AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
MERCANTILE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
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MARYLAND 6711 52-0898572
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
MERCANTILE BANK & TRUST BUILDING
TWO HOPKINS PLAZA
P.O. BOX 1477
BALTIMORE, MARYLAND 21203
(410) 237-5900
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive office)
------------------------------
JOHN A. O'CONNOR, JR., ESQ.
Senior Vice President and Secretary
Mercantile Bankshares Corporation
Mercantile Bank & Trust Building
Two Hopkins Plaza
P.O. Box 1477
Baltimore, Maryland 21203
(410) 237-5900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
ALAN D. YARBRO, ESQ.
Venable, Baetjer and Howard
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza, Suite 1800
Baltimore, Maryland 21201
(410) 244-7400
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If any of the securities being registered on this Form are to be offered
pursuant to Rule 415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box. X
------------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH OFFERING AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE (2) FEE (3)
Common Stock, $2.00 par value (1)............... 2,238,238 N/A $20,372,695 $2,950.53
</TABLE>
(1) Includes as to each share of Common Stock a right, not currently exercisable
or separately tradeable, to purchase additional securities in certain future
events, as described in the enclosed Prospectus and Proxy Statement.
(2) Estimated solely for purposes of calculating the registration fee, as
required by Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"), and calculated in accordance with Rule 457(f)(2)
thereunder, on the basis of the book value of Fredericksburg National
Bancorp, Inc. common stock to be received by the Registrant in exchange for
common stock of the Registrant pursuant to the Affiliation described in the
enclosed Prospectus and Proxy Statement.
(3) Calculated based on a registration fee in the amount of $7,025.07, less
$4,074.54 previously paid in connection with the filing of preliminary proxy
materials of Fredericksburg National Bancorp, Inc. on June 3, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERCANTILE BANKSHARES CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO RULE 404(A) OF THE SECURITIES ACT AND ITEM 501(B) OF REGULATION S-K,
SHOWING THE LOCATION OR HEADING IN THE PROSPECTUS AND PROXY STATEMENT
OF THE INFORMATION REQUIRED BY PART I OF FORM S-4
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FORM S-4 LOCATION OR HEADING IN
ITEM NUMBER AND CAPTION PROSPECTUS AND PROXY STATEMENT
------------------------------------------------------ ------------------------------------------------
A. Information About the Transaction
1. Forepart of the Registration Statement and Outside
Cover Page of Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Available Information; Documents Delivered and
Incorporated by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information..................................... Summary; Summary--The Parties, --The
Affiliation, --Market Price Data; Summary
Historical Financial Data; Comparative
Unaudited Per Share Data; The FNB Annual
Meeting--Vote Required; The
Affiliation--Appraisal Rights of Dissenting
Shareholders,--Certain Federal Income Tax
Consequences
4. Terms of the Transaction.............................. The Affiliation--Reasons for the Affiliation;
Recommendation of the FNB Board of
Directors,--Opinion of FNB Financial
Advisor,--Accounting Treatment,--Certain
Federal Income Tax Consequences,--Resale of
Mercshares Common Stock After the Affiliation
By Controlling Persons; Certain Other
Agreements; Description of Mercshares Capital
Stock; Documents Delivered and Incorporated by
Reference; Comparison of Stockholder Rights of
Mercshares and FNB Common Stock
5. Pro Forma Financial Information....................... Not Applicable
6. Material Contacts with the Company Being Acquired..... The Affiliation--Background to the Affiliation,
--Interests of Certain Persons in the
Affiliation; Certain Other Agreements--The
Stock Option Agreement,--The Support
Agreement,--Affiliate Undertakings,
--Agreement with FNB Shareholder
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters....... Not Applicable
8. Interests of Named Experts and Counsel................ Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................ Not Applicable
</TABLE>
<PAGE>
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FORM S-4 LOCATION OR HEADING IN
ITEM NUMBER AND CAPTION PROSPECTUS AND PROXY STATEMENT
------------------------------------------------------ ------------------------------------------------
B. Information About the Registrant
10. Information with Respect to S-3 Registrants........... Documents Delivered and Incorporated by
Reference; Description of Mercshares Capital
Stock
11. Incorporation of Certain Information by Reference..... Documents Delivered and Incorporated by
Reference
12. Information with Respect to S-2 or S-3 Registrants.... Not Applicable
13. Incorporation of Certain Information by Reference..... Not Applicable
14. Information with Respect to Registrants Other Than S-3
or S-2 Registrants.................................... Not Applicable
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies............. Not Applicable
16. Information with Respect to S-2 or S-3 Companies...... Documents Delivered and Incorporated by
Reference; Summary; Description of FNB;
Management's Discussion and Analysis of
Financial Condition and Results of Operations
17. Information with Respect to Companies Other Than S-3
or S-2 Companies...................................... Not Applicable
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations are
to be Solicited....................................... Documents Delivered and Incorporated by
Reference; The FNB Annual Meeting--Date, Place
and Time,
--Record Date,--Vote Required,
--Shareholder Proposals for 1995 Proxy
Statement; The Affiliation
--Appraisal Rights of Dissenting
Shareholders,--Interests of Certain Persons in
the Affiliation; Election of FNB Directors
19. Information if Proxies, Consents or Authorizations are
not to be Solicited or in an Exchange Offer......... Not Applicable
</TABLE>
<PAGE>
[FNB LETTERHEAD]
August 5, 1994
Dear Fellow Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Fredericksburg National Bancorp, Inc. ("FNB") to be held at the Main Office of
The National Bank of Fredericksburg (the "Bank") located at 2403 Fall Hill
Avenue, Fredericksburg, Virginia on Tuesday, September 13, 1994 at 2:00 p.m.
prevailing local time.
In addition to the election of directors, you will be asked to consider and
vote on the Agreement and Plan of Affiliation and Merger, dated March 29, 1994,
between FNB and Mercantile Bankshares Corporation, a bank holding company
organized under the laws of Maryland ("Mercshares"), and the related Plan of
Merger (the "Affiliation Agreement"). Based in Baltimore, Maryland, Mercshares
is a bank holding company with $5.5 billion in total assets at year-end 1993 and
with its principal operations currently being conducted through 19 affiliated
banks in Maryland, Virginia and Delaware.
Under the terms of the Affiliation Agreement, each share of common stock of
FNB outstanding immediately prior to consummation will automatically become and
be converted into 2.84 shares of Mercshares common stock. Cash will be paid in
lieu of fractional shares. Based on this exchange ratio, and the current
dividend rate on Mercshares common stock, your annual dividend payments would
increase to approximately $1.93 per share of FNB common stock now held by you.
The historical net income per share and the book value per share of Mercshares
common stock to be received by you after giving effect to the exchange ratio
represent a substantial increase in historical net income per share and book
value per share of FNB common stock. The shares of Mercshares common stock you
receive pursuant to the affiliation should be more readily marketable than the
shares of FNB common stock you presently hold. Following the consummation of the
transaction with Mercshares, the Bank will continue to operate as a separate
bank within the Mercshares system. The transaction with Mercshares does not
change the Bank's name, office locations, directors or staff.
Your Board of Directors has retained the investment banking firm of Scott &
Stringfellow, Inc. to act as its financial advisor in connection with the
transaction with Mercshares. As discussed in the accompanying Prospectus and
Proxy Statement, Scott & Stringfellow has delivered to the Board of Directors
its written opinion that, as of this date, the terms of the Affiliation
Agreement are fair from a financial point of view to our shareholders.
The exchange of FNB common stock for Mercshares common stock (other than
for cash in lieu of any fractional shares) pursuant to the Affiliation Agreement
will be a tax-free transaction for federal income tax purposes. Details of the
proposed transaction with Mercshares are set forth in the accompanying
Prospectus and Proxy Statement, which you are urged to read carefully in its
entirety. Approval of the transaction with Mercshares requires the affirmative
vote of at least a majority of the outstanding shares of common stock of FNB.
