properties and Leases............................................................17
4.11 Material Contracts...............................................................17
4.12 Loans............................................................................18
4.13 Restrictions on Investments......................................................18
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4.14 Employment Contracts and Benefits................................................18
4.15 Collective Bargaining and Employment Agreements..................................19
4.16 Compensation of Officers and Employees...........................................19
4.17 Legal Actions and Proceedings....................................................19
4.18 Execution and Delivery of the Agreement..........................................19
4.19 Retention of Broker or Consultant................................................20
4.20 Insurance........................................................................20
4.21 Loan Loss Reserves...............................................................20
4.22 Transactions With Affiliates.....................................................20
4.23 Information in Sierra Registration Statement.....................................20
4.24 Accuracy of Representations and Warranties.......................................20
Section 5 REPRESENTATIONS AND WARRANTIES OF SIERRA.........................................21
5.1 Corporate Status and Power to Enter Into Agreements..............................21
5.2 Articles, Bylaws, Books and Records..............................................21
5.3 Compliance With Laws, Regulations and Decrees....................................21
5.4 Capitalization...................................................................21
5.5 Financial Statements, Regulatory Reports.........................................22
5.6 Tax Returns......................................................................22
5.7 Material Adverse Change..........................................................22
5.8 Legal Actions and Proceedings....................................................22
5.9 Execution and Delivery of the Agreement..........................................23
5.10 No Undisclosed Liabilities.......................................................23
5.11 No Material Environmental Liabilities............................................23
5.12 No Material Liabilities Under ERISA..............................................24
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5.13 Retention of Broker or Consultant................................................24
5.14 Loan Loss Reserves...............................................................24
5.15 Information in Sierra Registration Statement.....................................24
5.16 Accuracy of Representations and Warranties.......................................25
Section 6 SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934..........................25
6.1 Preparation and Filing of Registration Statement.................................25
6.2 Effectiveness of Registration Statement and Listing of Shares....................25
6.3 Sales and Resales of Common Stock................................................25
6.4 Rule 145 and Related Matters.....................................................25
Section 7 CONDITIONS TO THE OBLIGATIONS OF SIERRA..........................................26
7.1 Representations and Warranties...................................................26
7.2 Compliance and Performance Under Agreement.......................................26
7.3 Material Adverse Change..........................................................26
7.4 Approval of Agreement............................................................26
7.5 Officer's Certificate............................................................26
7.6 Opinion of Counsel...............................................................26
7.7 Absence of Legal Impediment......................................................26
7.8 Effectiveness of Registration Statement..........................................26
7.9 Government Approvals.............................................................26
7.10 Tax Opinion......................................................................27
7.11 Unaudited Financials.............................................................27
7.12 Rule 145 Undertaking.............................................................27
7.13 Closing Documents................................................................27
7.14 Consents.........................................................................28
7.15 Shareholder Agreements...........................................................28
7.16 Financial Conditions to Closing..................................................28
(a) Other Real Estate and Non-Performing Loans..............................28
(b) Loan Loss Reserves......................................................28
Section 8 CONDITIONS TO THE OBLIGATIONS OF MERCANTILE......................................28
8.1 Representations and Warranties...................................................28
8.2 Compliance and Performance Under Agreement.......................................28
8.3 Material Adverse Change..........................................................28
8.4 Approval of Agreement............................................................28
8.5 Officer's Certificate............................................................29
8.6 Opinion of Counsel...............................................................29
8.7 Absence of Legal Impediment......................................................29
8.8 Effectiveness of Registration Statement..........................................29
8.9 Government Approvals.............................................................29
8.10 Tax Opinion or Ruling............................................................29
8.11 Unaudited Financials.............................................................29
8.12 Closing Documents................................................................29
8.13 Fairness Opinion.................................................................29
Section 9 CLOSING..........................................................................29
9.1 Closing Date.....................................................................29
9.2 Delivery of Documents............................................................29
9.3 Filings..........................................................................30
Section 10 EXPENSES.........................................................................30
10.1 Merger Related Expenses..........................................................30
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10.2 Miscellaneous Mercantile Expenses................................................30
Section 11 AMENDMENT; TERMINATION...........................................................30
11.1 Amendment........................................................................30
11.2 Termination......................................................................30
11.3 Termination......................................................................31
11.4 Breach of Obligations............................................................31
11.5 Termination and Expenses.........................................................31
Section 12 MISCELLANEOUS....................................................................32
12.1 Notices..........................................................................32
12.2 Binding Agreement................................................................32
12.3 Survival of Representations and Warranties.......................................32
12.4 Governing Law....................................................................32
12.5 Attorneys' Fees..................................................................32
12.6 Entire Agreement; Severability...................................................32
12.7 Counterparts.....................................................................33
</TABLE>
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Plan of Acquisition and Merger
THIS PLAN OF ACQUISITION AND MERGER, dated as of January 23,
1997 ("Agreement"), is made by and between SierraWest Bancorp, a California
corporation and a registered bank holding company under the Federal Bank Holding
Company Act of 1956 as amended ("BHC"), SierraWest Bank, a California banking
corporation (collectively "Sierra") and Mercantile, a California state banking
corporation ("Mercantile").
WITNESSETH:
A. The Boards of Directors of Sierra and Mercantile deem it
advisable and in the best interests of Sierra, Mercantile and their shareholders
that Sierra and Mercantile enter into a business combination whereby Sierra's
wholly owned subsidiary, SierraWest Bank a California state banking corporation
("Subsidiary") will be merged with Mercantile ("Merger"), with Subsidiary being
the surviving corporation.
B. The Merger Agreement attached as Exhibit A is intended to
be filed with the California Secretary of State ("Merger Agreement") when it has
been approved by the Superintendent of Banks of the State of California.
C. The Merger is intended to qualify as a tax free
reorganization within the meaning of the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "IRC").
D. Pursuant to the Merger, each Mercantile shareholder will
receive, in exchange for each share of Mercantile common stock and cash, the
number of shares of Sierra common stock determined in accordance with the
Exchange Ratio as more fully set forth in this Agreement ("Exchange Ratio").
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein, the parties hereto agree as follows:
Section 1. THE MERGER.
1.1 Effective Date. Subject to the terms and conditions of
this Agreement, the Merger shall become effective at the date on which an
executed copy of the Merger Agreement has been certified by the California
Secretary of State and filed with the Superintendent of Banks of the State of
California ("Superintendent") pursuant to Section 2072 of the California
Financial Code, in each case on the Closing Date as defined in Section 9.1
hereof ("Effective Date").
1.2 Effect of the Merger. Subject to the terms and conditions
of this Agreement, on the Effective Date, Mercantile shall be merged with and
into Subsidiary and the Subsidiary shall be the surviving corporation
("Surviving Corporation") in the merger. All assets, rights, privileges,
immunities, power, franchises and interests of Mercantile in and to every type
of property (real, personal and mixed) and choses in action, as they exist as of
the Effective Date, including appointments, designations and nominations and all
other rights and interests as trustee, executor, administrator, registrar of
stocks and bonds, guardian of estate, assignee, receiver and in every other
fiduciary capacity, shall pass and be transferred to and vest in the Subsidiary
as the Surviving Corporation by virtue of the Merger on the Effective Date
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without any deed, conveyance or other transfer; the separate existence of
Mercantile shall cease and the corporate existence of Subsidiary as the
Surviving Corporation shall continue unaffected and unimpaired by the merger;
and the Surviving Corporation shall be deemed to be the same entity as each of
Mercantile and Subsidiary and shall be subject to all of their duties and
liabilities of every kind and description. The Surviving Corporation shall be
responsible and liable for all the liabilities and obligations of each of
Subsidiary and Mercantile; and any claim existing or action or proceeding
pending by or against Subsidiary or Mercantile may be prosecuted as if the
Merger had not taken place, or the Surviving Corporation may be substituted in
its place. Neither the rights of creditors nor any liens upon the property of
Sierra, Subsidiary or Mercantile shall be impaired by reason of the Merger. The
articles of incorporation of Subsidiary shall be the articles of incorporation
of the Surviving Corporation and the bylaws of Subsidiary shall be the bylaws of
the Surviving Corporation. On the Effective Date, Subsidiary shall assume the
operations of, as successor to, Mercantile. On the Effective Date the board of
directors of Subsidiary will continue to serve until successors are duly elected
and qualified. Subsidiary shall remain a wholly-owned subsidiary of Sierra.
Section 2. CONVERSION AND CANCELLATION OF SHARES..
2.1 Exchange Amount; Conversion of Shares of Mercantile Common
Stock.
(a) For purposes of this Agreement, capitalized terms
have the following meanings:
Mercantile Shares Issued and outstanding shares of
Mercantile no par value common stock
("Mercantile Shares") as of the Effective
Date.
Exchange Amount The Exchange Amount, consisting of a
Cash Component and a Stock Component,
shall be $6,601,000 in the aggregate as
adjusted pursuant to Section 2.1(c) below.
The Cash Component shall be reduced by the
amount of cash allocated to holders of
Mercantile Shares who exercise dissenters'
rights pursuant to California Corporations
Code Section 1300 et. seq.
Cash Component Cash portion of the Exchange Amount
equal to $3,300,500, less one-half of the
amount of any adjustment to the
Exchange Amount pursuant to Section 2.1(c)
below.
Stock Component Newly issued shares of Sierra no par
value common stock ("Sierra Shares")
with an aggregate Market Value equal to
the $3,300,500, less one-half of the
amount of any adjustment to the Exchange
Amount pursuant to Section 2.1(c) below;
provided however, the total number of
newly issued shares of Sierra common stock
shall not exceed 250,000.
Per Share Cash Component The aggregate Cash Component divided
by the number of outstanding
Mercantile Shares on the Effective Date.
Per Share Stock Component The aggregate Stock Component divided by
the number of outstanding Mercantile
Shares on the Effective Date.
Exchange Ratio The Per Share Stock Component divided by
the Market Value.
Market Value The average of the closing prices of the
Sierra Shares as reported in the
western edition of the Wall Street Journal
for the 20 trading days preceding the
Determination Date. For purpose of
determining the average, the divisor shall
be only those days on which a trade
occurs.
Determination Date The fifth business day preceding the
Effective Date.
Adjustment Date The last day of the month preceding the
Determination Date.
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(b) On the Effective Date, by virtue of the Merger and without
any action on the part of the holders of Mercantile Shares, the outstanding
Mercantile Shares (other than any shares as to which dissenters' rights have
been perfected) shall be converted into the right to receive a combination of
cash and shares of the common stock, no par value, of Sierra ("Sierra common
stock" or "Sierra Shares") with an aggregate value equal to the Exchange Amount.
The Cash Component shall be one-half of the Exchange Amount. The Stock Component
will comprise the balance of the Exchange Amount, provided that the total number
of Sierra Share to be issued shall not exceed 250,000. In the event that the
Stock Component of the Exchange Amount reaches the maximum number of Sierra
Shares, the Cash Component shall not be adjusted.
(c) The $6,601,000 Exchange Amount shall be adjusted as
follows:
(i) By subtracting an amount derived by multiplying .0744 by
the amount by which Mercantile's Core Deposits as of the Adjustment Date are
less than $22.7 million. Core Deposits shall be defined as total Mercantile
deposits ("Total Deposits") less (i) all certificates of deposit; (ii) all
brokered deposits, wholesale deposits or deposits of other depository
institutions; (iii) deposits maintained by the officers, directors or
shareholders of Mercantile or their related interests to the extent that such
deposits exceed $1 million in the aggregate; and (iv) deposits opened or renewed
after the date of the Definitive Agreement where the rate exceeds the rates
established by Sierra for similar deposit products. Total Deposits for purposes
of this calculation shall be determined by averaging the Total Deposits
reflected on the books of Mercantile for the 20 business days preceding the
Adjustment Date.
(ii) By subtracting the amount by which the Mercantile's total
shareholder equity as adjusted ("Adjusted Shareholder Equity") is less than
$4,912,000 or by adding the amount by which Adjusted Shareholder Equity exceeds
$4,912,000. Adjusted Shareholder Equity shall be computed in accordance with
Generally Accepted Accounting Principles ("GAAP") but shall reflect the
following adjustments which may not be in accordance with GAAP:
(A) An amount necessary to cause the reserves and/or
accruals allocated to each asset identified in Schedule 2.1(c) (including
OREO) equal the amount shown in column H+I of Schedule 2.1(c). A related tax
adjustment shall be made. In the event that any asset shown on Schedule 2.1(c)
is liquidated or repaid in whole or in part, then such asset, including the
related reserves and/or accruals, shall be deleted in whole or in part from
Schedule 2.1(c) and the Adjusted Shareholder Equity as of the Adjustment Date.
(B) An amount necessary to cause Mercantile's
general loan loss reserves on the Adjustment Date for all assets not listed on
Schedule 2.1(c) equal the level of reserves required by using the Mercantile's
calculation methodology in effect as of December 31, 1996. A related tax adjust-
ment shall be made.
(C) An amount of additional reserves
reflecting any adverse change in Mercantile's assets as of the Adjustment
Date and as determined in accordance with Section 3.2(i). A related tax adjust-
ment shall be made.
(D) The amount necessary to increase the
Valuation Reserve reflected on Mercantile's books to offset the effect of
any additional carry-forward tax losses resulting from additions to
Mercantile's loan loss reserves or operating losses occurring after December
31, 1996.
2.2 Cash/Stock Election..
The Exchange Amount will be allocated to the Stock Component
and the Cash Component in accordance the following election and procedures (the
"Cash/Stock Election").
Each Mercantile shareholder may elect to receive his or her
portion of the Exchange Amount in either all Sierra shares or all cash. If no
election is made, the shareholder will receive a Cash Component equal to 50% of
such shareholder's pro rata portion of the Exchange Amount and a Stock Component
of 50% of such shareholders pro rata portion of the Exchange Amount.
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The Cash/Stock Election is subject to the limitation that the
aggregate Cash Component for all Mercantile shareholders may not be more than
$3,300,500. If the aggregate Cash Component is undersubscribed, the unsubscribed
portion of this minimum aggregate Cash Component will be allocated pro rata (by
number of shares) among all Mercantile shareholders; if the aggregate Cash
Component is oversubscribed, the Cash Component of each Mercantile shareholder
electing to receive cash will be reduced pro rata (by number of shares electing
to receive cash) so that the aggregate Cash Component of all Mercantile
shareholders will equal $3,300,500, as adjusted. The total of the Cash Component
and the Stock Component will always equal the Exchange Amount as adjusted and
subject to the limitation on the total number of Sierra Shares to be issued as
part of the Exchange Amount.
A Mercantile shareholder need not, and may not, make a
Cash/Stock Election until after the Effective Date. Immediately following the
Effective Date, Sierra shall send to each Mercantile shareholder a letter of
transmittal describing the Cash/Stock Election in more detail and providing
forms for making the Cash/Stock Election, as desired.
The Cash/Stock Election, if made, must be made for all shares
held in the name of the Mercantile shareholder. A Mercantile shareholder who
holds shares in two or more capacities or in different names may make a separate
Cash/Stock Election for each name or capacity in which shares are held. However,
shares represented by a single certificate may make only one Cash/Stock
Election.
Mercantile shareholders who make a Cash/Stock Election have no
assurance that they will receive all cash or all stock or any specific
proportion thereof.
2.3 Fractional Shares. Notwithstanding any other provision
hereof, no fractional shares of Sierra common stock shall be issued to holders
of Mercantile Shares. In lieu thereof, each such holder entitled to a fraction
of a share of Sierra common stock shall receive, at the time of surrender of the
certificate or certificates representing such holder's Mercantile Shares, an
amount in cash equal to the Market Value per share of the common stock of
Sierra, multiplied by the fraction of a share of Sierra common stock to which
such holder otherwise would be entitled. No such holder shall be entitled to
dividends, voting rights, interest on the value of, or any other rights in
respect of a fractional share.