Your Board of Directors unanimously approved the Affiliation Agreement and
the transaction with Mercshares and believes that they are in the best interests
of FNB and our shareholders. Accordingly, the Board unanimously recommends that
you vote TO APPROVE the Affiliation Agreement.
We hope you can attend the Annual Meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. Your vote is important regardless of the
number of shares you own.
We look forward to seeing you at the Annual Meeting.
Sincerely,
DUVAL Q. HICKS CHARLES T. LEWIS
Chairman of the Board President
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
FREDERICKSBURG, VIRGINIA
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 13, 1994
------------------------
The Annual Meeting of Shareholders of Fredericksburg National Bancorp, Inc.
("FNB") will be held on Tuesday, September 13, 1994, at 2:00 p.m. prevailing
local time at the Main Office of The National Bank of Fredericksburg, located at
2403 Fall Hill Avenue, Fredericksburg, Virginia for the following purposes:
1. To consider and vote upon a proposal to approve the Plan of Merger
provided by an Agreement and Plan of Affiliation and Merger, dated March
29, 1994 (the Plan of Merger and the Agreement and Plan of Affiliation and
Merger are collectively referred to herein as the "Affiliation Agreement")
by and between FNB and Mercantile Bankshares Corporation, a Maryland
corporation ("Mercshares") registered under the Bank Holding Company Act of
1956, a copy of which is included as Annex A attached to the accompanying
Prospectus and Proxy Statement, pursuant to which (i) FNB shall merge with
and into Mercshares and The National Bank of Fredericksburg shall become a
wholly-owned subsidiary of Mercshares (the "Affiliation") and (ii) each
outstanding share of FNB common stock, par value $1.00 per share ("FNB
Common Stock") (other than shares of dissenting FNB Shareholders redeemed
pursuant to Article 15 of Title 13.1 of the Code of Virginia of 1950, as
amended (the "VSCA")), shall automatically become and be converted into
2.84 shares of Mercshares common stock, par value $2.00 per share
("Mercshares Common Stock"). Cash will be paid in lieu of fractional shares
of Mercshares Common Stock.
2. To elect eleven directors to serve until the consummation of the
Affiliation or, if the Affiliation is not consummated, to serve until the
1995 annual meeting of shareholders and until their successors are elected
and qualified.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Each FNB Shareholder will have the right to dissent from the Affiliation
and to demand payment of the fair value of his shares in the event the
Affiliation is approved and consummated. Any right of any such FNB Shareholder
to receive such payment is contingent upon strict compliance with the
requirements set forth in Article 15 of the VSCA, the full text of which is
enclosed as Annex C attached to the accompanying Prospectus and Proxy Statement.
The Board of Directors has fixed August 2, 1994, as the record date for the
Annual Meeting, and only holders of record of FNB Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Annual Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
BARBARA J. SELF
Secretary
August 5, 1994
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF FNB RECOMMENDS THAT FNB
SHAREHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT
AND TO ELECT ALL 11 NOMINEES NAMED HEREIN.
<PAGE>
PROSPECTUS
RELATING TO 2,238,238 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
------------------------
PROXY STATEMENT
RELATING TO
THE ANNUAL MEETING OF SHAREHOLDERS OF
FREDERICKSBURG NATIONAL BANCORP, INC.
TO BE HELD ON SEPTEMBER 13, 1994
This Prospectus and Proxy Statement (the "Prospectus and Proxy Statement")
is being furnished to the holders (the "FNB Shareholders") of common stock, par
value $1.00 per share (the "FNB Common Stock"), of Fredericksburg National
Bancorp, Inc., a Virginia corporation ("FNB") registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), in connection with the
solicitation of proxies by the Board of Directors of FNB for use at the Annual
Meeting of Shareholders of FNB to be held at the Main Office of The National
Bank of Fredericksburg located at 2403 Fall Hill Avenue, Fredericksburg,
Virginia on Tuesday, September 13, 1994 at 2:00 p.m. prevailing local time, and
at any and all adjournments or postponements thereof (the "FNB Annual Meeting").
This Prospectus and Proxy Statement relates to the shares of common stock,
par value $2.00 per share ("Mercshares Common Stock") of Mercantile Bankshares
Corporation, a Maryland corporation ("Mercshares") registered under the BHCA,
issuable in connection with the proposed merger of FNB with and into Mercshares
and the affiliation of The National Bank of Fredericksburg, a national bank and
wholly-owned subsidiary of FNB (the "Bank"), with Mercshares (such merger and
affiliation are referred to herein as the "Affiliation"), pursuant to a Plan of
Merger provided by an Agreement and Plan of Affiliation and Merger, dated March
29, 1994, by and between Mercshares and FNB (the Plan of Merger and the
Agreement and Plan of Affiliation and Merger are collectively referred to herein
as the "Affiliation Agreement"). Following consummation of the Affiliation, the
Bank will continue to operate as a separate bank within the Mercshares system.
The transaction with Mercshares does not change the Bank's name, office
locations, directors or staff. Upon consummation of the Affiliation, each
outstanding share of FNB Common Stock (other than shares of dissenting FNB
Shareholders redeemed pursuant to Article 15 of Title 13.1 of the Code of
Virginia of 1950, as amended (the "VSCA")) shall automatically become and be
converted into 2.84 shares of Mercshares Common Stock. Cash will be paid in lieu
of fractional shares of Mercshares Common Stock.
This Prospectus and Proxy Statement also constitutes (i) a proxy statement
for use at the FNB Annual Meeting, at which the FNB Shareholders will be asked
to consider and vote upon (A) a proposal to approve the Affiliation Agreement
and (B) a proposal to elect 11 directors to serve until the consummation of the
Affiliation or, if the Affiliation is not consummated, to serve until the 1995
annual meeting of FNB Shareholders and until their successors are elected and
qualified, and (ii) a prospectus covering the issuance in connection with the
Affiliation of up to 2,238,238 shares of Mercshares Common Stock.
The information presented in this Prospectus and Proxy Statement concerning
FNB has been supplied by FNB and the information concerning Mercshares has been
supplied by Mercshares.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS AND PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
This Prospectus and Proxy Statement, the accompanying Mercshares' 1993
Annual Report to Stockholders and the accompanying form of proxy are being
furnished to FNB Shareholders on or about August 5, 1994.
<PAGE>
AVAILABLE INFORMATION
Mercshares and FNB are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at the following
Regional Offices of the Commission: Chicago Regional Office, CitiCorp Center,
500 West Madison Street, Suite 1400 Chicago, Illinois 60621-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials may be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004. In addition, copies of such materials filed by
Mercshares may be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Mercshares Common Stock is publicly traded and quoted on The Nasdaq National
Market under the symbol "MRBK."
Mercshares has filed with the Commission a Registration Statement on Form
S-4 (together with any annexes, exhibits and amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") covering up to 2,238,238 shares of Mercshares Common Stock.
Statements contained herein concerning any document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each such instance
reference is made to the copy of the applicable document filed with the
Commission or attached as an annex or exhibit thereto.
A copy of FNB's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 as filed with the Commission may be obtained without charge by
writing to FNB, P.O. Box 7207, 2403 Fall Hill Avenue, Fredericksburg, Virginia
22404-7207, Attention: Secretary.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
AND PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS AND PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROSPECTUS AND PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS AND PROXY STATEMENT NOR THE ISSUANCE OR
SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE DATE HEREOF.
2
<PAGE>
DOCUMENTS DELIVERED AND INCORPORATED BY REFERENCE
This Prospectus and Proxy Statement is accompanied by Mercshares' 1993
Annual Report to Stockholders.