2.4 Surrender of Mercantile Shares..
(a) Prior to the Effective Date, Sierra shall appoint any bank
or trust company (having capital of at least $50 million) mutually acceptable to
Mercantile and Sierra, as exchange agent (the "Exchange Agent") for the purpose
of exchanging certificates representing the Mercantile Shares at and after the
Effective Date, Sierra shall issue and deliver to the Exchange Agent
certificates representing the Sierra Shares, as shall be required to be
delivered to holders of Mercantile Shares. As soon as practicable after the
Effective Date, each holder of Mercantile Shares converted pursuant to Section
2.1, upon surrender to the Exchange Agent of one or more certificates for such
Mercantile Shares for cancellation, will be entitled to receive a certificate
representing the number of Sierra Shares determined in accordance with Section
2.1 and a payment in cash with respect to the Cash Component and fractional
shares, if any, determined in accordance with Section 2.3.
(b) No dividends or other distributions of any kind which are
declared payable to stockholders of record of the Sierra Shares after the
Effective Date will be paid to persons entitled to receive such certificates for
Sierra Shares until such persons surrender their certificates representing
Mercantile Shares. Upon surrender of such certificate representing Mercantile
Shares, the holder thereof shall be paid, without interest, any dividends or
other distributions with respect to the Sierra Shares as to which the record
date and payment date occurred on or after the Effective Date and on or before
the date of surrender.
(c) If any certificate for Sierra Shares is to be issued in a
name other than that in which the certificate for Mercantile Shares surrendered
in exchange therefor is registered, it shall be a condition of such exchange
that the person requesting such exchange shall pay to the Exchange Agent any
transfer costs, taxes or other expenses required by reason of the issuance of
certificates for such Sierra Shares in a name other than the registered holder
of the certificate surrendered, or such persons shall establish to the
satisfaction of Sierra and the Exchange Agent that such costs, taxes or other
expenses have been paid or are not applicable.
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(d) All dividends or distributions, and any cash to be paid
pursuant to the Cash Component or Section 2.3 in lieu of fractional shares, if
held by the Exchange Agent for payment or delivery to the holders of
unsurrendered certificates representing Mercantile Shares and unclaimed at the
end of one year from the Effective Date, shall (together with any interest
earned thereon) at such time be paid or redelivered by the Exchange Agent to
Sierra, and after such time any holder of a certificate representing Mercantile
Shares who has not surrendered such certificate to the Exchange Agent shall,
subject to applicable law, look as a general creditor only to Sierra for payment
or delivery of such dividends or distributions or cash, as the case may be.
2.5 No Further Transfers of Mercantile Shares. At the
Effective Date, the stock transfer books of Mercantile shall be closed and no
transfer of Mercantile Shares theretofore outstanding shall thereafter be made.
2.6 Adjustments. If, between the date of this Agreement and
the Effective Date, the outstanding Sierra common stock shall have been changed
into a different number of shares or a different class by reason of any
reclassification, recapitalization, split up, combination, exchange of shares or
readjustment, or a stock dividend thereon shall be declared with a record date
within such period, the number of Sierra Shares to be issued and delivered in
the Merger in exchange for each outstanding Mercantile Share shall be
correspondingly adjusted. For purposes of this Section 2.6, conversion of Sierra
convertible debentures shall not be considered an adjustment to Sierra Shares.
2.7 Personnel Matters..
(a) Employment At Effective Date. Not later than 30 days prior to the
Determination Date, Sierra shall notify Mercantile in writing of those employees
who shall be eligible for employment by Sierra or Subsidiary following the
Effective Date. Any Mercantile employee who is not identified by Sierra as being
eligible for employment shall be terminated by Mercantile immediately prior to
the Effective Date. Mercantile shall make severance payments to those employees
who are not eligible for employment by Sierra in the amount for each such
employee of not less than two weeks salary plus one additional week of salary
for each year served. Mercantile may, in its sole discretion, make additional
special bonus payments to retain employees who are deemed necessary to complete
the Merger. All such payments shall have been included in the calculation of
Adjusted Shareholder Equity and shall be paid or accrued on or before the
Adjustment Date. Such payments shall be conditioned upon the receipt of
enforceable releases from such employees. In terminating such employees,
Mercantile shall abide by all internal policies and all legal requirements for
termination of employment. From the date of this agreement through the Effective
Date, Mercantile shall consult with the human resources representative of
Sierra, who shall be designated in writing to Mercantile by Sierra, and keep
that representative advised as to all matters related to employment. From the
day of the Effective Date or any time thereafter, former employees of Mercantile
who are employed by Sierra following the Effective Date may be terminated by
Sierra, with or without cause, for any reason not prohibited by law.
Notwithstanding anything to the contrary described in this paragraph above,
Mercantile employee Denis Long shall be eligible for employment by Sierra
provided that he and Sierra shall have agreed to the terms of employment on or
before the Determination Date; provided, in the event that he has not reached
agreement with Sierra by such date, Mercantile shall have no obligation to
terminate Denis Long prior to the Effective Date.
(b) Retirement Benefits. Employees of Subsidiary formerly employed by
Mercantile on the Effective Date shall be eligible for participation in the
Sierra 401(k) plan and employee stock option plan at the earliest normal entry
date following the Effective Date as allowed by applicable law and the
provisions of Sierra's benefit plans, so long as such employees then meet the
eligibility requirements for participation in the Sierra plan. The former
employees of Mercantile who are employed by Subsidiary will be credited for
years of prior service with Mercantile for vesting (non-forfeitability) of
accrued benefits in the Sierra plans to the fullest extent such credit for such
prior service is permitted by Sierra's plans and by the laws, rules and
regulations of the Internal Revenue Service and the Employee Income Security Act
of 1974, as amended.
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(c) Other Benefit Plans.
(i) After the Effective Date, any or all Mercantile welfare
benefit plans shall be terminated by Sierra. Subsidiary employees formerly
employed by Mercantile immediately prior to the Effective Date shall be eligible
for participation in any existing Sierra plan, so long as such employee would
otherwise be eligible to participate in such plan.
(ii) Employees of Subsidiary formerly employed by Mercantile
on the Effective Date will receive credit for length of service with Mercantile
for determination of eligibility or participation in the Sierra (A) health
service plans, or (B) long-term disability, voluntary accident and life
insurance plans.
(d) Other Benefits.
(i) Employees of Subsidiary formerly employed by Mercantile on
the Effective Date will retain vacation benefits accrued with Mercantile prior
to the Effective Date, subject to Sierra's maximum accrual and carryover
limitations for such benefits; and will also retain the amount of sick leave
benefit eligibility on Mercantile's records prior to the Effective Date, to be
available subject to Sierra's policy for sick leave benefits; provided, however,
Mercantile shall have accrued the cost of such benefits on the books of
Mercantile on or before the Adjustment Date. Following the Effective Date, all
employees shall be subject to the standard policies of Sierra for accrual of
such benefits.
(ii) Employees of Subsidiary formerly employed by Mercantile
on the Effective Date will be subject to the severance policies in effect for
all Sierra employees.
Section 3. COVENANTS OF THE PARTIES..
3.1 Mutual Covenants.
(a) Government Approvals. Each party will use its reasonable
best efforts in good faith to take or cause to be taken as promptly as
practicable all such steps within their reasonable control to obtain (i) the
waiver of an application or prior approval of the Merger by the Board of
Governors of the Federal Reserve System ("FRB") under the BHC, (ii) the prior
approval of the Superintendent to the Merger; (iii) the prior approval of the
Federal Deposit Insurance Corporations ("FDIC") under the Bank Merger Act, and
(iv) all other consents and approvals of government agencies as are required by
law or otherwise, and shall do any and all acts and things necessary or
appropriate in order to cause the Merger to be consummated on the terms provided
in the Merger Agreement and this Agreement as promptly as practicable. The
approvals referred to in clauses (i)-(iv) of this Section 3.1(a) are hereinafter
referred to as the "Government Approvals." Each party shall respond to a written
request for information sought by the other for the purpose of obtaining the
Government Approvals promptly and in all cases within 10 days after receipt of
such request.
(b) Notification of Breach of Representations, Warranties and
Covenants. Each party shall promptly give written notice to the other party upon
becoming aware of the occurrence or impending or threatened occurrence of any
event which would cause or constitute a material breach of any of the
representations, warranties or covenants of that party contained or referred to
in the Merger Agreement or this Agreement and shall use its reasonable best
efforts to prevent the same or remedy the same promptly.
(c) Financial Statements.
(i) Each party has delivered or shall deliver to the other
party promptly after they become available true and correct copies of audited
financial statements as of such date and covering such period as may be
necessary to satisfy the minimum requirements of the Securities and Exchange
Commission ("Commission") and other governmental authorities having approval
authority over the Merger. The financial statements for such year ends have been
or shall be audited by their respective independent certified public accounting
firms which have been engaged in the past and include or shall include an
unqualified opinion of each such accounting firm, to the effect that such
financial statements have been prepared in accordance with GAAP consistently
applied and present fairly, in all material respects, the consolidated financial
position, results of operations and cash flows of the respective parties at the
dates indicated and for the periods then ending.
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(ii) Each party shall provide to the other party promptly
after they become available copies of all financial statements and proxy
statements issued or to be issued to either party's shareholders and/or
directors after December 31, 1996, and at or prior to the Effective Date.
(iii) Each party has delivered or shall deliver, to the other
party true and complete copies of its Annual Report to Shareholders for the
years ended December 31, 1995, 1994 and 1993, all periodic reports (including
interim quarterly financial statements) since December 31, 1993, all proxy
statements and other written material furnished to its shareholders since
December 31, 1993, and all other material reports, including year-end call
reports, relating to Sierra and Mercantile filed by Sierra and Mercantile with
the FRB , the Superintendent or the FDIC during 1993 through 1996 and in 1997
prior to the Effective Date. As of its date, each of the documents described in
the preceding sentence complied or shall comply in all material respects with
all legal and regulatory requirements applicable thereto.
(d) Press Releases. Neither party shall issue any press
release or written statement for general circulation relating to this Agreement
unless previously provided to the other party for review and approval (which
approval will not be unreasonably withheld or delayed) and shall cooperate with
the other party in the development and distribution of all news releases and
other public information disclosures with respect to the Merger, this Agreement
or the Merger Agreement; provided that either party may, without the consent of
the other party, make any disclosure with regard to this Agreement that it
determines, upon advice of counsel, is required under any applicable law or
regulation.
(e) Access to Properties, Books and Records; Confidentiality.
Prior to the Effective Date, each party shall (except as may be prohibited by
applicable law) give the other party and its officers, employees, agents and
representatives full access, during normal business hours and upon reasonable
notice, to all of its properties, books, contracts, records and facilities
including, but not limited to, the corporate, financial and operational records,
papers, reports, instructions, procedures, tax returns and filings, tax
settlement letters, material contracts or commitments, regulatory examinations
and correspondences. Each party shall also use its reasonable best efforts to
cause its independent accounting firm to make available to the other party, its
accountants, counsel and other agents, to the extent reasonably requested in
connection with such review, such firm's work papers and documentation relating
to its work papers and its audits of the books and records of each party. Each
party shall make available to the other originals or copies, at the responding
party's election, of such documents and records as the other may reasonably
request. The availability or actual delivery of such information about either
party shall not affect the covenants, representations and warranties of either
party contained in this Agreement and in the Merger Agreement. Each party shall
respond to any written request for information promptly and in all cases within
10 days after receipt of such request. Each party shall use its reasonable best
efforts to cause its officers, directors, employees, auditors and attorneys to
cooperate with the other in its reasonable requests for information except that
no information which is reasonably determined to be the subject of the attorney
client privilege shall be required to be disclosed. Each party shall treat as
confidential all such information in the same manner as each party treats
similar confidential information of its own, and if this Agreement is
terminated, each party shall continue to treat all such information as
confidential and to cause its employees to keep all such information
confidential and shall return such documents therefore delivered by the other
party as the other party shall request, and shall use such information, or cause
it to be used, solely for the purposes of evaluating and completing the
transactions contemplated hereby; provided that each party may disclose any such
information to the extent required by federal or state securities laws or
otherwise required by any governmental agency or authority, or by generally
accepted accounting principles. The foregoing confidentiality obligations shall
not apply in respect of any information publicly available or to any information
previously known to the party in question, the use of which is not otherwise
restricted.
(f) Additional Agreements. In case at any time after the
Effective Date any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
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to all properties, assets, rights, approvals, immunities and franchises of any
of the parties to the Merger, the proper officers and directors of each party to
this Agreement shall take all such necessary action as may be reasonably
requested by, and at the sole expense of, Sierra. Pending the Effective Date,
Sierra and Mercantile shall consult with one another and cooperate as reasonably
requested by Sierra to facilitate the integration of their respective operations
as promptly as practicable after the Effective Date. Such cooperation shall
include, if requested, communicating with employees, consultation regarding
material contracts, renewals, and capital commitments to be entered into by
Mercantile, coordination regarding third-party service agreements with a view to
providing common products and services as expeditiously as practicable following
the Effective Date, making arrangements for employee training prior to the
Effective Date and taking action to facilitate an orderly conversion of data
processing operations to occur promptly following the Effective Date, provided
that the cooperation required under this Section 3.1(f) shall not be deemed to
require actions that would materially delay or impede the Merger.
(g) Advice of Changes. Sierra and Mercantile shall promptly
advise the other party of any change or event having, or that would be
reasonably likely to have, a material adverse effect on it or which it believes
would or would be reasonably likely to cause or constitute a material breach of
any of its representations, warranties or covenants contained herein.
(h) Legal Conditions to Merger. Each of Sierra and Mercantile
shall use their reasonable best efforts (a) to take, or cause to be taken, all
actions necessary, proper, or advisable to comply promptly with all legal
requirements which may be imposed on such party with respect to the Merger and,
subject to the respective conditions set forth in Sections 7 and 8 hereof, to
consummate the transactions contemplated by this Agreement and (b) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any governmental entity and any other
third party which is required to be obtained by Mercantile or Sierra in
connection with the Merger and the other transactions contemplated by this
Agreement.
3.2 Covenants of Mercantile.
(a) Approval by Shareholders. Mercantile shall cause the
Merger, this Agreement and the Merger Agreement to be submitted promptly for the
approval of its shareholders in the most expeditious manner available, either by
consent solicitation of sufficient shareholders to cause approval of the Merger
or at a meeting to be called and held in accordance with applicable laws. If
such approval is to be taken by meeting Mercantile shall cause appropriate proxy
materials ("Proxy Materials") to be prepared and, if necessary, approved by
appropriate regulatory authorities as promptly as practicable and, when approved
or otherwise deemed effective, with any amendments thereto that may in the
judgment of its counsel be necessary or desirable, to be mailed to shareholders
of Mercantile. Subject to the fiduciary duty of the Board of Directors of
Mercantile, the Proxy Materials shall include therein a recommendation that
Mercantile shareholders vote to approve the proposed Merger. The Proxy Materials
shall be subject to prior approval by Sierra. In the event that such is required
by applicable securities laws, Sierra shall prepare for inclusion in the Proxy
Materials an appropriate registration statement/prospectus which Mercantile
shall assist with by providing such information and documents as may be required
in an expeditious and timely manner. Unless approval is provided by consent
solicitation, Mercantile shall hold its shareholder meeting as soon as possible
but no later than June 15, 1997, unless prevented from doing so by the
regulatory authorities or by delays in obtaining or conditions imposed by the
Government Approvals. Subject to its continuing fiduciary duty to the
shareholders of Mercantile, the members of the Board of Directors of Mercantile
shall at all times prior to and during such meeting of its shareholders
recommend that the transactions contemplated hereby be adopted and approved and,
subject to such duty, use its reasonable best efforts to cause such adoption and
approval.
(b) Compensation. Except for standard annual review of
employees and the normal wage increases incident thereto and subject to the
provision of Section 2.7(a) hereof, Mercantile shall not make or approve any
increase in the compensation payable or to become payable by it to any of its
directors, officers, employees or agents (including but not limited to
compensation through any profit sharing, pension, retirement, severance,
incentive or other employee benefit program or arrangement); nor shall any bonus
payment or any agreement or commitment to make a bonus payment be made other
than the obligations to make distributions reflecting 1996 profits under
Mercantile's profit sharing plan, nor shall any stock option, warrant or other
right to acquire capital stock be granted; nor shall any existing employment
agreement be extended or renewed or modified on terms more favorable to the
employee than those that are currently contained in such contract; nor shall any
employment agreement (other than any such employment agreement that may arise by
operation of law upon the hiring of any new employee) or consulting agreement be
entered into by Mercantile with any such directors, officers, employees or
agents unless Sierra has given its prior written consent. Without prior
notification to Sierra, Mercantile shall not hire any new employee at an annual
rate in excess of current customary practice or, in any event, in excess of
$40,000 per year.
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(c) Conduct of Business in the Ordinary Course. Prior to the
Effective Date:
(i) Except as expressly contemplated or permitted in this
Agreement, Mercantile shall conduct its businesses in the Ordinary Course as
heretofore conducted. For purposes of this Agreement, the "Ordinary Course" of
Mercantile shall consist of banking and related businesses as presently
conducted or consistent with good banking practices or by it and permitted under
applicable laws. Unless Sierra has given its previous written consent to any act
or omission to the contrary (which Sierra shall not unreasonably withhold),
Mercantile shall, until the Effective Date, cause its officers to use their
reasonable best efforts to:
(A) preserve its business and business organiza-
tions intact;
(B) preserve the good will of customers
and others having business relations with it and take no action that would
impair the benefit to the other party of the goodwill of it or the other
benefits of the Merger;
(C) consult with Sierra as to the making of any
decisions or the taking of any actions in matters other than in the Ordinary
Course and cooperate with all reasonable requests of Sierra that, in the
reasonable judgment of Sierra, are necessary to successfully complete the
transactions contemplated by this Agreement, including permitting a designated
representative or representatives of Sierra to attend and participate (but
not vote) in all loan committee meetings and board of directors meetings,
provided such Sierra representative may be excluded from any portion of a board
of directors meeting which relates to the Merger or any examination report or
response thereto, or is reasonably determined to be the subject of the attorney
client privilege;
(D) maintain its properties in customary
repair, working order and condition (reasonable wear and tear excepted);
(E) comply in all material respects with all
laws, regulations and decrees applicable to the conduct of its business;
(F) keep in force at not less than its present
limits all policies of insurance, including deposit insurance of the FDIC,
to the extent reasonably practicable in light of the prevailing market
conditions in the insurance industry;
(G) except as provided in Section 2.7(a) keep
available to the other party the services of its present officers and employees
(it being understood that both parties shall have the right to terminate the
employment of any of its officers or employees in accordance with its
established employment procedures);
(H) comply in all material respects with
all orders, agreements and memoranda of understanding with respect to it
made by or with any regulatory authority of competent jurisdiction, and
promptly forward to the other party all communications received from any such
authority that are not prohibited by such authority from being so disclosed
and inform the other party of any material restrictions imposed by any govern-
mental authority on its business;
(I) file in a timely manner (taking into
account any extensions duly obtained) all reports, tax returns and other
documents required to be filed with federal, state, local and other authorities;
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(J) conduct an environmental audit prior to
foreclosure on any property concerning which it has knowledge, or should
have knowledge, that asbestos or asbestos-containing material, PCB's or PCB-
contaminated materials, any petroleum product, or hazardous substance or
waste (as defined under any applicable environmental laws) was or is
present, manufactured, recycled, reclaimed, released, stored, treated, or
disposed of, and provide the results of such audit to and consult with the
other party regarding the significance of the audit prior to the foreclosure
on any such property;
(K) not sell, lease, pledge, assign, encumber
or otherwise dispose of any of its assets except other real estate owned or
other property in the Ordinary Course, in each case for adequate value, with-
out recourse and consistent with its customary practice;
(L) not make, renegotiate, renew, increase,
extend or purchase any loans, advances or loan commitments, in each case to any
of its officers, directors or any affiliated or related persons of such
directors or officers except in the Ordinary Course consistent with its
established loan procedures and in compliance with FRB Regulation O;
(M) not take any action to create, relocate or
terminate the operations of any banking office or branch, or to form any new
subsidiary or affiliated entity;
(N) not settle or otherwise take any action to
release or reduce any of its rights with respect to any litigation involving a
claim of more than $50,000 in which it is a party without the consent of Sierra
which consent shall not be unreasonably withheld; and
(O) maintain an allowance for loan losses which,
in addition to meeting the requirements of Section 2.1(c), shall be in
substantial compliance with the comments of the FDIC in its most recent Report
of Examination.
(ii) Mercantile shall not, without first having obtained the
written consent of Sierra which consent shall not be unreasonably withheld,
cause its officers to:
(A) commit itself to any loan or renewal or
restructure of an existing loan with a principal amount in excess of $40,000
if unsecured, or in excess of $80,000 and with a loan-to-value ratio above
75% if secured by real property, provided that Sierra's consent shall be
deemed given unless it objects and states the basis of its objection in
writing, or verbally with prompt written confirmation, within one business day
after receipt of written notice directed to the Chief Credit Officer of
Sierra, together with sufficient supporting information to allow Sierra to
make an informed judgment, and Sierra shall not unreasonably withhold its con-
sent; provided, further, that any consent given by Sierra shall be binding
only if given by such person or persons who are identified in writing by
Sierra; provided, further, no loan with an interest rate below the rate for
loans comparable to rates for similar loans by Sierra shall be granted or
approved by Mercantile. Notwithstanding any of the provisions of this
paragraph, Mercantile may proceed with making any loan not consented to by
Sierra and such loan shall be added to Schedule 2.1(c), a reserve shall be
established for such loan in accordance with Sierra methodology and such loan
shall be reviewed by the independent loan reviewer as set forth in Section
2.1(c)(ii)(C);
(B) purchase or sell any investment security
with a maturity in excess of three years;
(C) issue any certificate of deposit with a
rate of interest in excess of 50 basis points above the rate sheets provided
weekly to Mercantile by Sierra; or
(D) enter into or renew any contract having a
duration extending beyond 9 months from the date of this Agreement, whether or
not in the Ordinary Course.
(iii) It is understood and agreed by the parties hereto that
any consent sought of Sierra or required by Mercantile pursuant to Section
2.4(c) or any other provision of this Agreement shall be deemed to be given
following five (5) business days advanced notice by Mercantile to Sierra, which
notice shall include such information as Sierra shall reasonably request or
unless the comments of Sierra have been addressed by Mercantile.
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(d) No Merger or Solicitation.
(i) Prior to the Effective Date, Mercantile and its Board of
Directors and officers shall not initiate negotiations toward, or otherwise
effect or agree to effect, any Business Combination involving Mercantile,
acquire or agree to acquire any of its own capital stock or the capital stock
(except in a fiduciary capacity) or assets (except in the Ordinary Course) of
any other entity, or commence any proceedings for winding up and dissolution
affecting it. "Business Combination" shall mean any Merger, sale or purchase of
a subsidiary, sale or purchase of a substantial portion of any entity's assets,
or tender offer or other means of acquisition of substantially all the
outstanding capital stock of any entity.
(ii) Prior to the Effective Date, neither Mercantile nor any
officer, director or affiliate of Mercantile, nor any investment banker,
attorney, accountant or other agent, advisor or representative retained by
Mercantile shall (A) solicit or initiate, directly or indirectly, any inquiries,
discussions or proposals for, continue, propose or enter into discussions or
negotiations looking toward, or enter into any agreement or understanding
providing for, any Business Combination with Mercantile; or (B) disclose,
directly or indirectly, any nonpublic information to any corporation,
partnership, person or other entity or group concerning Mercantile's business
and properties or afford any such other party access to Mercantile's properties,
books or records or otherwise assist or encourage any such other party in
connection with the foregoing except in satisfaction of the Board of Directors'
fiduciary duties as determined on the advice of counsel; or (C) furnish or cause
to be furnished any information concerning the business, financial condition,
operations, properties or prospects of Mercantile to another person, having any
actual or prospective role with respect to any such transaction, provided,
however, that the Mercantile shall not be prohibited from reviewing or
responding in any way to unsolicited proposals involving such transactions.
(iii) Mercantile shall notify Sierra immediately of the
details of any indication of interest of any person, corporation, firm,
association or group to acquire by any means a controlling interest in it or
engage in any Business Combination with it.
(e) Changes in Capital Stock; Dividends. At or after the date
hereof and at or prior to the Effective Date, except with the prior written
consent of Sierra or as otherwise provided in this Agreement:
(i) Mercantile shall not amend its Articles of Incorporation
or Bylaws; make any change in its authorized, issued or outstanding capital
stock or any other equity security; issue, sell, pledge, assign or otherwise
encumber or dispose of, or purchase, redeem or otherwise acquire, any of its
shares of capital stock or other equity securities or enter into any agreement,
call or commitment of any character to do so; grant or issue any stock option
relating to, right to acquire, or security convertible into, shares of its
capital stock or other equity security; purchase, redeem, retire or otherwise
acquire (other than in a fiduciary capacity) any shares of, or any security
convertible into, capital stock or other equity security of its companies, or
agree to do any of the foregoing, except as expressly provided herein; and
(ii) Mercantile shall not declare, set aside or pay any cash
or stock dividend or other distribution in respect of its common stock.
(f) Employee Welfare Benefit Plans. Mercantile agrees that its
employee welfare benefit plans, as defined in Section 3(1) of ERISA, may be
terminated, frozen, modified or merged into Sierra's employee welfare benefit
plans as of or after the Effective Date, as determined by Sierra, in each case
consistent with Section 4980B of the Internal Revenue Code ("IRC"). On the
Effective Date, Mercantile employees will commence participation in Sierra's
welfare benefit plans on the same terms as Sierra employees.
(g) Shareholder Lists and Other Information. After execution
hereof, Mercantile shall from time to time make available to Sierra, upon
request, a list of its shareholders and their addresses, a list showing all
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transfers of the its common stock and such other information as Sierra shall
reasonably request regarding both the ownership and prior transfers of
Mercantile's common stock.
(h) Capital Commitments and Expenditures. After the execution
of this Agreement, no new capital commitments shall be entered into and no
capital expenditures shall be made by Mercantile, including but not limited to
creation of any new branches and acquisitions or leases of real property, except
commitments or expenditures within existing operating and capital budgets
furnished to and approved by Sierra and commitments and expenditures not
exceeding $15,000 in the aggregate.
(i) Asset Review. Mercantile shall continue to engage its
internal asset review examiners to identify potential losses with respect to
loans and other assets on its books and who shall have reviewed all NPAs, as
defined in Section 7.16(a) hereof, and other classified or criticized assets as
of a date within the end of the month preceding the Adjustment Date. Mercantile
shall promptly provide a copy of such reports to Sierra. Between the date of
this Agreement and the end of the month preceding the Adjustment Date, all
assets of Mercantile, including classified or criticized and NPAs, may be
reviewed by Sierra and Sierra provide, not later than the last day of the month
preceding the Adjustment Date, a report thereon to Mercantile setting forth
Sierra's grading or other assessment thereof (including accounting treatment and
loss recognition) utilizing Mercantile's regular loan/OREO review criteria
consistent with GAAP and RAP. Mercantile may either accept and implement
Sierra's grading or other assessments (including accounting treatment and loss
recognition) concerning loans or OREO, or, if it does not agree with Sierra's
conclusions as set forth in the report, refer the matter for resolution by the
independent loan and appraisal experts agreed to in writing by the parties (the
"Independent Loan Reviewer" or "Independent Appraiser") who shall immediately
review and/or appraise said loan(s) or OREO utilizing Mercantile's regular
loan/OREO review criteria consistent with GAAP and RAP. The parties agree that
if the Independent Loan Reviewer believes it necessary to retain an Independent
Appraiser (or if such an Appraiser is required by the penultimate sentence
below), the selection and supervision thereof of said Appraiser shall be at the
discretion and under the control of the Independent Loan Reviewer. Mercantile
agrees to recognize on its books and records all loan losses and record all OREO
at their net realizable value (and record related OREO expenses) based on the
review/appraisal by the Independent Loan Reviewer or Independent Appraiser no
later than the Adjustment Date. Sierra and Mercantile agree to accept the
determinations of the Independent Loan Reviewer and Independent Appraiser. With
respect to any OREO, based on all known information available from time to time,
if it appears that the then current independent appraisals may not be accurate
or upon request of and at the expense of Sierra, Mercantile shall immediately
obtain updated independent appraisals by an Independent Appraiser (utilizing
Mercantile's regular criteria consistent with GAAP and RAP) and provide copies
of all such appraisals to Sierra. Any new or additional writedowns or OREO
expenses shall be recorded immediately upon receiving any updated independent
appraisal. The costs of the neutral loan reviewer shall be shared equally by the
parties. Notwithstanding the foregoing, nothing herein shall require a reduction
of the reserves as set forth on Schedule 2.1(c) except as provided in Section
2.1(c)(ii)(A).
3.3 Covenants of Sierra.
(a) Conduct of Business in the Ordinary Course. Prior to the
Effective Date
(i) In the event that Sierra undertakes any transaction or
series of transactions outside the ordinary course of business prior to the
Effective Date, as soon as is practicable following the determination to proceed
with such a transaction or transactions, Sierra shall advise the board of
directors of Mercantile of such determination. For purposes of this Agreement,
the "Ordinary Course" of Sierra shall consist of banking and related businesses
as permitted under applicable banking laws. Unless Mercantile has given its
previous written consent to any act or omission to the contrary, Sierra shall,
until the Effective Date, cause its officers to use their reasonable best
efforts to:
(A) preserve its business and business organizations
intact;
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(B) preserve the good will of customers and others
having business relations with it and take no action that would materially
impair the benefit to the other party of the goodwill of it or the other
benefits of the Merger;
(C) maintain its properties in customary repair,
working order and condition (reasonable wear and tear excepted);
(D) comply with all laws, regulations and decrees
applicable to the conduct of its business;
(E) use its reasonable best efforts to keep in
force at not less than its present limits all policies of insurance,
including deposit insurance of the FDIC, to the extent reasonably practic-
able in light of the prevailing market conditions in the insurance industry;
(F) comply with all orders, agreements and
memoranda of understanding withrespect to it made by or with any regulatory
authority of competent jurisdiction;
(G) file in a timely manner (taking into account any
extensions duly obtained) all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities;
(H) not sell, lease, pledge, assign, encumber or
otherwise dispose of any of its assets except for adequate value, without
recourse and consistent with its customary practice; and
(I) not make, renegotiate, renew, increase,
extend or purchase any loans, advances or loan commitments, in each case to
any of its officers, directors or any affiliated or related persons of such
directors or officers except in the Ordinary Course consistent with its
established loan procedures and in compliance with FRB Regulation O.
(ii) It is understood and agreed by the parties hereto that
any consent sought of Mercantile or required by Sierra pursuant to Section
2.4(c) or any other provision of this Agreement shall be deemed to be given
following five (5) business days advanced notice by Sierra to Mercantile, which
notice shall include such information as Mercantile shall reasonably request or
unless the comments of Mercantile have been addressed by Sierra.
(b) Dividends. At or after the date hereof and at or prior to
the Effective Date, except with the prior written consent of Mercantile or as
otherwise provided in this Agreement, Sierra shall not declare, set aside or pay
any cash dividend or other distribution in respect of its common stock other
than, in the discretion of the board of directors of Sierra, regular cash
dividends not to exceed $0.50 per share on an annual basis.
(c) Indemnification; Insurancee.