The following documents, previously filed with the Commission, are
incorporated by reference into this Prospectus and Proxy Statement:
1. Mercshares' Annual Report on Form 10-K for the fiscal year ended
December 31, 1993;
2. The description of Mercshares Common Stock and Preferred Stock
Purchase Rights set forth in Mercshares' registration statement filed
pursuant to Section 12 of the Exchange Act, and any amendment or report
filed for the purpose of updating any such description;
3. Mercshares' Quarterly Report on Form 10-Q for the period ended
March 31, 1994;
4. FNB's Annual Report on Form 10-K for the fiscal year ended December
31, 1993;
5. The description of FNB Common Stock set forth in FNB's registration
statement filed pursuant to Section 12 of the Exchange Act, and any
amendment or report filed for the purpose of updating any such description;
6. FNB's Current Report on Form 8-K dated March 29, 1994; and
7. FNB's Quarterly Report on Form 10-Q for the period ended March 31,
1994.
In addition, all reports and other documents subsequently filed by
Mercshares pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the FNB Annual Meeting shall also be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such reports
and documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and Proxy Statement to the extent that a
statement contained herein, or in any other subsequently filed document that
also is incorporated or 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
Prospectus and Proxy Statement.
THIS PROSPECTUS AND PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR
ORAL REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS
PROSPECTUS AND PROXY STATEMENT IS DELIVERED, IN THE CASE OF DOCUMENTS RELATING
TO MERCSHARES, FROM MERCANTILE BANKSHARES CORPORATION, TWO HOPKINS PLAZA, P.O.
BOX 1477, BALTIMORE, MARYLAND 21203, ATTENTION: SECRETARY (TELEPHONE (410)
237-5900), OR, IN THE CASE OF DOCUMENTS RELATING TO FNB, FROM FREDERICKSBURG
NATIONAL BANCORP, INC., P.O. BOX 7207, 2403 FALL HILL AVENUE, FREDERICKSBURG,
VIRGINIA 22404-7207, ATTENTION: SECRETARY (TELEPHONE (703) 899-3200). IN ORDER
TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
SEPTEMBER 6, 1994.
3
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION.................................................................................. 2
DOCUMENTS DELIVERED AND INCORPORATED BY REFERENCE...................................................... 3
SUMMARY................................................................................................ 5
The Parties.......................................................................................... 5
The Affiliation...................................................................................... 5
Certain Other Agreements............................................................................. 8
Certain Federal Income Tax Consequences.............................................................. 8
Comparison of Stockholder Rights..................................................................... 8
Recent Developments.................................................................................. 8
Election of FNB Directors............................................................................ 9
Market Price Data.................................................................................... 9
SUMMARY HISTORICAL FINANCIAL DATA...................................................................... 10
COMPARATIVE UNAUDITED PER SHARE DATA................................................................... 11
THE FNB ANNUAL MEETING................................................................................. 12
THE AFFILIATION........................................................................................ 14
General.............................................................................................. 14
Background to the Affiliation........................................................................ 14
Reasons for the Affiliation; Recommendation of the FNB Board of Directors............................ 16
Opinion of FNB Financial Advisor..................................................................... 17
Effective Date....................................................................................... 20
Procedures for Exchange of Certificates.............................................................. 20
Certain Federal Income Tax Consequences.............................................................. 21
Accounting Treatment................................................................................. 21
Resale of Mercshares Common Stock After the Affiliation by Controlling Persons....................... 22
Conditions to Affiliation............................................................................ 22
Treatment of Employee Benefit Plans.................................................................. 23
Exclusive Dealing.................................................................................... 23
Interests of Certain Persons in the Affiliation...................................................... 24
Termination.......................................................................................... 24
Appraisal Rights of Dissenting Shareholders.......................................................... 24
CERTAIN OTHER AGREEMENTS............................................................................... 27
The Stock Option Agreement........................................................................... 27
The Support Agreement................................................................................ 28
Affiliate Undertakings............................................................................... 28
Agreement with FNB Shareholder....................................................................... 28
DESCRIPTION OF FNB..................................................................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 30
COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES AND FNB
COMMON STOCK......................................................................................... 46
DESCRIPTION OF MERCSHARES CAPITAL STOCK................................................................ 50
ELECTION OF FNB DIRECTORS.............................................................................. 51
LEGAL MATTERS.......................................................................................... 58
EXPERTS................................................................................................ 58
INDEX TO FINANCIAL STATEMENTS.......................................................................... F-1
ANNEX A--AGREEMENT AND PLAN OF AFFILIATION AND MERGER AND PLAN OF MERGER............................... A-1
ANNEX B--OPINION OF SCOTT & STRINGFELLOW, INC.......................................................... B-1
ANNEX C--ARTICLE 15 OF THE VIRGINIA STOCK CORPORATION ACT.............................................. C-1
</TABLE>
4
<PAGE>
SUMMARY
The following is a brief summary of this Prospectus and Proxy Statement and
the Annexes hereto prepared in accordance with applicable disclosure
regulations. This Summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere or incorporated by
reference in this Prospectus and Proxy Statement. Unless otherwise defined
herein, capitalized terms used in this Summary have the respective meanings
assigned to them elsewhere in this Prospectus and Proxy Statement. FNB
Shareholders should read carefully this Prospectus and Proxy Statement in its
entirety.
THE PARTIES
Mercantile Bankshares Corporation and Affiliates. Mercshares is a Maryland
corporation registered as a bank holding company under the BHCA. Its principal
operations are conducted by 16 banks in Maryland, two banks in Virginia and one
bank in Delaware, all of which are wholly-owned by Mercshares (the "Affiliated
Banks"), and a wholly-owned mortgage banking company (collectively, the
"Affiliates"). At March 31, 1994, Mercshares and the Affiliates had total assets
of approximately $5.548 billion, deposits of approximately $4.493 billion, and
loans (net) of approximately $3.476 billion. Its principal executive office is
located at Two Hopkins Plaza, P.O. Box 1477, Baltimore, Maryland 21203,
telephone number (410) 237-5900.
As of March 31, 1994, there were 45,908,886 shares of Mercshares Common
Stock outstanding which are publicly traded and quoted on The Nasdaq National
Market under the symbol "MRBK."
As used in this Prospectus and Proxy Statement, the term "Mercshares"
refers to Mercantile Bankshares Corporation and the Affiliates, unless the
context otherwise requires.
Fredericksburg National Bancorp, Inc. FNB is a Virginia corporation
registered as a bank holding company under the BHCA. Its principal operations
are conducted by its wholly-owned subsidiary, The National Bank of
Fredericksburg, a national banking association (the "Bank"). The Bank operates
seven banking offices in the Fredericksburg area. At March 31, 1994, FNB and the
Bank had total assets of approximately $233.4 million, deposits of approximately
$210.2 million and loans (net) of approximately $141.4 million. The principal
executive office of FNB is located at 2403 Fall Hill Avenue, Fredericksburg,
Virginia 22404-7207, telephone number (703) 899-3200.
As of March 31, 1994, there were 788,112 shares of FNB Common Stock
outstanding for which there is no established trading market.
As used in this Prospectus and Proxy Statement, the term "FNB" refers to
both Fredericksburg National Bancorp, Inc. and The National Bank of
Fredericksburg, unless the context otherwise requires. The term "Bank" refers to
The National Bank of Fredericksburg, unless the context otherwise requires.
THE AFFILIATION
General. At the FNB Annual Meeting described in the notice (the "Notice")
accompanying this Prospectus and Proxy Statement, FNB Shareholders will be asked
to consider and vote upon a proposal to approve the Affiliation Agreement, a
copy of which is attached as Annex A to this Prospectus and Proxy Statement.
Upon consummation of the Affiliation, each outstanding share of FNB Common Stock
(other than shares of dissenting FNB Shareholders redeemed pursuant to Article
15 of Title 13.1 of the VSCA) shall automatically become and be converted into
2.84 shares of Mercshares Common Stock (the "Exchange Ratio") and cash in lieu
of fractional shares of Mercshares Common Stock. The Exchange Ratio was derived
pursuant to arm's length negotiations among Mercshares, FNB and FNB's
5
<PAGE>
financial advisor. See "THE AFFILIATION--General," "--Background to the
Affiliation," "-- Reasons for the Affiliation; Recommendation of the FNB Board
of Directors" and "--Appraisal Rights of Dissenting Shareholders."
Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of FNB Common Stock entitled to vote thereon will be required
to approve the Affiliation Agreement. As of June 30, 1994, the directors and
executive officers of FNB beneficially owned an aggregate of 175,622 shares
(22.3%) of FNB Common Stock. Such directors and executive officers and another
FNB Shareholder owning 120,912 shares (15.3)% of FNB Common Stock have executed
agreements with Mercshares pursuant to which each such person has agreed to vote
his shares to approve the Affiliation Agreement. As a result, the holders of
37.6% of FNB Common Stock have agreed to vote their shares to approve the
Affiliation Agreement. See "THE FNB ANNUAL MEETING" and "CERTAIN OTHER
AGREEMENTS--The Support Agreement," and "--Agreement with FNB Shareholder."
Recommendation of the FNB Board; Reasons for the Affiliation. The FNB Board
of Directors believes that the terms of the Affiliation and the Affiliation
Agreement are fair to, and in the best interests of, FNB and the FNB
Shareholders and has unanimously adopted the Affiliation Agreement. In
considering the terms and conditions of the Affiliation, the FNB Board of
Directors considered, among other things: the financial terms of the
Affiliation; the fact that since the Mercshares Common Stock is publicly traded
and quoted on The Nasdaq National Market, Mercshares Common Stock should be more
readily marketable than FNB Common Stock; the financial condition and history of
performance of Mercshares; the diversification of risk associated with ownership
of an institution with a broader geographic area; the opinion of its financial
advisor as to the fairness, from a financial point of view, of the terms of the
Affiliation Agreement to the FNB Shareholders; the operational and competitive
benefits of the Affiliation; and the ability of the Bank to remain a separate
entity with a local Board of Directors managing its affairs. As discussed in
"THE AFFILIATION--Reasons for the Affiliation; Recommendation of the FNB Board
of Directors," given the FNB Board of Directors' views as to Mercshares, its
perception that no other affiliation possibilities presented the advantages that
the Affiliation would provide, and the results of the negotiations with
Mercshares, the FNB Board of Directors did not authorize its financial advisor,
Scott & Stringfellow, Inc. ("Scott & Stringfellow") to contact other
institutions concerning their possible interest in submitting an affiliation
proposal.
The FNB Board of Directors also considered that the historical dividends
per share, net income per share and book value per share of the Mercshares
Common Stock to be received by the FNB Shareholders, after giving effect to the
Exchange Ratio, represent a substantial increase in the historical dividends per
share, net income per share and book value per share of FNB Common Stock,
although there can be no assurance that pro forma amounts are indicative of
future dividends, income per share or book value per share of Mercshares. THE
FNB BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FNB SHAREHOLDERS VOTE TO
APPROVE THE AFFILIATION AGREEMENT. See "THE AFFILIATION-- Background to the
Affiliation," "--Reasons for the Affiliation; Recommendation of the FNB Board of
Directors," and "--Interests of Certain Persons in the Affiliation."
Opinion of Financial Advisor. The FNB Board of Directors has received an
opinion from Scott & Stringfellow to the effect that the terms of the
Affiliation Agreement are fair to the FNB Shareholders from a financial point of
view. A copy of the opinion of Scott & Stringfellow, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Annex B to this Prospectus and Proxy Statement and is incorporated
herein by reference. FNB Shareholders are urged to read the opinion in its
entirety. See "THE AFFILIATION--Opinion of FNB Financial Advisor."
Conditions to Affiliation. The mutual obligation of Mercshares and FNB to
consummate the Affiliation is subject to the requisite approval of the
Affiliation Agreement by the FNB Shareholders.
6
<PAGE>
Additionally, the obligation of Mercshares to consummate the Affiliation is
subject to various conditions, including the receipt of all appropriate
regulatory approvals and that less than 10% of FNB Shareholders (or, in certain
circumstances, a smaller percentage) exercise dissenters' rights of appraisal.
See "THE AFFILIATION--Conditions to Affiliation," and "--Accounting Treatment."
Governmental Approvals. Certain aspects of the Affiliation will require
notifications to, and approvals from, certain federal and state authorities,
including approval by the Board of Governors of the Federal Reserve, the
Maryland Bank Commissioner and the Virginia State Corporation Commission (the
"Virginia Commission"). Mercshares expects to submit filings and notifications
for these purposes as soon as practicable. See "THE AFFILIATION--Conditions to
Affiliation."
Accounting Treatment. It is expected that the Affiliation will be accounted
for as a pooling of interests under generally accepted accounting principles.
The receipt of a letter from Coopers & Lybrand, the independent certified public
accountants of Mercshares, confirming that the Affiliation will qualify for
"pooling of interests" accounting is a condition to Mercshares' obligation to
consummate the Affiliation. Such condition may be waived by Mercshares in its
discretion. See "THE AFFILIATION--Conditions to Affiliation," and "--Accounting
Treatment and "COMPARATIVE UNAUDITED PER SHARE DATA" in this Summary.
Appraisal Rights. Under Virginia law, an FNB Shareholder who objects to the
Affiliation and follows specified procedures is entitled to appraisal rights
with respect to the Affiliation. In order to be entitled to appraisal rights, an
FNB Shareholder must (a) deliver to FNB prior to the vote at the FNB Annual
Meeting a written notice of intent to demand payment, (b) ensure that his shares
are not voted (or deemed to have been voted) to approve the Affiliation
Agreement, (c) after the Affiliation is consummated, follow the procedures set
forth in a notice sent to such FNB Shareholder by Mercshares, and (d) if
necessary, notify Mercshares of such FNB Shareholder's estimate of the fair
value of such shares and make a demand for payment therefor. If a judicial
determination of the "fair value" of FNB Common Stock held by such FNB
Shareholder is necessary, such a determination may result in a value that is
more than, less than, or equal to the consideration which would have been paid
by Mercshares pursuant to the Affiliation. See "THE AFFILIATION--Appraisal
Rights of Dissenting Shareholders" for a more complete discussion of FNB
Shareholders' appraisal rights.
AN FNB SHAREHOLDER WHO RETURNS A SIGNED PROXY BUT FAILS TO PROVIDE
INSTRUCTIONS AS TO THE MANNER IN WHICH SUCH SHARES ARE TO BE VOTED WILL BE
DEEMED TO HAVE VOTED TO APPROVE THE AFFILIATION AGREEMENT AND THEREFORE TO HAVE
WAIVED HIS DISSENTERS' RIGHTS. AN FNB SHAREHOLDER MAY VOTE AGAINST, ABSTAIN FROM
VOTING ON, OR REFRAIN FROM VOTING ON (BY NOT RETURNING THE PROXY CARD OR BY NOT
VOTING AT THE MEETING) THE AFFILIATION AGREEMENT WITHOUT LOSING HIS RIGHT TO
ASSERT DISSENTERS' RIGHTS, AS LONG AS SUCH FNB SHAREHOLDER'S INTENT TO DEMAND
PAYMENT IS TIMELY GIVEN. A VOTE AGAINST OR AN ABSTENTION WITH REGARD TO THE
AFFILIATION AGREEMENT WILL NOT ITSELF CONSTITUTE A TIMELY WRITTEN NOTICE OF
INTENT TO DEMAND PAYMENT AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY
WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT. See "THE AFFILIATION--Appraisal
Rights of Dissenting Shareholders."