(i) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior to
the date of this Agreement, or who becomes prior to the Effective Time, a
director or officer of Mercantile ("Indemnified Parties") is, or is threatened
to be, made a party based in whole or in part on, or arising in whole or in part
out of, or pertaining to (i) the fact that he is or was a director or officer of
Mercantile or any predecessor or (ii) this Agreement or any of the transactions
contemplated hereby, whether in any case asserted or arising before or after the
Effective Date, the parties hereto agree to cooperate and use their best efforts
to defend against and respond thereto. It is understood and agreed that after
the Effective Date, Sierra shall indemnify and hold harmless, as and to the
fullest extent permitted by law, each such Indemnified Party against any losses,
claims, damages, liabilities, costs, expenses (including reasonable attorney's
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fees and expenses in advance of the final disposition of any claim, suit,
proceeding or investigation to each Indemnified Party to the fullest extent
permitted by law upon receipt of any undertaking required by applicable law),
judgments, fines and amounts paid in settlement in connection with any such
threatened or actual claim, action, suit, proceeding or investigation and in the
event of any such threatened or actual claim, action, suit, proceeding, or
investigation (whether asserted or arising before or after the Effective Date),
the Indemnified Parties may retain counsel reasonably satisfactory to then after
consultation with Sierra; provided, however, that (1) Sierra shall have the
right to assume the defense thereof and upon such assumption Sierra shall not be
liable to any Indemnified Party for any legal expenses of other counsel or any
other expenses subsequently incurred by any Indemnified Party in connection with
the defense thereof, except that if Sierra elects not to assume such defense or
counsel for the Indemnified Parties reasonably advises the Indemnified Parties
that there are issues which raise conflicts of interest between Sierra and the
Indemnified Parties, the Indemnified Parties may retain counsel reasonably
satisfactory to them after consultation with Sierra, and Sierra shall pay the
reasonable fees and expenses of such counsel for the Indemnified Parties, (2)
Sierra shall be obligated pursuant to this paragraph to pay for only one firm of
counsel for all Indemnified Parties, unless an Indemnified Party shall have
reasonably concluded; based on the advice of counsel, that in order to be
adequately represented, separate counsel is necessary for such Indemnified
Party, in which case, Sierra shall be obligated to pay for such separate
counsel, (3) Sierra shall not be liable for any settlement effected without its
prior written consent (which consent shall not be unreasonably withheld), and
(4) Sierra shall have no obligation hereunder to any Indemnified Party when and
if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that indemnification of
such Indemnified Party in the manner contemplated hereby is prohibited by
applicable law. Any Indemnified Party wishing to claim Indemnification under
this Section 3.3(c), upon learning of any such claim, action, suit, proceeding
or investigation, shall notify Sierra thereof, provided that the failure to so
notify shall not affect the obligations of Sierra under this Section 3.3(c)
except to the extent such failure to notify materially prejudices Sierra.
Sierra's obligations under this Section 3.3(c) continue in full force and effect
for a period of four (4) years from the Effective Date; provided, however, that
all rights to indemnification in respect of any claim ("Claim") asserted or made
within such period shall continue until the final disposition of such Claim and
provided further that Sierra shall have the right of setoff against any payments
required to be made by Sierra to an Indemnified Party pursuant to this Section
3.3(c) to the extent that such Indemnified Party shall have received the
indemnification to which such Indemnified Party is entitled from an insurer
under a directors' and officers' liability insurance policy maintained by
Mercantile or Sierra. As of the Effective Date, Sierra may in its discretion
request that its insurance carrier, or Mercantile's insurance carrier, for
directors' and officers' liability insurance provide extended coverage for the
liability to the directors and officers of Mercantile for such period as Sierra
deems appropriate.
(ii) In the event Sierra or any of its successors or assigns
(A) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (B) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Sierra
assume the obligations set forth in this section. The provisions of this Section
3.3(c) are intended to be for the benefit of, and shall be enforceable by, each
Indemnified Party and his or her heirs and representatives.
Section 4. REPRESENTATIONS AND WARRANTIES OF MERCANTILE..
Mercantile represents and warrants to Sierra that, except as
set forth on a Schedule attached to this Agreement and corresponding in number
with the applicable section:
4.1 Corporate Status and Power to Enter Into Agreements. (i)
Mercantile is a banking corporation duly incorporated, validly existing and in
good standing under California law, (ii) subject to the Government Approvals and
to the approval of this Agreement and the transactions contemplated hereby by
the shareholders of Mercantile, Mercantile has all necessary corporate power to
enter into this Agreement and the Merger Agreement and to carry out all of the
terms and provisions hereof and thereof to be carried out by it, (iii)
Mercantile holds a currently valid license issued by the Superintendent to
engage in the business of commercial banking in California at its principal
office in Sacramento, California and (iv) Mercantile is not subject to any order
of the FDIC, the Superintendent or any other regulatory authority having
jurisdiction over its business or any of its assets or properties. Neither the
scope of the business of Mercantile nor the location of its properties requires
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it to be licensed to do business in any jurisdiction other than the State of
California. Mercantile's deposits are insured by the FDIC to the maximum extent
permitted by applicable law and regulation.
4.2 Articles, Bylaws, Books and Records. The copies of the
Articles of Incorporation and Bylaws of Mercantile heretofore delivered to
Sierra are complete and accurate copies thereof as in effect on the date hereof.
The minute books of Mercantile made available to Sierra contain a complete and
accurate record of all meetings of Mercantile's Board of Directors (and
committees thereof) and shareholders. The corporate books and records (including
financial statements) of Mercantile fairly reflect the material transactions to
which Mercantile is a party or by which its properties are subject or bound, and
such books and records have been properly kept and maintained.
4.3 Compliance With Laws, Regulations and Decrees. Mercantile
(i) has the corporate power to own or lease its properties and to conduct its
business as currently conducted, (ii) has complied with, and is not in default
of any laws, regulations, ordinances, orders or decrees applicable to the
conduct of its business and the ownership of its properties, including but not
limited to all federal and state laws (including but not limited to the Bank
Secrecy Act), rules and regulations relating to the offer, sale or issuance of
securities, and the operation of a commercial bank other than where such
noncompliance or default is not likely to result in a material limitation on the
conduct of its business or is not likely to otherwise have a material adverse
effect on Mercantile taken as a whole, (iii) has not failed to file with the
proper federal, state, local or other authorities any material report or other
document required to be filed, and (iv) has all approvals, authorizations,
consents, licenses, clearances and orders of, and has currently effective all
registrations with, all governmental and regulatory authorities which are
necessary to the business and operations of Mercantile as now being conducted.
4.4 Capitalization. The authorized capital stock of Mercantile
consists of 1,000,000 shares of Mercantile common stock, no par value, of which
336,980 are duly authorized, validly issued, fully paid and nonassessable except
as provided in Section 662 of the California Financial Code, and currently
outstanding. Said stock has been issued in compliance with all applicable
securities laws. There are no outstanding (A) options, agreements, calls or
commitments of any character which would obligate Mercantile to issue, sell,
pledge, assign or otherwise encumber or dispose of, or to purchase, redeem or
otherwise acquire, any Mercantile common stock or any other equity security of
Mercantile, or (B) warrants or options relating to, rights to acquire, or debt
or equity securities convertible into, shares of Mercantile common stock or any
other equity security of Mercantile.
4.5 Equity Interest in Any Entity. Except as collateral for
outstanding loans held in its loan portfolio, Mercantile does not own, directly
or indirectly, any equity interest in any bank, corporation or other entity.
4.6 Financial Statements, Regulatory Reports. No financial
statement or other document to be provided to Sierra by Mercantile under this
Agreement, as of the date of such document, contained, or as to documents to be
delivered after the date hereof, will contain, any untrue statement of a
material fact, or, at the date thereof, omitted or will omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements were or will be made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify information as of any earlier date. Mercantile has filed all
material documents and reports required to be filed by it with the FDIC, the
Superintendent and any other governmental authority having jurisdiction over its
business or any of its assets or properties. All such reports conform in all
material respects with the requirements promulgated by such regulatory agencies.
All compliance or corrective action relating to Mercantile required by
governmental authorities and regulatory agencies having jurisdiction over
Mercantile have been taken, including compliance with any of the FDIC or the
Superintendent in their most recent Reports of Examination. Mercantile has not
received any notification, formally or informally, from any agency or department
of any federal, state or local government or any regulatory agency or the staff
thereof (i) asserting that it is not in compliance with any of the statutes,
regulations or ordinances which such government or regulatory authority
enforces, where such non-compliance or default is likely to result in a material
limitation on the conduct of its business or is not likely to otherwise have a
material adverse effect on Mercantile taken as a whole, or (ii) threatening to
revoke any license, franchise, permit or governmental authorization. Mercantile
has paid all assessments made or imposed by any governmental agency. Mercantile
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has delivered to Sierra copies of all annual management letters and opinions,
and has made available to Sierra for inspection all reviews, correspondence and
other documents in the files of Mercantile prepared by its independent
accounting firm delivered to Mercantile since December 31, 1995. The financial
records of Mercantile have been, and are being and shall be, maintained in all
material respects in accordance with all applicable legal and accounting
requirements sufficient to insure that all transactions reflected therein are,
in all material respects, executed in accordance with management's general or
specific authorization and recorded in conformity with generally accepted
accounting principles at the time in effect. The data processing equipment, data
transmission equipment, related peripheral equipment and software used by
Mercantile in the operation of its business to generate and retrieve its
financial records are adequate for the current needs of Mercantile.
4.7 Tax Returns.
(i) Mercantile has timely filed all federal, state, county,
local and foreign tax returns required to be filed by it, including, without
limitation, estimated tax, use tax, excise tax, real property and personal
property tax reports and returns, employer's withholding tax returns, other
withholding tax returns and Federal Unemployment Tax Returns, and all other
reports or other information required or requested to be filed by it, and each
such return, report or other information was, when filed, complete and accurate
in all material respects. Mercantile has paid all taxes, fees and other
governmental charges, including any interest and penalties thereon, when they
have become due, except those that are being contested in good faith, which
contested matters have been disclosed to Sierra and are disclosed on Schedule
4.7 hereto. Mercantile has not been requested to give or has given any currently
effective waivers extending the statutory period of limitation applicable to any
tax return required to be filed by it for any period. Other than as disclosed in
writing to Sierra, there are no claims pending against Mercantile for any
alleged deficiency in the payment of any taxes, and Mercantile does not know of
any pending or threatened audits, investigations or claims for unpaid taxes or
relating to any liability in respect of any taxes. As to such tax claims,
Mercantile has accrued on its books an amount that is believed to be sufficient
to pay all such taxes, including interest and penalties that may be due, and has
reduced tangible shareholders' equity by such amount. There has been no event,
including a change in ownership, that would result in a reappraisal and
establishment of a new base-year full value for purposes of Article XIII.A of
the California Constitution, of any real property owned in whole or in part by
Mercantile or to Mercantile's knowledge, of any real property leased by
Mercantile.
(ii) Mercantile has delivered to Sierra copies of all its tax
returns with respect to taxes payable to the United States of America and the
State of California for the fiscal years ended December 31, 1994 and 1995.
(iii) No consent has been filed relating to Mercantile
pursuant to Section 341(f) of the IRC.
4.8 Material Adverse Change. Except as heretofore disclosed in
writing by Mercantile to Sierra, since September 30, 1996, there has been (i) no
material adverse change in the business, assets, licenses, permits, franchises,
results of operations or financial condition of Mercantile (whether or not in
the Ordinary Course), (ii) no change in any of the assets, licenses, permits or
franchises of Mercantile that has had or can reasonably be expected to have a
material adverse effect on any of the items listed in clause (i) above, (iii) no
damage, destruction, or other casualty loss (whether or not covered by
insurance) that has had or can reasonably be expected to have a material adverse
effect on any of the items listed in clause (i) above, (iv) no amendment,
modification, or termination of any existing, or entering into of any new,
contract, agreement, plan, lease, license, permit or franchise that is material
to the business, financial condition, assets, liabilities or operations of
Mercantile, except in the Ordinary Course; and (v) no disposition by Mercantile
of one or more assets that, individually or in the aggregate, are material to
Mercantile, except sales of assets in the Ordinary Course.
4.9 No Undisclosed Liabilities. Except for items for which
reserves have been established or accrued and recorded in the audited balance
sheets of Mercantile as of December 31, 1995, Mercantile has not incurred or
discharged, and is not legally obligated with respect to any indebtedness,
liability (including, without limitation, a liability arising out of an
indemnification, guarantee, hold harmless or similar arrangement) or obligation
(accrued or contingent, whether due or to become due, and whether or not
subordinated to the claims of its general creditors), other than as a result of
operations in the Ordinary Course after such date. No agreement pursuant to
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which any loans or other assets have been or will be sold by Mercantile entitled
the buyer of such loans or other assets, unless there is material breach of a
representation or covenant by the seller, to cause Mercantile to repurchase such
loan or other asset or the buyer to pursue any other form of recourse against
Mercantile. Mercantile has not knowingly made and shall not make any
representation or covenant in any such agreement that contained or shall contain
any untrue statement of a material fact or omitted or shall omit to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which such representations and/or covenants
were made or shall be made, not misleading. No cash, stock or other dividend or
any other distribution with respect to the stock of Mercantile has been
declared, set aside or paid, nor have any shares of the stock of Mercantile been
purchased, redeemed or otherwise acquired, directly or indirectly, by Mercantile
since December 31, 1995.
4.10 Properties and Leases.
(a) Mercantile has good and marketable title, free and clear
of all liens and encumbrances and the right of possession, subject to existing
leaseholds, to all real properties and good title, free and clear of all liens
and encumbrances, to all other property and assets, tangible and intangible,
reflected in the Mercantile balance sheet as of December 31, 1995 (except
property held as lessee under leases disclosed in writing prior to the date
hereof and except personal property sold or otherwise disposed of since December
31, 1995, in the Ordinary Course), except (i) liens for taxes or assessments not
delinquent, (ii) such other liens and encumbrances and imperfections of title as
do not materially affect the value of such property as reflected in the
Mercantile balance sheet as of December 31, 1995, or as currently shown on the
books and records of Mercantile and which do not interfere with or impair its
present and continued use, (iii) exceptions disclosed in title reports and
preliminary title reports, copies of which have been provided to Sierra. All
tangible properties of Mercantile conform in all material respects with all
applicable ordinances, regulations and zoning laws. All tangible properties of
Mercantile are in a good state of maintenance and repair and are adequate for
the current business of Mercantile. No properties of Mercantile, and, to
Mercantile's knowledge, no properties in which it holds a collateral or
contingent interest or purchase option, are the subject of any pending or
threatened investigation, claim or proceeding relating to the use, storage or
disposal on such property of or contamination of such property by any toxic or
hazardous waste material or substance. To Mercantile's knowledge, Mercantile
does not own, possess or have a collateral or contingent interest or purchase
option in any properties or other assets which contain or have located within or
thereon any hazardous or toxic waste material or substance unless the location
of such hazardous or toxic waste material or other substance or its use thereon
conforms in all material respect with all federal, state and local laws, rules,
regulations or other provisions regulating the discharge of materials into the
environment. As to any asset not owned or leased by Mercantile, Mercantile has
not controlled, directed or participated in the operation or management of any
such asset or any facilities or enterprise conducted thereon, such that it has
become an owner or operator of such asset under applicable environmental laws.
(b) All properties held by Mercantile under leases are held by
it under valid, binding and enforceable leases, with such exceptions as are not
material and do not interfere with the conduct of the business of Mercantile,
and Mercantile enjoys quiet and peaceful possession of such leased property.
Mercantile is not in default in any respect under any material lease, agreement
or obligation regarding its properties to which it is a party or by which it is
bound.
(c) Except as disclosed to Sierra in writing, all of
Mercantile's rights and obligations under the leases referred to in Section (b)
above do not require the consent of any other party to the transactions
contemplated by this Agreement and the Merger Agreement. Where required,
Mercantile shall obtain, prior to the Effective Date, the consent of all parties
to any such transaction.
4.11 Material Contracts. Except as previously disclosed to
Sierra in writing and excluding loans, lines of credit, loan commitments or
letters of credit to which Mercantile is a party, Mercantile is not a party to
or bound by any contract or other agreement made in the Ordinary Course which
involves aggregate future payments by or to Mercantile of more than $20,000 and
which is made for a fixed period expiring more than one year from the date
hereof, and Mercantile is not a party to or bound by any agreement not made in
the Ordinary Course which is to be performed at or after the date hereof. Each
of the contracts and agreements disclosed to Sierra pursuant to this Section is
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a legal and binding obligation (subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general applicability), and no
material breach or default (and no condition which, with notice or passage of
time, or both, could become a material breach or default) exists with respect
thereto.
4.12 Loans. Mercantile has disclosed to Sierra in writing
prior to the date hereof, and will promptly inform Sierra of the amounts of all
loans, leases, other extensions of credit or commitments, or other
interest-bearing assets of Mercantile, that have been classified as of the date
hereof or hereafter by any internal bank examiner or any bank regulatory agency
or the Superintendent as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," or words of similar import in the case of
loans (or that would have been so classified, in the case of other
interest-bearing assets, had they been loans). Mercantile has furnished and will
continue to furnish to Sierra true and accurate information concerning the loan
portfolio of Mercantile, and no material information with respect to the loan
portfolio has been or will be withheld from Sierra. All loans and investments of
Mercantile are legal, valid and binding obligations enforceable in accordance
with its terms and are not subject to any setoffs, counterclaims or disputes
(subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to equitable
principles of general applicability), except as disclosed to Sierra in writing
or reserved for in the balance sheet of Mercantile as of September 30, 1996, and
were duly authorized under and made in compliance with applicable federal and
state laws and regulations. Mercantile does not have any extensions of credit,
investments, guarantees, indemnification agreements or commitments for the same
(including without limitation commitments to issue letters of credit, to create
acceptances, or to repurchase securities, federal funds or other assets) other
than those documented on the books and records of Mercantile.
4.13 Restrictions on Investments. Except for pledges to secure
public and trust deposits and repurchase agreements in the Ordinary Course, none
of the investments reflected in the Mercantile unaudited balance sheet as of
September 30, 1996, and none of the investments made by Mercantile since
September 30, 1996, is subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Mercantile to freely dispose
of such investment at any time except as restricted by any applicable banking,
securities or government regulations.
4.14 Employment Contracts and Benefits.
(a) Mercantile shall deliver to Sierra an accurate list
setting forth all bonus, incentive compensation, profit-sharing, pension,
retirement, stock purchase, stock option, deferred compensation, severance,
hospitalization, medical, dental, vision, group insurance, death benefits,
disability and other fringe benefit plans, trust agreements, arrangements and
commitments of Mercantile (including but not limited to such plans, agreements,
arrangements and commitments applicable to former employees or retired
employees, or for which such persons are eligible), if any, together with copies
of all such plans, agreements, arrangements and commitments that are documented,
any and all contracts of employment and has made available to Sierra any Board
of Directors' minutes (or committee minutes) authorizing, approving or
guaranteeing such plans and contracts.
(b) All contributions, premiums or other payments due from
Mercantile to (or under) any plan listed in subsection (a) have been fully paid
or adequately provided for through periodic accruals or otherwise on its
unaudited financial statements for the period ended September 30, 1996. All
accruals thereon (including, where appropriate, proportional accruals for
partial periods) have been made in accordance with generally accepted accounting
principles consistently applied on a reasonable basis.
(c) To Mercantile's knowledge, each plan listed in subsection
(a) complies with all material requirements of (i) the Age Discrimination in
Employment Act of 1967, as amended, and the regulations thereunder and (ii)
Title VII of the Civil Rights Act of 1964, as amended, and the regulations
thereunder.
(d) To Mercantile's knowledge, each plan listed in subsection
(a) complied with all material requirements of the health care continuation
coverage provisions of the Consolidated Omnibus Budget Reconciliation Act of
1985 and the regulations thereunder.
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(f) Mercantile has heretofore disclosed in writing to
Sierra the names of each director, officer and employee of Mercantile.
4.15 Collective Bargaining and Employment Agreements. Except
as provided in this Agreement or as previously disclosed to Sierra in writing,
Mercantile does not have any union or collective bargaining or written
employment agreements, contracts or other agreements with any labor organization
or with any member of management, or any management or consultation agreement
not terminable at will by Mercantile without liability and no such contract or
agreement has been requested by, or is under discussion by management with, any
group of employees, any member of management or any other person. There are no
material controversies pending between Mercantile and any current or former
employees, and to Mercantile's knowledge, there are no efforts presently being
made by any labor union seeking to organize any of such employees.
4.16 Compensation of Officers and Employees. Except as
previously disclosed to Sierra in writing, (i) no officer or employee of
Mercantile is receiving aggregate direct remuneration at a rate exceeding
$60,000 per annum, and (ii) the consummation of the transactions contemplated by
this Agreement and the Merger Agreement will not (either alone or upon the
occurrence of any additional or further acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from Mercantile or Sierra
to any employee of Mercantile.
4.17 Legal Actions and Proceedings. Except as previously
disclosed to Sierra in writing, Mercantile is not a party to, or so far as
either of them is aware, threatened with, and to Mercantile's knowledge, there
is no reasonable basis for, any legal action or other proceeding or
investigation before any court, any arbitrator of any kind or any government
agency, and Mercantile is not subject to any potential adverse claim, the
outcome of which could involve the payment or receipt by Mercantile of any
amount in excess of $50,000, unless an insurer of Mercantile has agreed to
defend against and pay the amount of any resulting liability without
reservation, or, if any such legal action, proceeding, investigation or claim
will not involve the payment by Mercantile of a monetary amount, which could
materially adversely affect Mercantile or its business or property or the
transactions contemplated hereby. Mercantile has no knowledge of any pending or
threatened claims or charges under the Community Reinvestment Act, before the
Equal Employment Opportunity Commission, the California Department of Fair
Housing & Economic Development, the California Unemployment Appeals Board, or
any human relations commission. There is no labor dispute, strike, slow-down or
stoppage pending or, to Mercantile's knowledge, threatened against Mercantile.
4.18 Execution and Delivery of the Agreement.
(a) The execution and delivery of this Agreement have been
duly authorized by the Board of Directors of Mercantile and, when the Merger,
this Agreement and the Merger Agreement have been duly approved by the
affirmative vote of the holders of a majority of the outstanding shares of
Mercantile common stock at a meeting of shareholders duly called and held, the
Merger, this Agreement and the Merger Agreement will be duly and validly
authorized by all necessary corporate action on the part of Mercantile.
(b) This Agreement has been duly executed and delivered by
Mercantile and (assuming due execution and delivery by Sierra) constitutes, and
the Merger Agreement upon its execution and delivery by Mercantile (and assuming
due execution and delivery by Sierra) will constitute, legal and binding
obligations of Mercantile in accordance with its terms except as enforcement may
be limited by general principles of equity whether applied in a court of law or
a court of equity and by bankruptcy, insolvency and similar laws affecting
creditor's rights and remedies generally.
(c) The execution and delivery by Mercantile of this Agreement
and the Merger Agreement and the consummation of the transactions herein and
therein contemplated (i) do not violate any provision of the Articles of
Incorporation or Bylaws of Mercantile or, to Mercantile's knowledge, any
provision of federal or state law or any governmental rule or regulation
(assuming (A) receipt of the Government Approvals, (B) receipt of the requisite
Mercantile shareholder approval, (C) due registration of the Sierra Shares under
the Securities Act of 1933, as amended ("1933 Act"), (D) receipt of appropriate
permits or approvals under state securities or "blue sky" laws, and (E) accuracy
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of the representations of Sierra set forth herein), and (ii) to Mercantile's
knowledge, do not require any consent of any person except as contemplated
herein, conflict with or result in a breach of, or accelerate the performance
required by any of the terms of, any material debt instrument, lease, license,
covenant, agreement or understanding to which Mercantile is a party or by which
it is bound or any order, ruling, decree, judgment, arbitration award or
stipulation to which Mercantile is subject, or constitute a default thereunder
or result in the creation of any lien, claim, security interest, encumbrance,
charge, restriction or right of any third party of any kind whatsoever upon any
of the properties or assets of Mercantile.
4.19 Retention of Broker or Consultant. No broker, agent,
finder, consultant or other party (other than legal, compliance, loan auditors
and accounting advisors) has been retained by Mercantile or is entitled to be
paid based upon any agreements, arrangements or understandings made by
Mercantile in connection with any of the transactions contemplated by this
Agreement or the Merger Agreement, except that Mercantile has engaged Carpenter
and Company to render an opinion regarding the fairness of the Merger.
Mercantile shall provide Sierra with a true and accurate copy of its
agreement(s) with such firm. All costs related to such opinion shall be paid or
accrued prior to the Effective Date.
4.20 Insurance. Mercantile is and continuously since its
inception has been, insured with reputable insurers against all risks normally
insured against by California commercial banks, and all of the insurance
policies and bonds maintained by Mercantile are in full force and effect,
Mercantile is not in default thereunder and all material claims thereunder have
been filed in due and timely fashion. In the best judgment of the management of
Mercantile, such insurance coverage is adequate for Mercantile. Except as
disclosed to Sierra in writing, there has not been any damage to, destruction
of, or loss of any assets of Mercantile not covered by insurance that could
materially and adversely affect the business, financial condition, properties,
assets or results of operations of Mercantile.
4.21 Loan Loss Reserves. To the knowledge of Mercantile's
management, the allowance for loan losses as of the Effective Date will be
adequate in all material respects under the requirements of all applicable state
and federal laws and regulations to provide for possible loan losses on
outstanding loans, net of recoveries.
4.22 Transactions With Affiliates. Except as may arise in the
Ordinary Course, Mercantile has not extended credit, committed itself to extend
credit, or transferred any asset to or assumed or guaranteed any liability of
the employees or directors of Mercantile, or any spouse or child of any of them,
or to any of their "affiliates" or "associates" as such terms are defined in
Rule 405 under the 1933 Act. Mercantile has not entered into any other
transactions with the employees or directors of Mercantile or any spouse or
child of any of them, or any of their affiliates or associates, except as
disclosed in writing to Sierra. Any such transactions have been on terms no less
favorable to Mercantile than those which would prevail in an arms-length
transaction with an independent third party.
4.23 Information in Sierra Registration Statement. The
information pertaining to Mercantile which has been or will be furnished to
Sierra for or on behalf of Mercantile for inclusion in the Sierra Registration
Statement and the Proxy Materials, or in the applications to be filed to obtain
the Government Approvals ("Applications"), does not and will not contain any
untrue statement of any material fact or omits or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that information of a later date shall be deemed
to modify information as of an earlier date. All financial statements of
Mercantile included in the Proxy Materials will present fairly the financial
condition and results of operations of Mercantile at the dates and for the
periods covered by such statements in accordance with generally accepted
accounting principles consistently applied throughout the periods covered by
such statements. Mercantile shall promptly advise Sierra in writing if prior to
the Effective Date Mercantile shall obtain knowledge of any facts that would
make it necessary to amend or supplement the Sierra Registration Statement, the
Proxy Materials or the Applications, in order to make the statements therein not
misleading or to comply with applicable law.
4.24 Accuracy of Representations and Warranties. No
representation or warranty by Mercantile, and no statement by Mercantile in any
certificate, agreement, schedule or other document furnished in connection with
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the transactions contemplated by this Agreement or the Merger Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make such representation,
warranty or statement not misleading to Sierra; provided, however, that
information as of a later date shall be deemed to modify information as of an
earlier date.
Section 5. REPRESENTATIONS AND WARRANTIES OF SIERRA..
Sierra represents and warrants to Mercantile that, except as
set forth on a Schedule attached to this Agreement and corresponding in number
to the appropriate section:
5.1 Corporate Status and Power to Enter Into Agreements. (i)
Sierra is a corporation duly incorporated, validly existing and in good standing
under California law, and is a registered bank holding company under the Bank
holding Company Act of 1956, as amended, (ii) subject to the approval of this
Agreement and the transactions contemplated hereby by the Superintendent, the
FDIC and, unless waived, the FRB, Sierra has all necessary corporate power to
enter into this Agreement and the Merger Agreement and to carry out all of the
terms and provisions hereof and thereof to be carried out by it, (iii) Sierra's
bank subsidiary is duly licensed to engage in the commercial banking business as
now conducted by it, and (iv) neither Sierra nor any of its subsidiaries is
subject to any order of the FRB, the FDIC, the Superintendent or any other
regulatory authority having jurisdiction over its business or any of its assets
or properties. Neither the scope of the business of Sierra nor the location of
its properties requires it to be licensed to do business in any jurisdictions
other than states of California and Nevada.
5.2 Articles, Bylaws, Books and Records. The copies of the
Articles of Incorporation and Bylaws of Sierra made available to Mercantile are
complete and accurate copies thereof as in effect on the date hereof. The minute
books of Sierra contain a complete and accurate summary of all meetings of
Sierra's Board of Directors (and committees thereof) and shareholders. The
corporate books and records (including financial statements) of Sierra fairly
reflect the material transactions to which Sierra is a party or by which its
properties are subject or bound, and such books and records have been properly
kept and maintained.
5.3 Compliance With Laws, Regulations and Decrees. Sierra (i)
has the corporate power to own or lease its properties and to conduct its
business as currently conducted, (ii) has complied with, and is not in default
of any laws, regulations, ordinances, orders or decrees applicable to the
conduct of its business and the ownership of its properties, including but not
limited to all federal and state laws (including but not limited to the Bank
Secrecy Act), rules and regulations relating to the offer, sale or issuance of
securities, and the operation of a commercial bank, other than where such
noncompliance or default is not likely to result in a material limitation on the
conduct of the business of Sierra or is not likely to otherwise have a material
adverse effect on Sierra taken as a whole, (iii) has not failed to file with the
proper federal, state, local or other authorities any material report or other
document required to be to filed, and (iv) has all approvals, authorizations,
consents, licenses, clearances and orders of, and has currently effective all
registrations with, all governmental and regulatory authorities which are
necessary to the business and operations of Sierra as now being conducted.
5.4 Capitalization. As of November 30, 1996, the authorized
capital stock of Sierra consists of 10,000,000 shares of Sierra common stock, no
par value, of which 2,754,569 are duly authorized, validly issued, fully paid
and nonassessable and currently outstanding, 9,800,000 shares of preferred stock
none of which is outstanding, 200,000 shares of series A preferred stock none of
which are issued or outstanding and $8,705,000 of Sierra debentures convertible
into 870,500 shares of Sierra common stock. Said stock has been issued in
compliance with all applicable securities laws. There are currently outstanding
options to purchase 384,080 shares of Sierra common stock, at a weighted average
exercise price of $9.47 per share, issued pursuant to its 1996 Stock Option
Plan. Said options were issued and, upon issuance in accordance with the terms
of the outstanding options said shares shall be issued, in compliance with all
applicable securities laws. Sierra has adopted a Board of Directors Deferred
Compensation and Stock Award Plan under which the members of Sierra's Board of
Directors can elect to defer earned director compensation and take such
compensation upon retirement from the Board either in the form of Sierra Shares
or in cash. Otherwise, there are no outstanding (i) options, agreements, calls
or commitments of any character which would obligate Sierra to issue, sell,
pledge, assign or otherwise encumber or dispose of, or to purchase, redeem or
otherwise acquire, any Sierra common stock or any other equity security of
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Sierra, or (ii) warrants or options relating to, rights to acquire, or debt or
equity securities convertible into, shares of Sierra common stock or any other
equity security of Sierra. The outstanding common stock of Sierra has been duly
and validly registered with the Commission pursuant to the 1934 Act, to the
extent required thereunder.
5.5 Financial Statements, Regulatory Reports. No financial
statement or other document to be provided to Mercantile by Sierra under this
Agreement, as of the date of such document, contained, or as to documents to be
delivered after the date hereof, will contain, any untrue statement of a
material fact, or, at the date thereof, omitted or will omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which such statements were or will be made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify information as of any earlier date. Sierra has filed all
material documents and reports required to be filed by it with the FRB, the
Commission and any other governmental authority having jurisdiction over its
business or any of its assets or properties. All such reports conform in all
material respects with the requirements promulgated by such regulatory agencies.
All compliance or corrective action relating to Sierra required by governmental
authorities and regulatory agencies having jurisdiction over Sierra or any of
its bank subsidiaries have been taken. Sierra has not received any notification,
formally or informally, from any agency or department of any federal, state or
local government or any regulatory agency or the staff thereof (i) asserting
that it is not in compliance with any of the statutes, regulations or ordinances
which such government or regulatory authority enforces, or (ii) threatening to
revoke any license, franchise, permit or governmental authorization of Sierra.