Interests of Certain Persons in the Affiliation. The Affiliation Agreement
provides that following the Effective Date (as hereinafter defined), Mercshares
shall indemnify any person with respect to matters occurring on or prior to the
Effective Date who has rights to indemnification from FNB, to the same extent
and on the same conditions as in effect on the date of the Affiliation
Agreement. Mercshares has also agreed to use its reasonable best efforts to
maintain FNB's existing directors' and officers' liability policy, or another
policy providing at least comparable coverage, covering persons who are
currently covered by such insurance of FNB for a period of three years after the
Effective Date on
7
<PAGE>
terms no less favorable than those in effect on the date of the Affiliation
Agreement. See "THE AFFILIATION--Interests of Certain Persons in the
Affiliation."
CERTAIN OTHER AGREEMENTS
As a condition and inducement to Mercshares' willingness to enter into the
Affiliation Agreement, FNB entered into a Stock Option Agreement, dated as of
March 30, 1994 (the "Stock Option Agreement"), between Mercshares and FNB,
pursuant to which FNB granted to Mercshares an option (the "Option") to purchase
up to the number of shares equal to 19.9% of the issued and outstanding shares
of FNB Common Stock at a price of $43.50 per share under certain specified
conditions. The Option may only be exercised upon the occurrence of certain
events, which generally relate to (i) an acquisition of control of, or a
significant equity interest in, or significant assets of, FNB by a third party,
or certain proposals or offers with respect thereto, or (ii) the withdrawal or
material modification of the recommendation of the FNB Board of Directors with
respect to the Affiliation. None of such events has occurred as of the date of
this Prospectus and Proxy Statement. Certain aspects of the Stock Option
Agreement could have the effect of discouraging a third party from pursuing an
acquisition transaction involving FNB. See "CERTAIN OTHER AGREEMENTS--The Stock
Option Agreement."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Affiliation will qualify as a tax-free
reorganization for Federal income tax purposes. Accordingly, (i) no gain or loss
will be recognized by FNB Shareholders (except with respect to cash, if any,
received in lieu of fractional shares) upon the exchange of FNB Common Stock for
Mercshares Common Stock by reason of the Affiliation, and (ii) no gain or loss
will be recognized by Mercshares, FNB or the Bank in the Affiliation. The
receipt of an opinion of counsel dated the Effective Date as to (i) above and as
to certain other matters is a condition to FNB's obligation to consummate the
Affiliation. FNB SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE AFFILIATION. See "THE
AFFILIATION--Certain Federal Income Tax Consequences."
COMPARISON OF STOCKHOLDER RIGHTS
Upon consummation of the Affiliation, FNB Shareholders will become
stockholders of Mercshares, which is a Maryland corporation, and their rights as
stockholders of Mercshares will be governed by the Maryland General Corporation
Law ("MGCL"), Mercshares' Articles of Incorporation and Mercshares' By-laws. The
rights of FNB Shareholders differ from those of the holders of Mercshares Common
Stock in a number of areas, including the ability of Mercshares to issue
preferred stock, the purchase rights attached to each share of Mercshares Common
Stock and the stockholder vote required for extraordinary transactions. See
"COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES AND FNB COMMON STOCK" and
"DESCRIPTION OF MERCSHARES CAPITAL STOCK" for a description of the material
differences between the rights of holders of Mercshares Common Stock and FNB
Common Stock and a description of Mercshares capital stock.
RECENT DEVELOPMENTS
In May 1994, an action was brought against the Bank in the United States
District Court for the Eastern District of Virginia, Richmond Division, by
certain of its retired employees alleging, among other things, violations of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The
plaintiffs are seeking (i) a judgment declaring that the Bank is obligated to
provide them with health care benefits for the duration of their lives and of
those of their spouses, (ii) injunctive relief requiring the Bank to provide
such benefits, and (iii) costs and expenses. On June 10, 1994, the
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<PAGE>
District Court granted the plaintiffs' motion to preliminarily enjoin the Bank,
pending a final determination on the merits, from terminating or modifying its
current practice of providing health care benefits. FNB believes that the Bank
is not required to provide the benefits asserted, and the Bank intends to defend
the action vigorously. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
Mr. Charles T. Lewis has been appointed as President of FNB and the Bank in
view of the voluntary resignation in June of 1994 of Mr. Gregory R. Bosiack, who
had assumed those positions in January of 1994 as the successor to Mr. Lewis.
Mr. Bosiack has elected to pursue another business opportunity outside of the
banking industry. Mr. Lewis had earlier announced his plans to retire at the end
of 1994 and since the first of the year had been serving as Assistant to the
President. A committee has been formed to search for a new President. See
"ELECTION OF FNB DIRECTORS--Management Matters."
ELECTION OF FNB DIRECTORS
At the FNB Annual Meeting, the FNB Shareholders will also elect 11 persons
to serve as directors until the consummation of the Affiliation or, if the
Affiliation is not consummated, to serve until the 1995 annual meeting of FNB
Shareholders and until their successors are elected and qualified. The
affirmative vote of a plurality of the votes cast at the FNB Annual Meeting will
be required for the election of directors. The FNB Board of Directors has
nominated the individuals set forth in this Prospectus and Proxy Statement to
serve as such directors. See "THE FNB ANNUAL MEETING-- Purpose of the FNB Annual
Meeting" and "ELECTION OF FNB DIRECTORS."
THE FNB BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE SLATE OF DIRECTORS
NOMINATED BY THE BOARD.
MARKET PRICE DATA
Mercshares Common Stock is publicly traded and quoted on The Nasdaq
National Market under the Symbol "MRBK." The market value of Mercshares Common
Stock on March 28, 1994, the last full trading day preceding the public
announcement of the execution of the Affiliation Agreement, based on the closing
price as reported on The Nasdaq National Market, was $19.125 per share. The
market value of Mercshares Common Stock on July 28, 1994, the latest practicable
date prior to the date of this Prospectus and Proxy Statement, based on the
closing price as reported on The Nasdaq National Market, was $20.25 per share.
FNB Common Stock is not traded on any exchange and no established public trading
market exists for FNB Common Stock.
BECAUSE THE MARKET PRICE OF MERCSHARES COMMON STOCK IS SUBJECT TO
FLUCTUATION, THE MARKET VALUE OF THE MERCSHARES COMMON STOCK THAT FNB
SHAREHOLDERS WILL RECEIVE PURSUANT TO THE AFFILIATION MAY INCREASE OR DECREASE
PRIOR TO THE EFFECTIVE DATE. FNB SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR MERCSHARES COMMON STOCK.
9
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of
Mercshares and FNB. Mercshares' historical financial data for each of the annual
periods presented have been derived from its audited consolidated financial
statements previously filed with the Commission. FNB's historical financial data
for each of the annual periods presented also have been derived from its audited
consolidated financial statements previously filed with the Commission. The
selected historical financial data for both companies for the three-month
periods ended March 31, 1993 and 1994 have been derived from the companies'
separate unaudited Quarterly Reports on Form 10-Q previously filed with the
Commission and, in the opinions of the respective managements of Mercshares and
FNB, include all normal recurring adjustments necessary for a fair presentation
of results for such interim periods. Operating results for the three months
ended March 31, 1994 for each company are not necessarily indicative of the
results that may be obtained for the entire year ended December 31, 1994. THE
SUMMARY HISTORICAL FINANCIAL DATA SET FORTH BELOW DOES NOT PURPORT TO BE
COMPLETE AND SHOULD BE READ IN CONJUNCTION WITH EACH COMPANY'S AUDITED FINANCIAL
STATEMENTS FOR EACH OF THE ANNUAL PERIODS PRESENTED AND EACH COMPANY'S UNAUDITED
FINANCIAL STATEMENTS FOR EACH OF THE QUARTERLY PERIODS PRESENTED, ALL OF WHICH
ARE INCORPORATED BY REFERENCE HEREIN OR PRESENTED ELSEWHERE HEREIN. See
"AVAILABLE INFORMATION."