Sierra has paid all assessments made or imposed by any governmental agency.
Sierra has delivered to Mercantile copies of all annual management letters and
opinions, and has made available to Mercantile for inspection all reviews,
correspondence and other documents in the files of Sierra prepared by Deloitte &
Touche or any other certified public accountant engaged by Sierra and delivered
to Sierra since December 31, 1995. The financial records of Sierra have been,
are being and shall be maintained in all material respects in accordance with
all applicable legal and accounting requirements sufficient to insure that all
transactions reflected therein are, in all material respects, executed in
accordance with management's general or specific authorization and recorded in
conformity with generally accepted accounting principles at the time in effect.
The data processing equipment, data transmission equipment, related peripheral
equipment and software used by Sierra in the operation of its business to
generate and retrieve its financial records are adequate for the current needs
of Sierra.
5.6 Tax Returns.
(a) Sierra has timely filed all federal, state, county, local
and foreign tax returns required to be filed by it, including, without
limitation, estimated tax, use tax, excise tax, real property and personal
property tax reports and returns, employer's withholding tax returns, other
withholding tax returns and Federal Unemployment Tax Returns, and all other
reports or other information required or requested to be filed by each of them,
and each such return, report or other information was, when filed, complete and
accurate in all material respects. Sierra has paid all taxes, fees and other
governmental charges, including any interest and penalties thereon, when they
have become due, except those that are being contested in good faith, which
contested matters have been disclosed to Mercantile. Except as set forth below,
neither Sierra nor any of its subsidiaries has been requested to give or has
given any currently effective waivers extending the statutory period of
limitation applicable to any tax return required to be filed by either of them
for any period. Except as set forth below, there are no claims pending against
Sierra or any of its subsidiaries for any alleged deficiency in the payment of
any taxes, and Sierra does not know of any pending or threatened audits,
investigations or claims for unpaid taxes or relating to any liability in
respect of any taxes.
(b) No consent has been filed relating to Sierra pursuant
to Section 341(f) of the IRC.
5.7 Material Adverse Change. Except as heretofore disclosed in
writing by Sierra to Mercantile, since September 30, 1996, there has been no
material adverse change in the business, assets, licenses, permits, franchises,
results of operations or financial condition of Sierra (whether or not in the
Ordinary Course).
5.8 Legal Actions and Proceedings. Except as previously
disclosed to Mercantile in writing, Sierra is not a party to, or so far as
either of them is aware, threatened with, and to Sierra's knowledge, there is no
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reasonable basis for, any legal action or other proceeding or investigation
before any court, any arbitrator of any kind or any government agency, and
Sierra is not subject to any potential adverse claim, the outcome of which could
involve the payment or receipt by Sierra of any amount in excess of $200,000,
unless an insurer of Sierra has agreed to defend against and pay the amount of
any resulting liability without reservation, or, if any such legal action,
proceeding, investigation or claim will not involve the payment by Sierra of a
monetary amount, which could materially adversely affect Sierra or its business
or property or the transactions contemplated hereby. Sierra has no knowledge of
any pending or threatened claims or charges under the Community Reinvestment
Act, before the Equal Employment Opportunity Commission, the California
Department of Fair Housing & Economic Development, the California Unemployment
Appeals Board, or any human relations commission. There is no labor dispute,
strike, slow-down or stoppage pending or, to the knowledge of Sierra, threatened
against Sierra.
5.9 Execution and Delivery of the Agreement..
(a) The Merger, this Agreement and the Merger Agreement have
been duly and validly authorized by all necessary corporate action on the part
of Sierra.
(b) This Agreement has been duly executed and delivered by
Sierra and (assuming due execution and delivery by Mercantile) constitutes, and
the Merger Agreement, upon its execution and delivery by Sierra (and assuming
due execution and delivery by Mercantile) will constitute, legal and binding
obligations of Sierra in accordance with its terms.
(c) The execution and delivery by Sierra of this Agreement and
the Merger Agreement and the consummation of the transactions herein and therein
contemplated (i) do not violate any provision of the Articles of Incorporation
or Bylaws of Sierra or, to Sierra's knowledge, any provision of federal or state
law or any governmental rule or regulation (assuming (A) receipt of the
Government Approvals, (B) due registration of the Sierra Shares under the 1933
Act, (C) receipt of appropriate permits or approvals under state securities or
"blue sky" laws, and (D) accuracy of the representations of Mercantile set forth
herein), and (ii) to Sierra's knowledge, do not require any consent of any
person under, conflict with or result in a breach of, or accelerate the
performance required by any of the terms of, any material debt instrument,
lease, license, covenant, agreement or understanding to which Sierra is a party
or by which it is bound or any order, ruling, decree, judgment, arbitration
award or stipulation to which Sierra is subject, or constitute a default
thereunder or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever upon any of the properties or assets of Sierra.
5.10 No Undisclosed Liabilities. Except for items for which
reserves have been established in the audited balance sheets of Sierra as of
December 31, 1995, Sierra has not incurred or discharged, and is not legally
obligated with respect to any indebtedness, liability (including, without
limitation, a liability arising out of an indemnification, guarantee, hold
harmless or similar arrangement) or obligation (accrued or contingent, whether
due or to become due, and whether or not subordinated to the claims of its
general creditors), which would have a material effect on the capital or
earnings of Sierra other than as a result of operations in the Ordinary Course
after such date. Other than a possible cash dividend by Sierra payable to
shareholders of record as of March, 1997, no cash, stock or other dividend or
any other distribution with respect to the stock of Sierra has been declared,
set aside or paid, nor have any shares of the stock of Sierra been purchased,
redeemed or otherwise acquired, directly or indirectly, by Sierra since December
31, 1995.
5.11 No Material Environmental Liabilities. To Sierra's
knowledge, Sierra does not own, possess or have a collateral or contingent
interest or purchase option in any properties or other assets which contain or
have located within or thereon any hazardous or toxic waste material or
substance unless the location of such hazardous or toxic waste material or other
substance or its use thereon conforms in all material respect with all federal,
state and local laws, rules, regulations or other provisions regulating the
discharge of materials into the environment the liability of remediation for
which would cause a material adverse change in the capital or earnings of
Sierra.
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5.12 No Material Liabilities Under ERISA. No governmental
agency or claimant or representative of such claimant have alleged a material
violation of ERISA by Sierra the liability for which, if adversely determined,
would result in a material adverse change in the capital or earnings of Sierra.
5.13 Retention of Broker or Consultant. No broker, agent,
finder, consultant or other party (other than legal, compliance, loan auditors
and accounting advisors) has been retained by Sierra or is entitled to be paid
based upon any agreements, arrangements or understandings made by Sierra in
connection with any of the transactions contemplated by this Agreement or the
Merger Agreement.
5.14 Loan Loss Reserves. To the knowledge of Sierra's
management, the allowance for loan losses in the Sierra balance sheet dated
September 30, 1996, and as of the Effective Date are and will be adequate in all
material respects under the requirements of all applicable state and federal
laws and regulations to provide for possible loan losses on outstanding loans,
net of recoveries, including compliance with the comments of the FDIC in its
most recent Report of Examination.
5.15 Information in Sierra Registration Statement. The
information pertaining to Sierra which has been or will be furnished for or on
behalf of Sierra for inclusion in the Sierra Registration Statement or the Proxy
Materials, or in the Applications, does not and will not contain any untrue
statement of any material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading; provided,
however, that information of a later date shall be deemed to modify information
as of an earlier date. All financial statements of Sierra included in the Proxy
Materials will present fairly the financial condition and results of operations
of Sierra at the dates and for the periods covered by such statements in
accordance with generally accepted accounting principles consistently applied
throughout the periods covered by such statements. Sierra shall promptly advise
Mercantile in writing if prior to the Effective Date Sierra shall obtain
knowledge of any facts that would make it necessary to amend the Sierra
Registration Statement, the Proxy Materials or any Application, or to supplement
the prospectus, in order to make the statements therein not misleading or to
comply with applicable law.
5.16 Accuracy of Representations and Warranties. No
representation or warranty by Sierra, and no statement by Sierra in any
certificate, agreement, schedule or other document furnished in connection with
the transactions contemplated by this Agreement or the Merger Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make such representation,
warranty or statement not misleading to Mercantile; provided, however, that
information as of a later date shall be deemed to modify information as of an
earlier date.
Section 6. SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934..
6.1 Preparation and Filing of Registration Statement. Unless
exempted from registration by Section 3(a)(10) of the 1933 Act, Sierra shall
promptly prepare and file with the Commission a registration statement on the
appropriate form ("Sierra Registration Statement") under and pursuant to the
provisions of the 1933 Act for the purpose of registering the Sierra Shares to
be issued in the Merger. Sierra and Mercantile shall promptly prepare Proxy
Materials for the purpose of submitting the Merger, this Agreement and the
Merger Agreement to the shareholders of Mercantile for approval. Sierra and
Mercantile shall cooperate in all reasonable respects with regard to the
preparation of the Sierra Registration Statement and the Proxy Materials. The
Proxy Materials in definitive form are expected to serve as the prospectus to be
included in the Sierra Registration Statement. Sierra and Mercantile shall each
provide promptly to the other such information concerning its business and
financial condition and affairs as may be required or appropriate for inclusion
in the Sierra Registration Statement or the Proxy Materials, and shall cause its
counsel and auditors to cooperate with the other's counsel and auditors in the
preparation of the Sierra Registration Statement and the Proxy Materials.
6.2 Effectiveness of Registration Statement and Listing of
Shares. Sierra and Mercantile shall use their commercially reasonable efforts to
have the Sierra Registration Statement and any amendments or supplements thereto
declared effective under the 1933 Act as soon as practicable, and thereafter
Mercantile shall distribute the Proxy Materials to holders of its common stock
in accordance with applicable laws. Sierra shall use commercially reasonable
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efforts to cause the Sierra Shares issued to effect the Merger to be approved
for listing on the Nasdaq National Market System when such Sierra Shares are
issued to Mercantile's shareholders.
6.3 Sales and Resales of Common Stock. Sierra shall not be
required to maintain the effectiveness of the Sierra Registration Statement for
the purpose of sale or resale of the Sierra Shares by any person.
6.4 RuleRule 145 and Related Matters. At Sierra's option,
securities representing Sierra Shares issued to "affiliates", as that term is
defined in the 1933 Act, of Mercantile (as determined by counsel to Sierra and
Mercantile) under Rule 145 of the Rules and Regulations under the 1933 Act
pursuant to the Merger Agreement will be subject to stop transfer orders and
will bear a restrictive legend in substantially the following form:
"The Securities Represented by this Certificate Have been
Issued in a Transaction to Which Rule 145 Promulgated under
the Securities Act of 1933, as Amended, Applies and May Only
Be Sold or Otherwise Transferred in Compliance with the
Requirements of Rule 145 or Pursuant to an Effective
Registration Statement under Said Act or in a Transaction
Which, in the Opinion of Counsel Satisfactory to the Issuer,
satisfies an Exemption from Such Registration."
Should any opinion of counsel described in clause (ii) of the foregoing legend
indicate that the legend and any stop transfer order then in effect with respect
to the shares may be removed, Sierra will upon request substitute unlegended
securities and remove any stop transfer orders.
Section 7. CONDITIONS TO THE OBLIGATIONS OF SIERRA..
The obligations of Sierra under this Agreement are, at its
option, subject to fulfillment at or prior to the Effective Date of each of the
following conditions; provided, however, that any one or more of such conditions
may be waived by the Board of Directors of Sierra at any time at or prior to the
Effective Date:
7.1 Representations and Warranties. The representations and
warranties of Mercantile in Section 4 hereof shall be true and correct in all
material respects on and as of the Effective Date, with the same effect as
though such representations and warranties had been made on and as of such date
except as to any representation or warranty which specifically relates to an
earlier date.
7.2 Compliance and Performance Under Agreement. Mercantile
shall have performed and complied in all material respects with all terms of
this Agreement and the Merger Agreement required to be performed or complied
with by it at or prior to the Effective Date.
7.3 Material Adverse Change. No materially adverse change
shall have occurred since September 30, 1996, in the business, financial
condition or results of operations of Mercantile and Mercantile shall not be a
party to or, so far as Mercantile is aware, threatened with, and to Mercantile's
knowledge there is no reasonable basis for, any legal action or other proceeding
before any court, any arbitrator of any kind or any Government agency if, in the
reasonable judgment of Sierra, such legal action or proceeding could materially
adversely affect Mercantile, or its business, financial condition or results of
operations.
7.4 Approval of Agreement. The Merger, this Agreement and the
Merger Agreement shall have been duly approved by the affirmative vote of the
holders of a majority of the outstanding shares of Mercantile common stock.
7.5 Officer's Certificate. Sierra shall have received a
certificate, dated the Effective Date, signed on behalf of Mercantile by its
President to the effect that the conditions in Sections 7.1-7.4 have been
satisfied.
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7.6 Opinion of Counsel. Mercantile shall have delivered to
Sierra such documents as may reasonably be requested by Sierra to evidence
compliance by Mercantile with the provisions of this Agreement and the Merger
Agreement, including an opinion of its counsel in a form substantially as set
forth on Exhibit 7.6.
7.7 Absence of Legal Impediment. On the Effective Date, the
absence of: (a) any suit, action or proceeding, or order against Mercantile or
Sierra with respect to any part of this Agreement, or the Merger, or
challenging, enjoining, or otherwise affecting the consummation of the Merger
which, in the opinion of counsel for Sierra, materially affects the Merger or
the consummation of this Agreement; or (b) any pending or threatened action or
proceeding by the United States Department of Justice or other federal
governmental agency seeking to enjoin, prohibit or otherwise impede the Merger;
or (c) a banking moratorium or other suspension of payment by banks in the
United States or any general limitation on extension of credit by lending banks
in the United States.
7.8 Effectiveness of Registration Statement. The Sierra common
stock to be issued to Mercantile shareholders shall have been determined to be
exempt from registration or the Sierra Registration Statement and any amendments
or supplements thereto shall have become effective under the 1933 Act. No stop
order suspending the effectiveness of such Registration Statement shall be in
effect and no proceedings for such purpose shall have been initiated or
threatened by or before the Commission. All state securities and "blue sky"
permits or approvals required to consummate the transactions contemplated by
this Agreement and the Merger Agreement shall have been received.
7.9 Government Approvals. All Government Approvals shall be in
effect, and all conditions or requirements prescribed by law or by any such
Governmental Approval shall have been satisfied; provided, however, that no
Government Approval shall be deemed to have been received if it shall require
the divestiture or cessation of any of the present businesses or operations
conducted by either of the parties hereto or shall impose any other condition or
requirement, which Sierra in its reasonable judgment shall deem to be materially
burdensome (in which case Sierra shall promptly notify Mercantile). For purposes
of this Agreement no condition shall be deemed to be "materially burdensome" if
such condition does not materially differ from conditions regularly imposed by
the FRB, the Superintendent, or FDIC in orders approving transactions of the
type contemplated by this Agreement and compliance with such condition would
not:
(a) require the taking of any action inconsistent with
the manner in which Sierra or Mercantile has conducted its business previously;
(b) have a material adverse effect upon the business,
financial condition or results of operations of Sierra or Mercantile; or
(c) preclude satisfaction of any of the conditions to
consummation of the transactions contemplated by this Agreement.
7.10 Tax Opinion. Sierra and Mercantile shall have received an
opinion of counsel or accountants satisfactory to both parties, subject to
assumptions and exceptions normally included, in form and substance reasonably
satisfactory to both parties, substantially to the effect that under federal
income tax law and California income and franchise tax law:
(a) The Merger will comply with the requirements of
Internal Revenue Code Section 368;
(b) Except for the Cash Component of the Exchange Amount and
any cash received in lieu of any fractional share, no gain or loss will be
recognized by holders of Mercantile Shares who receive Sierra Shares in exchange
for the Mercantile Shares which they hold;
(c) The holding period of Sierra Shares exchanged for
Mercantile Shares will include the holding period of the Mercantile Shares for
which they are exchanged, assuming the shares of Mercantile Shares are capital
assets in the hands of the holder thereof at the Effective Date; and
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(d) The basis of the Sierra Shares received in the exchange
will be the same as the basis of the Mercantile Shares for which they are
exchanged, less any basis attributable to the Cash Component or to fractional
shares for which cash is received.