<TABLE> <CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED MARCH
31, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
MERCANTILE BANKSHARES CORPORATION
HISTORICAL:
Net Interest Income................... $ 58,841 $ 58,273 $ 237,617 $ 228,540 $ 208,609 $ 200,086 $ 192,300
Income Before Income Taxes............ 34,876 33,201 134,571 122,776 111,596 107,135 101,257
Net Income............................ 21,221 20,492 82,416 76,298 70,562 68,856 66,433
Net Income Per Share of Common
Stock(1)............................ .46 .45 1.80 1.67 1.56 1.55 1.51
Total Assets.......................... 5,548,279 5,320,860 5,554,008 5,459,577 5,216,802 4,885,599 4,346,457
Long-Term Debt........................ 32,135 14,895 32,350 15,108 16,609 17,298 23,234
Per Share Cash Dividends Declared and
Paid on Common Stock(1)................. .17 .15 .64 .58 .571/3 .541/3 .481/3
Cash Dividends Declared and Paid on
Common Stock............................ 7,826 6,874 29,385 26,454 25,936 23,624 19,525
Loans, Net............................ 3,475,603 3,426,585 3,487,593 3,401,213 3,309,005 3,258,339 3,074,004
FREDERICKSBURG NATIONAL BANCORP, INC.
HISTORICAL:
Net Interest Income................... $ 2,331 $ 2,285 $ 9,084 $ 9,438 $ 9,386 $ 10,057 $ 10,036
Income Before Income Taxes and
Cumulative Effect Adjustment............ 832 600 2,744 3,202 1,804 3,636 3,495
Net Income (Loss)..................... 597 (499) 1,052 2,248 1,331 2,577 2,521
Net Income Before Cumulative Effect
Adjustment Per Share of Common
Stock(2)................................ .76 .55 2.52 2.85 1.68 3.24 3.15
Net Income (Loss) Per Share of Common
Stock(2)(3)............................. .76 (.63) 1.34 2.85 1.68 3.24 3.15
Total Assets.......................... 233,434 223,935 235,548 221,589 205,174 197,921 194,362
Per Share Cash Dividends Declared and
Paid on Common Stock(2)................. .25 .25 1.00 1.00 1.00 1.03 .93
Cash Dividends Declared and Paid on
Common Stock............................ 197 197 788 788 790 814 740
Loans, Net............................ 141,433 128,232 140,987 129,972 130,848 137,975 140,496
</TABLE>
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(1) In September 1993 Mercshares effected a three-for-two stock split and in
December 1989 effected a two-for-one stock split, both of which were
effected in the form of a stock dividend. All per share amounts above have
been adjusted to give effect to the two splits.
(2) In April 1992 FNB effected a four-for-one stock split in the form of a stock
dividend. All per share amounts above have been adjusted to give effect to
the split.
(3) Net Income (Loss) Per Share of Common Stock for FNB for the quarter ended
March 31, 1993 and for the year ended December 31, 1993 reflects the
cumulative effect adjustment from the adoption of FASB No. 106, "Employers'
Accounting For Postretirement Benefits Other than Pensions" on January
1, 1993.
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information of Mercshares and FNB giving effect to the
Affiliation under the pooling of interests accounting method is not considered
to be material to the consolidated financial statements of Mercshares.
Accordingly, pro forma combined financial information is not presented.
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<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following unaudited consolidated financial information reflects certain
comparative per share data relating to the Affiliation. The information shown
below should be read in conjunction with the historical consolidated financial
statements of Mercshares and FNB including the respective notes thereto, which
are included elsewhere in this Prospectus and Proxy Statement or in documents
delivered herewith or incorporated herein by reference.
The following information is not necessarily indicative of the results of
operations or combined financial position that would have resulted had the
Affiliation been consummated at the beginning of the periods indicated, nor is
it necessarily indicative of the results of operations in future periods.
The table below presents selected comparative consolidated unaudited per
share information (i) for Mercshares on a historical basis and on a pro forma
combined basis assuming the Affiliation had been effective during the periods
presented and accounted for as a pooling of interests and (ii) for FNB on a
historical basis and on a pro forma equivalent basis.
<TABLE> <CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1994 1993 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE:
NET INCOME (LOSS):
FNB--historical(1)........................................ $ .76 $ (.63) $ 1.34 $ 2.85 $ 1.68
FNB pro forma equivalent(2)............................... 1.28 1.19 4.91 4.66 4.32
Mercshares--historical(3)................................. .46 .45 1.80 1.67 1.56
Mercshares pro forma combined(4).......................... .45 .42 1.73 1.64 1.52
CASH DIVIDENDS DECLARED:
FNB--historical(1)........................................ $ .25 $ .25 $ 1.00 $ 1.00 $ 1.00
FNB pro forma equivalent(2)............................... .48 .43 1.82 1.65 1.63
Mercshares--historical(3)................................. .17 .15 .64 .58 .571/3
Mercshares pro forma combined(5).......................... .17 .15 .64 .58 .571/3
BOOK VALUE:
FNB--historical(1)........................................ $ 25.85 $ 24.15 $ 25.39 $ 25.02 $ 23.19
FNB pro forma equivalent(2)............................... 40.38 37.37 39.65 36.47 33.34
Mercshares--historical(3)................................. 14.48 13.37 14.24 13.07 11.95
Mercshares pro forma combined............................. 14.22 13.16 13.96 12.84 11.74
</TABLE>
- ---------------
(1) In April 1992 FNB effected a four-for-one stock split in the form of a stock
dividend. All per share amounts have been adjusted to give effect to the
split.
(2) FNB pro forma equivalent amounts represent Mercshares' pro forma combined
information multiplied by the Exchange Ratio of 2.84 shares of Mercshares
Common Stock for each share of FNB Common Stock.
(3) In September 1993 Mercshares effected a three-for-two stock split and in
December 1989 effected a two-for-one stock split, both of which were
effected in the form of a stock dividend. All per share amounts above have
been adjusted to give effect to the two splits.
(4) Pro forma combined net income per share represents historical net income per
share of Mercshares adjusted for the impact of pooling of interests with
FNB.
(5) Pro forma combined dividends per share represent historical dividends per
share paid by Mercshares.
The comparative per share information set forth above is based on the
assumption that the Affiliation will be accounted for as a pooling of interests
under generally accepted accounting principles. As more fully set forth herein
under the heading "THE AFFILIATION--Accounting Treatment," Mercshares'
obligation to consummate the Affiliation is conditional (which condition is
waivable by Mercshares) with respect to the application of pooling of interest
accounting treatment to the Affiliation. If the Affiliation were not to qualify
for pooling of interests accounting treatment and Mercshares waived the
condition with respect thereto so that the Affiliation were consummated using
purchase accounting, the aggregate purchase price of FNB (consisting of the fair
value of FNB Common Stock at the execution of the Affiliation Agreement and
transaction expenses) would be allocated to the tangible and intangible net
assets acquired, based on their estimated fair values at the Effective Date. Any
excess of such purchase price over the tangible assets acquired would be
amortized against the consolidated income of Mercshares for a period of 15
years. Mercshares and FNB believe that should the Affiliation be accounted for
as a purchase, such accounting treatment would have no material adverse effect
on the comparative per share information which is set forth above. See "THE
AFFILIATION--Accounting Treatment."
11
<PAGE>
THE FNB ANNUAL MEETING
DATE, PLACE AND TIME
The FNB Annual Meeting will be held at the Main Office of The National Bank
of Fredericksburg located at 2403 Fall Hill Avenue, Fredericksburg, Virginia on
Tuesday, September 13, 1994 at 2:00 p.m. prevailing local time.
PURPOSE OF THE FNB ANNUAL MEETING
At the FNB Annual Meeting, FNB Shareholders will consider and vote upon (i)
a proposal to approve the Affiliation Agreement pursuant to which FNB
Shareholders (other than dissenting shareholders whose shares of FNB Common
Stock are redeemed pursuant to Article 15 of Title 13.1 of the VSCA) shall
receive, in exchange for each share of FNB Common Stock owned by them, 2.84
shares of Mercshares Common Stock and cash in lieu of fractional shares of
Mercshares Common Stock, (ii) a proposal to elect 11 persons to the FNB Board of
Directors to serve until the consummation of the Affiliation or, if the
Affiliation is not consummated, to serve until the 1995 annual meeting of FNB
Shareholders and until their successors are elected and qualified, and (iii)
such other matters as may properly be brought before the FNB Annual Meeting.
The following are the FNB Board's nominees for election as directors:
Leland L. Baker, Jr. Charles T. Lewis
John H. Chichester Charles A. McCormack
George C. Freeman, Jr. William E. Milby
Thomas C. Goodloe J. William Poole
DuVal Q. Hicks, Jr. Frank C. Silvey, Jr.
John A. Jamison
Details as to the background of each director nominee, each of whom currently
serves as a director, are set forth herein under the section entitled "ELECTION
OF FNB DIRECTORS." In the event any nominee is unable to or declines to serve as
a director at the time of the FNB Annual Meeting, the proxies will be voted for
a substitute nominee who shall be designated by the FNB Board of Directors to
fill the vacancy. As of the date of this Prospectus and Proxy Statement, the FNB
Board of Directors is not aware of any nominee who is unable or will decline to
serve as director.
THE FNB BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE AFFILIATION
AGREEMENT AND TO ELECT ALL 11 NOMINEES NAMED ABOVE.
RECORD DATE
The FNB Board of Directors has fixed the close of business on August 2,
1994 (the "FNB Record Date") as the record date for determining holders entitled
to notice of and to vote at the FNB Annual Meeting. Accordingly, only holders of
record of FNB Common Stock at the close of business on the FNB Record Date will
be entitled to notice of, and to cast their vote at, the FNB Annual Meeting. At
the close of business on the FNB Record Date, there were 788,112 shares of FNB
Common Stock issued and outstanding held by holders of record.
VOTE REQUIRED
Each holder of record of shares of FNB Common Stock on the FNB Record Date
is entitled to cast one vote per share, in person or by properly executed proxy,
on any matter that may properly come before the FNB Annual Meeting. The
presence, in person or by properly executed proxy, of the holders of a majority
of the shares of FNB Common Stock outstanding on the FNB Record Date is
necessary to constitute a quorum at the FNB Annual Meeting.
12
<PAGE>
The approval of the Affiliation Agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of FNB Common Stock entitled
to vote thereon. The election of directors requires the affirmative vote of a
plurality of the votes cast at the FNB Annual Meeting.
As of June 30, 1994 the directors and executive officers of FNB owned an
aggregate of 175,622 shares (22.3%) of FNB Common Stock. Such persons and an FNB
Shareholder holding 120,912 shares (15.3%) of FNB Common Stock have executed
agreements with Mercshares pursuant to which such persons have agreed to vote
their shares of FNB Common Stock to approve the Affiliation Agreement. See
"CERTAIN OTHER AGREEMENTS--The Support Agreement" and "--Agreement with FNB
Shareholder."
All shares of FNB Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF FNB COMMON STOCK WILL BE VOTED TO APPROVE THE
AFFILIATION AGREEMENT AND TO ELECT THE NOMINEES SPECIFIED HEREIN.
FNB does not know of any matters other than as described in the Notice that
are to come before the FNB Annual Meeting. If any other matter or matters are
properly presented for action at the FNB Annual Meeting, the persons named in
the enclosed form of proxy and acting thereunder will have the discretion to
vote on such matters in accordance with their best judgment, unless such
authorization is withheld. An FNB Shareholder who has given a proxy may revoke
it at any time prior to its exercise by giving written notice thereof on or
prior to the date of the FNB Annual Meeting to Barbara J. Self, Secretary of
FNB, by signing and returning a later dated proxy, or by voting in person at the
FNB Annual Meeting; however, mere attendance at the FNB Annual Meeting will not
in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the FNB Annual Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the FNB Shareholders for a vote, proxies are marked as abstentions (or FNB
Shareholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. If a broker indicates on the proxy that it
does not have discretionary authority as to certain shares to vote on a
particular matter, those shares are also treated as shares that are present and
entitled to vote for quorum purposes. An abstention or broker non-vote will have
no effect on the election of directors but will have the effect of a vote
against the Affiliation Agreement.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the FNB Board of Directors
and FNB will bear the costs of its solicitation of proxies. Solicitations may be
made by mail, telephone, or personally by directors, officers and employees of
FNB and the Bank, none of whom will receive additional compensation for
performing such services. Mercshares will pay all the expenses of printing and
mailing the Prospectus and Proxy Statement.
SHAREHOLDER PROPOSALS FOR 1995 PROXY STATEMENT
Under the current rules of the Commission, the deadline for FNB
Shareholders to submit proposals to be considered for inclusion in FNB's proxy
statement for next year's annual meeting (if the Affiliation has not been
consummated prior to the date such meeting is to be held) is expected to be
November 30, 1994. Such proposals may be included in next year's proxy statement
if they comply with certain rules and regulations promulgated by the Commission.
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THE AFFILIATION
The following description of the Affiliation does not purport to be
complete and is qualified in its entirety by reference to the Affiliation
Agreement, a copy of which is attached to this Prospectus and Proxy Statement as
Annex A and incorporated herein by reference. FNB Shareholders are urged to read
the Affiliation Agreement in its entirety.
GENERAL
The Affiliation Agreement provides that, subject to the satisfaction or
waiver of the conditions set forth therein, FNB will merge with and into
Mercshares, whereupon the separate existence of FNB shall cease, and Mercshares
shall be the surviving corporation. Pursuant to the Affiliation Agreement, each
share of the issued and outstanding FNB Common Stock (other than shares of
dissenting FNB Shareholders redeemed pursuant to Article 15 of the VSCA) for all
corporate purposes and without any further action on the part of the holder
thereof, shall automatically become and be converted into 2.84 shares of
Mercshares Common Stock. Cash will be paid in lieu of fractional shares of
Mercshares Common Stock. Following consummation of the Affiliation, the Bank
will continue to operate as a separate bank within the Mercshares system. The
officers and directors of Mercshares shall be the officers and directors of the
surviving corporation. The transaction with Mercshares does not change the
Bank's name, office locations, directors or staff. Certificates for FNB Common
Stock shall be exchanged for certificates of Mercshares Common Stock as
described below.
Based upon the capitalization of Mercshares and FNB as of March 31, 1994,
the FNB Shareholders would own approximately 4.6% of the outstanding Mercshares
Common Stock following consummation of the Affiliation. Based upon the unaudited
financial statements of Mercshares and FNB at March 31, 1994, upon consummation
of the Affiliation, the percentage of total assets and the percentage of total
liabilities represented by FNB in the combined entity would each be less than
5.0%.
As discussed below in "Reasons for the Affiliation; Recommendation of the
FNB Board of Directors," the FNB Board of Directors has concluded that the
Affiliation and the Affiliation Agreement are in the best interests of FNB and
the FNB Shareholders. Upon consummation of the Affiliation, the former FNB
Shareholders who become holders of Mercshares Common Stock will be stockholders
in a larger entity with equity traded on The Nasdaq National Market. Each FNB
Shareholder who becomes a holder of Mercshares Common Stock shall possess the
same rights as other such holders, and former FNB Shareholders as a group will
no longer be taking action at the FNB corporate level. See "COMPARISON OF
STOCKHOLDER RIGHTS OF MERCSHARES AND FNB COMMON STOCK" and "DESCRIPTION OF
MERCSHARES CAPITAL STOCK."
BACKGROUND TO THE AFFILIATION
In early 1993, the FNB Board of Directors appointed a committee consisting
of Messrs. George C. Freeman, Jr., DuVal Q. Hicks, Jr., and Frank C. Silvey, Jr.