7.11 Unaudited Financials. Not later than the Determination
Date, Mercantile shall have furnished Sierra a copy of its most recently
prepared unaudited consolidated financial statements for the period beginning
January 1, 1997 and ending the monthend immediately preceding the Determination
Date, including a balance sheet and statement of income of Mercantile for that
period.
7.12 Rule 145 Undertaking. Each director, executive officer
and other person who is an "affiliate" (for purposes of Rule 145 under the
Securities Act) of such party shall have delivered to Sierra, as soon as
practicable after the date of this Agreement, and prior to the date of the
shareholder meeting called by Mercantile to approve this Agreement, a written
agreement, in the form of Exhibit 7.12 hereto, providing that such person will
not sell, pledge, transfer or otherwise dispose of any Sierra Shares to be
received by such "affiliate" in the Merger, except in compliance with the
applicable provisions of the Securities Act and the rules and regulations
thereunder. Notwithstanding any other provision of this Agreement, no
certificate for Sierra Shares shall be delivered in exchange for Mercantile
Shares held by any such "affiliate" who shall not have executed and delivered
such an agreement.
7.13 Closing Documents. Sierra shall have received such
certificates and other closing documents as counsel for Sierra shall reasonably
request.
7.14 Consents. Mercantile shall have received, or Sierra shall
have satisfied itself that Mercantile will receive, all consents of other
parties to and required by material mortgages, notes, leases, franchises,
agreements, licenses and permits applicable to Mercantile, in each case in form
and substance reasonably satisfactory to Sierra, and no such consent or license
or permit shall have been withdrawn or suspended.
7.15 Shareholder Agreements. All directors of Mercantile and
the Brooks Trust shall have entered into a shareholder's agreement in the form
attached hereto as Exhibit 7.15 contemporaneously with the execution of this
Agreement by which such shareholders agree to vote their shares and any shares
over which such shareholders have voting authority in favor of the Merger and
further agreeing, to the extent permitted by law and the bylaws of Mercantile,
to vote in favor of the Merger by consent solicitation.
7.16 Financial Conditions to Closing. The books of Mercantile
as of the Adjustment Date and as of Closing shall reflect compliance with the
following financial conditions:
(a) Other Real Estate and Non-Performing Loans.(a)+Other Real Estate
and Non-Performing Loans. Mercantile's other real estate owned ("OREO"),
non-performing loans ("NPAs") (those loans not accruing interest on Mercantile's
books), loans 90 days or more past due, and other loans under regulatory
requirements classified as substandard or non-performing shall not exceed $2.495
million and the ratio of OREO and NPAs to Shareholder Equity plus Allowance for
Loan Losses ("ALL") shall not exceed 42.5%.
(b) Loan Loss Reserves.(b)+Loan Loss Reserves. Mercantile shall
maintain an ALL of no less than $962 thousand, less reserves deleted from
Schedule 2.1(c) pursuant to the terms of Section 2.1(c)(ii)(A), and 2.95% of
total loans, whichever is greater, and a ratio of ALL to NPAs of not less than
38.5% ("Coverage Ratio").
Section 8. CONDITIONS TO THE OBLIGATIONS OF MERCANTILE..
The obligations of Mercantile under this Agreement are, at its
option, subject to the fulfillment at or prior to the Effective Date of each of
the following conditions provided, however, that any one or more of such
conditions may be waived by the Board of Directors of Mercantile at any time at
or prior to the Effective Date:
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8.1 Representations and Warranties. The representations and
warranties of Sierra in Section 5 hereof shall be true and correct in all
material respects on and as of the Effective Date with the same effect as though
such representations and warranties had been made on and as of such date except
as to any representation or warranty which specifically related to an earlier
date.
8.2 Compliance and Performance Under Agreement. Sierra shall
have performed and complied in all material respects with all of the terms of
this Agreement and the Merger Agreement required to be performed or complied
with by them at or prior to the Effective Date.
8.3 Material Adverse Change. No materially adverse change
shall have occurred since September 30, 1996, in the business, financial
condition, results of operations or properties of Sierra and its subsidiaries
taken as a whole, and Sierra shall not be engaged in, or a party to or so far as
Sierra is aware, threatened with, and to Sierra's knowledge no grounds shall
exist for, any legal action or other proceeding before any court, any arbitrator
of any kind or any government agency if, in the reasonable judgment of
Mercantile, such legal action or proceeding could materially adversely affect
Sierra or its business, financial condition, results of operations or assets.
8.4 Approval of Agreement. The Merger, this Agreement and the
Merger Agreement shall have been duly approved by the affirmative vote of the
holders of a majority of the outstanding shares of Mercantile common stock.
8.5 Officer's Certificate. Mercantile shall have received a
certificate, dated the Effective Date, signed on behalf of Sierra by its
President and Chief Financial Officer, certifying to the fulfillment of the
conditions stated in Sections 8.1-8.4 hereof.
8.6 Opinion of Counsel. Sierra shall have delivered to
Mercantile such documents as may reasonably be requested by Mercantile to
evidence compliance by Sierra with the provisions of this Agreement and the
Merger Agreement, including an opinion of its counsel in a form substantially as
set forth on Exhibit 8.6.
8.7 Absence of Legal Impediment. On the Effective Date, the
absence of: (a) any suit, action or proceeding, or order against Mercantile or
Sierra with respect to any part of this Agreement, or the Merger, or
challenging, enjoining, or otherwise affecting the consummation of the Merger
which, in the opinion of counsel for Mercantile, materially affects the Merger
or the consummation of this Agreement; or (b) any pending or threatened action
or proceeding by the United States Department of Justice or other federal
governmental agency seeking to enjoin, prohibit or otherwise impede the Merger;
or (c) a banking moratorium or other suspension of payment by banks in the
United States or any general limitation on extension of credit by lending banks
in the United States.
8.8 Effectiveness of Registration Statement. The Sierra common
stock to be issued to Mercantile shareholders shall have been determined to be
exempt from registration or the Sierra Registration Statement and any amendments
or supplements thereto shall have become effective under the 1933 Act. No stop
order suspending the effectiveness of the Sierra Registration Statement shall be
in effect and no proceedings for such purpose shall have been initiated or
threatened by or before the Commission. All state securities and "blue sky"
permits or approvals required to consummate the transactions contemplated by
this Agreement and the Merger Agreement shall have been received.
8.9 Government Approvals. The Government Approvals shall have
been received and shall be in effect, and all conditions or requirements
prescribed by law or by any such approval shall have been satisfied; provided,
however that no Government Approval shall be deemed to have been received if it
shall require the divestiture or cessation of any of the present business or
operations conducted by either of the parties hereto or shall impose any other
condition or requirement, which Mercantile in its reasonable judgment shall deem
to be materially burdensome (in which case Mercantile shall promptly notify
Sierra).
8.10 Tax Opinion or Ruling. Sierra and Mercantile shall have
received the opinion referred to in Section 7.10 hereof which opinion shall meet
the requirements of such section.
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8.11 Unaudited Financials. Not later than the Determination
Date, Sierra shall have furnished Mercantile a copy of its most recently
prepared unaudited year-to-date consolidated financial statements, including a
balance sheet and year-to-date statement of income of Sierra.
8.12 Closing Documents. Mercantile shall have received such
certificates and other closing documents as counsel for Mercantile shall
reasonably request.
8.13 Fairness Opinion. The Board of Directors of Mercantile
shall have received an opinion of its financial advisor to the effect that the
terms of the Merger are fair, from a financial point of view, to Mercantile and
its shareholders.
Section 9. CLOSING.
9.1 Closing Date. The closing of the transactions contemplated
by this Agreement ("Closing") shall, unless another date, time or place is
agreed to in writing by Sierra and Mercantile, be held at the offices of
McCutchen, Doyle, Brown & Enersen, San Francisco, California on the Effective
Date.
9.2 Delivery of Documents. At the Closing, the opinions,
certificates and other documents required to be delivered by this Agreement
shall be delivered.
9.3 Filings. At the Closing, Sierra and Mercantile shall
instruct its representatives to make or confirm such filings as shall be
required in the opinion of counsel to Sierra and Mercantile to give effect to
the Merger.
Section 10. EXPENSES.
10.1 Merger Related Expenses. Each party hereto agrees to pay,
without right of reimbursement from the other party and whether or not the
transactions contemplated by this Agreement or the Merger Agreement shall be
consummated, the costs incurred by such party incident to the performance of its
obligations under this Agreement and the Merger Agreement, including without
limitation, costs incident to the preparation of the Merger Agreement, this
Agreement, the Sierra Registration Statement and the Proxy Materials (including
the audited financial statements of the parties contained therein) and incident
to the consummation of the Merger and of the other transactions contemplated
herein and in the Merger Agreement, including the fees and disbursements of
counsel, accountants, consultants and financial advisers employed by such party
in connection therewith. Mercantile shall pay or accrue up to $10,000 toward the
printing costs of the Sierra Registration Statement and the Proxy Materials and
the costs of distributing the Proxy Materials and other information relating to
these transactions to shareholders of Mercantile. All fees payable pursuant to
state "blue-sky" securities laws, fees related to obtaining a tax opinion, the
fee required to be paid to the Commission to register the Sierra Shares shall be
shared equally by the parties. For purposes of determining Adjusted Book Value,
all expenses of Mercantile in connection with the Merger shall be treated as if
they have been paid by accrued on the books of Mercantile as of the
Determination Date.
10.2 Miscellaneous Mercantile Expenses. For purposes of
determining Adjusted Book Value, as of the Adjustment Date Mercantile shall
accrue on its books all expenses or contractual obligations that are or will
become due as of the Effective Date that have been incurred by Mercantile or for
which Mercantile will be liable, regardless of whether Mercantile has received a
billing or invoice for such expenses or obligations.
Section 11. AMENDMENT; TERMINATION..
11.1 Amendment. This Agreement and the Merger Agreement may be
amended by Sierra and Mercantile at any time prior to the Effective Date without
the approval of the shareholders of Mercantile with respect to any of their
terms except, after Mercantile shareholders have approved the Merger, the terms
relating to the form or amount of consideration to be delivered to Mercantile
shareholders in the Merger.
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11.2 Termination. This Agreement and the Merger Agreement may
be terminated as follows:
(a) By the mutual consent of the Boards of Directors of
both Sierra and Mercantile at any time prior to the consummation of the Merger.
(b) By the Board of Directors of Sierra on or after June 30,
1997, if (i) any of the conditions in Section 7 to which the obligations of
Sierra are subject have not been fulfilled, or (ii) such conditions have been
fulfilled or waived by Sierra and Mercantile shall have failed to complete the
Merger.
(c) By the Board of Directors of Sierra if (i) it has become
aware of any facts or circumstances of which it was not aware on the date hereof
and which materially adversely affect Mercantile or its properties, operations
or financial condition, (ii) a materially adverse change shall have occurred
since September 30, 1996, in the business, financial condition, results of
operations or properties of Mercantile, or (iii) there has been material failure
or prospective material failure on the part of Mercantile to comply with its
obligations under this Agreement or the Merger Agreement, or any material
failure or prospective failure to comply with any of the conditions set forth in
Section 7 hereof.
(d) By the Board of Directors of Sierra in the event that
Mercantile enters into a transaction or series of transactions with a third
person or group providing for the acquisition of all or a substantial part of
Mercantile, whether by way of merger, exchange or purchase of stock, sale of
assets or otherwise.
(e) By the Board of Directors of Mercantile on or after June
30, 1997, if (i) any of the conditions contained in Section 8 to which the
obligations of Mercantile are subject have not been fulfilled, or (ii) such
conditions have been fulfilled or waived but Sierra shall have failed to
complete the Merger; provided, however, that if Sierra is engaged at the time in
litigation (including an administrative appeal procedure) relating to an attempt
to obtain one or more of the Governmental Approvals or if Sierra shall be
contesting in good faith any litigation which seeks to prevent consummation of
the transactions contemplated hereby, such nonfulfillment shall not give
Mercantile the right to terminate this Agreement until the earlier of (A) June
30, 1997, and (B) 60 days after the completion of such litigation and of any
further regulatory or judicial action pursuant thereto, including any further
action by a governmental agency as a result of any judicial remand, order or
directive or otherwise or any waiting period with respect thereto provided such
date shall not occur beyond December 31, 1997.
(f) By the Board of Directors of Mercantile if (i) it has
become aware of any facts or circumstances of which it was not aware on the date
hereof and which can or do materially adversely affect Sierra or its properties,
operations or financial condition, (ii) a materially adverse change shall have
occurred since September 30, 1996 in the business, financial condition, results
of operations or assets of Sierra, or (iii) there has been a material failure or
prospective material failure on the part of Sierra to comply with its
obligations under this Agreement or the Merger Agreement, or any material
failure or prospective material failure to comply with any condition set forth
in Section 8.
(g) By the Board of Directors of Mercantile in the event
Sierra or its affiliates enter into a Business Combination with any other entity
which does not expressly contemplate the performance by Sierra or its successor
in interest of Sierra's obligations under this Agreement and Sierra indicates it
will not consummate this Agreement.
11.3 Termination. The power of termination hereunder may be
exercised by Sierra or Mercantile, as the case may be, only by giving written
notice, signed on behalf of such party by its Chief Executive Officer or
President, to the other party.
11.4 Breach of Obligations. If there has been a material
breach by either party in the performance of any of the obligations herein which
shall not have been cured within ten business days after written notice thereof
has been given to the defaulting party, the nondefaulting party shall have the
right to terminate this Agreement upon written notice to the other party. In any
event, the nondefaulting party shall have no obligation to consummate any
transaction or take any further steps toward such consummation contemplated
hereunder until such breach is cured.
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11.5 Termination and Expenses..
(a) If this Agreement is terminated for any reason, the Merger
Agreement shall automatically terminate. Termination of this Agreement shall not
terminate or affect the obligations of the parties to pay expenses as provided
in Section 10, to maintain the confidentiality of the other party's information
pursuant to Section 3.1(f), or the provisions of this Section 11.5 or of
Sections 12.1-12.7.
(b) If Sierra terminates this Agreement pursuant to Section
11.2(d) or because of a willful breach of the Agreement by Mercantile,
Mercantile shall pay to Sierra, on demand, the sum of $350,000. If Mercantile
terminates this Agreement pursuant to Section 11.2(g) or because of a willful
breach of the Agreement by Sierra, Sierra shall pay to Mercantile, on demand,
the sum of $350,000. In each case, the amount indicated shall be deemed
consideration or liquidated damages for expenses incurred and the lost
opportunity cost for time devoted to the transactions contemplated by this
Agreement, provided, however, each party shall remain liable for expenses as set
forth in Section 10.
Section 12. MISCELLANEOUS..
12.1 Notices. Any notice or other communication required or
permitted under this Agreement shall be effective only if it is in writing and
delivered personally, or by overnight courier, or by facsimile or sent by first
class United States mail, postage prepaid, registered or certified mail,
addressed as follows:
To Sierra: To Mercantile:
SierraWest Bancorp Mercantile
10181 Truckee-Tahoe Airport Road 455 Capitol Mall
Truckee, California 96160 Sacramento, California 95814
Attention: William T. Fike Attention: Michael Burkart
President & CEO President & CEO
With a copy to: With a copy to:
McCutchen, Doyle, Brown & Enersen Lillick & Charles
Three Embarcadero Center Two Embarcadero Center
San Francisco, CA 94111 San Francisco, CA 94111
Attention: James M. Rockett Attention: Ronald W. Bachli
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
12.2 Binding Agreement. This Agreement is binding upon and is
for the benefit of Sierra and Mercantile and its successors and permitted
assigns. This Agreement is not made for the benefit of any person, firm,
corporation or association not a party hereto, and no other person, firm,
corporation or association shall acquire or have any right under or by virtue of
this Agreement. No party may assign this Agreement or any of its rights,
privileges, duties or obligations hereunder without the prior written consent of
the other party to this Agreement.
12.3 Survival of Representations and Warranties. No
investigation by Sierra or Mercantile made before or after the date of this
Agreement shall affect the representations and warranties which are contained in
this Agreement and such representations and warranties shall survive such
investigation, provided that representations, warranties, covenants and
agreements of Sierra and Mercantile contained in this Agreement shall not
survive the Closing.
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12.4 Governing Law. This Agreement shall be governed by and
construed in accordance with he laws of the State of California.
12.5 Attorneys' Fees. In any action at law or suit in equity
in relation to this Agreement, the prevailing party in such action or suit shall
be entitled to receive a reasonable sum for its attorneys' fees and all other
reasonable costs and expenses incurred in such action or suit.
12.6 Entire Agreement; Severability. This Agreement and the
documents, certificates, agreements, letters, schedules and exhibits attached or
required to be delivered pursuant hereto set forth the entire agreement and
understandings of the parties in respect of the transactions contemplated
hereby, and supersede all prior agreements, arrangements and understanding
relating to the subject matter hereof. Each provision of this Agreement shall be
interpreted in a manner to be effective and valid under applicable law, but if
any provision hereof shall be prohibited or ruled invalid under applicable law,
the validity, legality and enforceability of the remaining provisions shall not,
except as otherwise required by law, be affected or impaired as a result of such
prohibition or ruling.
12.7 Counterparts. This 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, Sierra and Mercantile have each caused
this Agreement and Plan of Merger to be signed by its Chief Executive Officer or
Chairman as of the day and year first above written.
MERCANTILE BANK SIERRAWEST BANCORP
By__/s/ Michael Burkart___________ By_/s/ William T. Fike____________
Michael Burkart William T. Fike
President and Chief Executive Officer President and Chief Executive Officer
SIERRAWEST BANK
By__/s/ William T. Fike____________
William T. Fike
President and Chief Executive Officer
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2
EXHIBIT A
Merger Agreement
...........................This merger agreement ("Merger Agreement") dated as
of ___________, 1997 between SierraWest Bank, ("Subsidiary"), a California
banking corporation, and Mercantile Bank ("Mercantile"), a California banking
corporation is entered into as follows:
Section 13. Outstanding Shares.
(a) Mercantile is a California banking corporation authorized
by the California State Banking Department. Mercantile has 1,000,000 authorized
shares of no par value common stock of which 336,980 are outstanding. Mercantile
has no outstanding shares of preferred stock, options or warrants.
(b) Subsidiary is a California banking corporation authorized
by the California State Banking Department. Subsidiary has ____________
authorized shares of common stock of which __________ are outstanding.
Subsidiary has no outstanding shares of preferred stock, options or warrants.
Section 14. The Merger.
Mercantile shall be merged into Subsidiary ("Merger").
Section 15. Conversion of Shares.
Upon consummation of the Merger, (i) each outstanding share of
Mercantile, other than shares held by shareholders who perfect their rights as
dissenting shareholders under California law, shall be converted into the right
to receive the exchange amount of $_____ per share ("Per Share Exchange Amount")
comprised of a Cash Component of 50% and a Stock Component consisting of common
stock of SierraWest Bancorp valued at 50%, in accordance with an election
described in Section __ below; and (ii) the outstanding shares of Subsidiary
shall remain the outstanding shares of the Surviving Corporation and are not
affected by the Merger; and there will be no other outstanding shares, options,
warrants or other stock rights to acquire any shares of Mercantile.
16. Terms of Cash/Stock Election.Election.
The Exchange Amount will be allocated to the Stock Component
and the Cash Component in accordance the following election and procedures (the
"Cash/Stock Election").
Mercantile shareholders may elect to receive the Exchange
Amount in either all SierraWest Bancorp shares or all cash. If no election is
made, the shareholder will receive cash equal to 50% and stock of a value equal
to 50%.
If the aggregate Cash Component is undersubscribed, the
unsubscribed portion of this minimum aggregate Cash Component will be allocated
pro rata (by number of shares) among all Mercantile shareholders; if the
aggregate Cash Component is oversubscribed, the Cash Component of each
Mercantile shareholder electing to receive cash will be reduced pro rata (by
number of shares electing to receive cash). The total of the Cash Component and
the Stock Component will always equal the Exchange Amount.
Mercantile shareholders who make a Cash/Stock Election have no
assurance that they will in fact receive all cash or all stock. They will
receive cash in excess of the above amount per share only to the extent excess
cash is available under the limitation set forth above, and they will receive
all stock only if other Mercantile shareholders elect at least an aggregate of
50% in cash.
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Section 17. Articles of Incorporation and By-Laws.
(a) The Articles of Incorporation of Subsidiary shall, upon
the Effective Date, be the Articles of Incorporation of the Surviving
Corporation. It is the intention of the parties that the Merger will be treated
as a tax free reorganization pursuant to Section 368 of the Internal Revenue
Code.
(b) The By-Laws of Subsidiary, as they exist on the Effective
Date, shall be the By-Laws of the Surviving Corporation until the same are
amended.
Section 18. Exchange of Shares.
The conversion of shares as provided in the Merger Agreement
shall occur automatically upon the Effective Date without action by the holders
thereof. Each holder of Mercantile Shares shall on or after the Effective Date
surrender each certificate representing Mercantile Shares to the Exchange Agent
appointed by the parties and shall be entitled to receive in exchange therefor
the Per Share Exchange Amount.
Section 19. Effect of Merger And Effective Date.
The effect of the Merger and the Effective Date of the Merger
are as prescribed by law.
Section 20. Officers and Directors
The officers and directors of Subsidiary holding office on the
Effective Date shall be the officers and directors of the Surviving Corporation
until removed as provided by law or until the election of their respective
successors.
Section 21. Acts of Merging Corporation
Mercantile, as the merging corporation, shall from time to
time, as and when requested by the Surviving Corporation, execute and deliver
all such documents and instruments and take all such action necessary or
desirable to evidence or carry out this Merger.
All capitalized term herein shall have the meanings ascribed
to them in this Merger Agreement; provided, however, if no meaning is separately
ascribed to such capitalized terms in this Merger Agreement, then such terms
will have the meanings ascribed to them in the Agreement and Plan of Acquisition
and Merger dated __________, 1997.
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In witness whereof the parties have executed this Merger Agreement.
Mercantile Bank
By___________________________________
Michael Burkart
President
By___________________________________
Secretary
SierraWest Bank
By___________________________________
William T. Fike
President
By___________________________________
Secretary
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(Letterhead of Carpenter & Company)
ANNEX B
January 23, 1997
Board of Directors
Mercantile Bank
455 Capital Mall, Suite 100
Sacramento, California 95814
Members of the Board:
We understand that Mercantile Bank (the Company") proposes to enter into a Plan
of Acquisition and Merger Agreement dated as of January 23, 1997 ("the
Agreement) with SierraWest Bancorp pursuant to which SierraWest Bancorp will
acquire all the shares of common stock of Mercantile Bank in exchange for a
combination of common shares of SierraWest Bancorp and cash valued at $6,601,000
subject to adjustment as set forth in the Agreement ("the Consideration"). You
have asked for our opinion as to whether the Consideration to be received by
shareholders of the company, as described in the Agreement, taken as a whole are
fair from a financial point of view to such shareholders, as of the date hereof.
In connection with our opinion, we have among other activities: (a) reviewed
certain publicly available financial and other data with respect to the Company,
including the consolidated financial statements for recent years and for interim
periods to November 30, 1996, and certain other relevant financial and operating
data relating to the Company made available to us from published sources and
from the internal records of the Company; (b) reviewed the terms of the
Agreement; (c) reviewed certain historical market prices and trading volume of
common stock of California banking companies; (d) compared the Company and
SierraWest Bancorp from a financial point of view with certain other companies
in the financial services industry which we deemed to be relevant; (e)
considered the financial terms, to the extent publicly available, of selected
recent transactions which we deem to be comparable, in whole or in part, to the
Transaction; (f) reviewed and discussed with representatives of the management
of the Company certain information of a business and financial nature regarding
the Company, including financial forecasts and related assumptions of the
Company; (g) made inquiries and held discussions on the Transaction and the
Agreement and other matters relating thereto with the Company's counsel; and (h)
performed such other analyses and examinations as we have deemed appropriate.
In connection with our review, we have not independently verified any of the
foregoing information with respect to the Company. We have relied on all such
information provided by the Company and have assumed that all such information
is complete and accurate in all material respects. We have assumed that there
have been no material changes in the Company's assets, financial condition,
results of operations, business or prospects since the respective dates of their
last financial statements made available to us. We have relied on advice of
counsel to the Company as to all legal matters with respect to the Company, the
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Transaction, and the Agreement. In addition, we have not made an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of the Company, nor have we been furnished with any such appraisals.
Further, our opinion is based upon economic, monetary, and market conditions
existing as of the date hereof.
Based upon the foregoing, and in reliance thereon, it is our opinion that, as of
today's date, the Consideration is fair to the shareholders of the Company from
a financial point of view.
This opinion is furnished pursuant to our engagement letter dated January 3,
1997, and is solely for the benefit of the Board of Directors and stockholders
of the Company. Except as provided in such engagement letter, this opinion may
not be used or referred to by the Company or quoted or disclosed to any person
in any manner without our prior written consent.
Very truly yours,
SEAPOWER CARPENTER CAPITAL, INC.,
dba CARPENTER & COMPANY
By: /s/John Flemming
John Flemming
JB/gw
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ANNEX C
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION CODE
ss. 1300. Right to Require Purchase - "Dissenting Shares" and "Dissenting
Shareholder" Defined.
(a)......If the approval of the outstanding shares (Section
152) of a corporation is required for a reorganization under subdivisions (a)
and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-term merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the shareholder
which are dissenting shares as defined in subdivision (b). The fair market value
shall be determined as of the day before the first announcement of the terms of
the proposed reorganization or short- form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
(b)......As used in this chapter, "dissenting shares" means
shares which come within all of the following descriptions:
(1)......Which were not immediately prior to the
reorganization or short-term merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board
of Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes the provisions of this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that this
provisions does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or regulation;
and provided, further, that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for payment are filed with
respect to 5 percent or more of the outstanding shares of that class.
(2)......Which were outstanding on the date for the
determination of shareholders entitled to vote on the reorganization and (A)
were not voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that
paragraph), were voted against the reorganization, or which were held of record
on the effective date of a short-term merger; provided, however, that
subparagraph (A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3)......Which the dissenting shareholder has demanded that
the corporation purchase at their fair market value, in accordance with Section
1301.
(4)......Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c)......As used in this chapter, "dissenting shareholder"
means the recordholder of dissenting shares and includes a transferee of record.
ss. 1301. Demand for Purchase.
(a)......If, in the case of a reorganization, any shareholders
of a corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1304 and this section, a statement of the
price determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
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the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b)......Any shareholder who has a right to require the
corporation to purchase the shareholder's shares for cash under Section 1300,
subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof,
and who desires the corporation to purchase such shares shall make written
demand upon the corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not effective for
any purpose unless it is received by the corporation or any transfer agent
thereof (1) in the case of shares described in clause (i) or (ii) [sic] of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos
in that paragraph), not later than the date of the shareholders' meeting to vote
upon the reorganization, or (2) in any other case within 30 days after the date
on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c)......The demand shall state the number and class of the
shares held of record by the shareholder which the shareholder demands that the
corporation purchase and shall contain a statement of what such shareholder
claims to be the fair market value of those shares as of the day before the
announcement of the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to sell the shares
at such price.
ss. 1302. Endorsement of Shares.
Within 30 days after the date on which notice of the approval
by the outstanding shares or the notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the shares
are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
ss. 1303. Agreed Price -- Time for Payment.
(a)......If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon at
the legal rate on judgments from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between the corporation
and the holders thereof shall be filed with the secretary of the corporation.
(b)......Subject to the provisions of Section 1306, payment of
the fair market value of dissenting shares shall be made within 30 days after
the amount thereof has been agreed or within 30 days after any statutory or
contractual conditions to the reorganization are satisfied, whichever is later,
and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
ss. 1304. Dissenter's Action to Enforce Payment.
(a)......If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail to agree upon the
fair market value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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(b)......Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two or more such
actions may be consolidated.
(c)......On the trial of the action, the court shall determine
the issues. If the status of the shares as dissenting shares is in issue, the
court shall first determine that issue. If the fair market value of the
dissenting shares is in issue, the court shall determine, or shall appoint one
or more impartial appraisers to determine the fair market value of the shares.
ss. 1305. Appraisers' Report -- Payment -- Costs.
(a)......If the court appoints an appraiser or appraisers,
they shall proceed forthwith to determine the fair market value per share.
Within the time fixed by the court, the appraisers, or a majority of them, shall
make and file a report in the office of the clerk of the court. Thereupon, on
the motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court finds
the report reasonable, the court may confirm it.
(b)......If a majority of the appraisers appointed fail to
make and file a report within 10 days from the date of their appointment or
within such further time as may be allowed by the court or the report is not
confirmed by the court, the court shall determine the fair market value of the
dissenting shares.
(c)......Subject to the provisions of Section 1306, judgment
shall be rendered against the corporation for payment of an amount equal to the
fair market value of each dissenting share multiplied by the number of
dissenting shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was entered.
(d)......Any such judgment shall be payable forthwith with
respect to uncertificated securities and, with respect to certificated
securities, only upon the endorsement and delivery to the corporation of the
certificates for the shares described in the judgment. Any party may appeal from
the judgment.
(e)......The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, shall be assessed or
apportioned as the court considers equitable, but, if the appraisal exceeds the
price offered by the corporation, the corporation shall pay the costs (including
in the discretion of the court attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments from the date of compliance with
Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is
more than 125 percent of the price offered by the corporation under subdivision
(a) of Section 1301).
ss. 1306. Dissenting Shareholder's Status as Creditor.
To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
ss. 1307. Dividends Paid as Credit Against Payment.
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
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ss. 1308. Continuing Rights and Privileges of Dissenting Shareholders.
Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges incidents to
their shares, until the fair market value of their shares is agreed upon or
determined. A dissenting shareholder may not withdraw a demand for payment
unless the corporation consents thereto.
ss. 1309. Termination of Dissenting Shareholder Status.
Dissenting shares lose their status as dissenting shares and
the holders thereof cease to be dissenting shareholders and cease to be entitled
to require the corporation to purchase their shares upon the happening of any of
the following:
(a)......The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on demand to any
dissenting shareholder who has initiated proceedings in good faith under this
chapter all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b)......The shares are transferred prior to their submission
for endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c)......The dissenting shareholder and the corporation do not
agree upon the status of the shares as dissenting shares or upon the purchase
price of the shares, and neither files a complaint or intervenes in a pending
action as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d)......The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of the dissenting
shares.
ss. 1310. Suspension of Proceedings for Payment Pending Litigation.
If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a reorganization, any
proceedings under Section 1304 and 1305 shall be suspended until final
determination of such litigation.
ss. 1311. Exempt Shares.
This chapter, except Section 1312, does not apply to classes
of shares whose terms and provisions specifically set forth the amount to be
paid in respect to such shares in the event of reorganization or merger.
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ss. 1312. Attacking Validity of Reorganization or Merger.
(a)......No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by the shareholder
shall have any right at law or in equity to attack the validity of the
reorganization or short-form merger, or to have the reorganization or short-form
merger set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have been legally
voted in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the approved
reorganization.
(b)......If one of the parties to a reorganization or
short-form merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form merger,
subdivision (a) shall not apply to any shareholder of such party who has not
demanded payment of cash for such shareholder's shares pursuant to this chapter;
but if the shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the reorganization or short-form
merger set aside or rescinded, the shareholder shall not thereafter have any
right to demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination by
the court that clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such shareholder is a member.
(c)......If one of the parties to a reorganization or
short-form merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form merger, in any
action to attack the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded, (1) a party
to a reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
[3/97]