(the "Strategy Committee") to study ways to improve the market liquidity of FNB
Common Stock. Because of the historically small trading volume in FNB Common
Stock, for which there has been no established public trading market, the FNB
Board of Directors had become increasingly concerned over the marketability of
such stock. Scott & Stringfellow was retained to examine various options to
improve the marketability of FNB Common Stock, including having FNB Common Stock
approved for quotation on The Nasdaq National Market, affiliating with a similar
size financial institution or affiliating with a larger institution having stock
which is traded on an established public market.
Scott & Stringfellow studied the various options and submitted its report
to the Strategy Committee on April 14, 1993. Having reviewed the report, the
Strategy Committee concluded that the most
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advisable method for improving market liquidity for FNB Shareholders was to
explore an affiliation with a larger institution involving a tax-free exchange
of FNB Common Stock. The Strategy Committee also concluded it would be
preferable from an employee and customer relations standpoint if, following such
an affiliation, the Bank continued to operate as a separate bank within a larger
bank holding company system. After reporting its recommendations to the FNB
Board of Directors, the Strategy Committee authorized Scott & Stringfellow to
contact only Mercshares. It was believed that Mercshares had the financial
capacity and might have the desire to make a proposal that would be attractive
to the FNB Shareholders from a financial point of view. In addition, it was
believed that Mercshares might have a banking culture that would be compatible
with that of FNB, particularly since Mercshares allows its Affiliated Banks to
continue to operate as separate banks within the holding company system. In view
of the discussions that ensued with Mercshares and the ultimate result of the
negotiations, Scott & Stringfellow was not thereafter authorized to contact
other institutions concerning their possible interest in submitting an
affiliation proposal.
A meeting among members of the Strategy Committee, representatives of Scott
& Stringfellow and senior management of Mercshares was held in Baltimore on
April 19, 1993. The discussion at that meeting was substantially limited to the
banking strategies and styles of both institutions. Commencing with the April
19, 1993 meeting until late February 1994, discussions between Mercshares and
FNB were general and exploratory in nature and did not result in any specific
offers or proposals being made.
Shortly after the April 19 meeting, FNB began to provide financial
information to Mercshares, and members of the Strategy Committee and certain
other executive officers of FNB visited with the management of three of
Mercshares' Affiliated Banks. FNB selected such banks because two of the banks
are headquartered in Virginia, and the third bank, in a manner similar to the
Bank, operates under a national bank charter. Further discussions between FNB
and Mercshares were held on June 24, 1993 when certain members of Mercshares'
senior management visited FNB. Discussions between FNB and Mercshares continued
intermittently thereafter over the next several months and included a meeting in
Baltimore on September 16, 1993 between senior management of Mercshares and
members of the Strategy Committee and certain executive officers of FNB.
At a meeting held on September 23, 1993, the FNB Board of Directors
considered the status of the discussions with Mercshares. The Strategy Committee
was expanded to include Mr. J. William Poole as a new member, and the Strategy
Committee was directed to pursue a dialogue with Mercshares and in addition, the
FNB Board directed the Strategy Committee to search for a successor to Mr.
Charles Lewis. Mr. Lewis, after serving the Bank for 44 years and approaching
retirement age, had earlier announced his plans to retire at the end of 1994 as
President and Chief Executive Officer of FNB and the Bank. Over the next several
months, the Strategy Committee focused its efforts on finding a new President.
In December, an offer was made to and accepted by Mr. Gregory R. Bosiack and he
assumed office in January of 1994. Mr. Bosiack was directed to continue
discussions with Mercshares.
Further discussions between FNB and Mercshares ensued and in late February,
1994, Mercshares advised FNB that it was prepared to submit an affiliation
proposal. FNB then engaged Scott & Stringfellow to serve as its financial
advisor and to assist in the negotiations with Mercshares. In late February and
early March, members of senior management of the two institutions, together with
representatives of Scott & Stringfellow, held discussions concerning the
structure and terms of a possible affiliation. In late February, Mercshares
indicated that it might be prepared to make an offer that included an exchange
ratio of 2.75 shares of Mercshares Common Stock for each share of FNB Common
Stock. Further discussion between Scott & Stringfellow and Mercshares resulted
in an agreement on an exchange ratio of 2.84 shares of Mercshares Common Stock
for each share of FNB Common Stock.
Scott & Stringfellow presented its analysis of the Mercshares offer to the
FNB Board on March 4, 1994 and reported that it would be able to render an
opinion that the terms of the affiliation as
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theretofore discussed were fair to the FNB Shareholders from a financial point
of view. The FNB Board determined at the March 4, 1994 meeting to pursue further
negotiations with Mercshares. On March 9, 1994, the Mercshares Board of
Directors authorized its management to proceed with a transaction with FNB. From
March 9 until March 29 the terms of the definitive agreements were negotiated.
On March 29, 1994, the FNB Board of Directors unanimously approved the
Affiliation and the execution of the Affiliation Agreement and the Option
Agreement. See "--Reasons for the Affiliation; Recommendation of the FNB Board
of Directors" and "CERTAIN OTHER AGREEMENTS." The terms of the Affiliation and
the execution of the Affiliation Agreement and the Option Agreement were
announced in a joint press release on March 29, 1994.
REASONS FOR THE AFFILIATION; RECOMMENDATION OF THE FNB BOARD OF DIRECTORS
The FNB Board of Directors believes that the Affiliation and the
Affiliation Agreement are in the best interests of FNB and the FNB Shareholders.
As explained below, this conclusion is supported by the opinion of its
independent financial advisor. In considering the terms and conditions of the
Affiliation Agreement, the FNB Board of Directors considered a number of
factors. The FNB Board of Directors did not assign any relative or specific
weights to the factors considered. The material factors considered were:
(i) The Financial Terms of the Affiliation. In this regard, the FNB
Board of Directors was of the view that, based on historical and
anticipated trading ranges for Mercshares Common Stock, the value of
consideration to be received by FNB Shareholders resulting from the
Exchange Ratio represented a fair multiple of FNB's per share book value
and earnings. The FNB Board of Directors also considered that, under the
proposed Exchange Ratio and based on the FNB Board of Directors' belief
that Mercshares would continue to pay dividends at its current rate, the
Affiliation would result in a substantial increase in dividend income to
FNB Shareholders, although there can be no assurance that current dividends
are indicative of future dividends. See "COMPARATIVE UNAUDITED PER SHARE
DATA." In addition, the FNB Board of Directors considered how the premium
included in Mercshares' offer (measured as the difference between the total
transaction value of the Affiliation and FNB's book value at December 31,
1993) compared on a percentage basis to FNB's loans and deposits. See
"--Opinion of FNB Financial Advisor" for a discussion of this comparative
information.
(ii) The Terms, Other Than the Financial Terms, and Structure of the
Affiliation. In this respect, the FNB Board of Directors considered the
benefits to the customers and employees of the Bank and the communities it
serves by allowing the Bank to remain a separate bank within the Mercshares
system. The FNB Board of Directors also considered that the Affiliation
would qualify as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended (the "Code"). See "--Certain Federal Income Tax
Consequences."
(iii) Certain Financial and Other Information Concerning Mercshares.
In this respect, the FNB Board of Directors considered, among other things,
the consistent high position of Mercshares among its peer group of national
and regional financial institutions in terms of profitability, capital
adequacy and asset quality. The FNB Board of Directors also considered that
the historical dividends per share, net income per share and book value per
share of Mercshares Common Stock to be received by the FNB Shareholders,
after giving effect to the Exchange Ratio, would represent a substantial
increase in the historical dividends per share, net income per share and
book value per share of FNB Common Stock, although there can be no
assurance that pro forma amounts are indicative of future dividends, income
per share or book value per share of Mercshares. The FNB Board of Directors
also considered the marketability of Mercshares Common Stock, which is
publicly traded and quoted on The Nasdaq National Market. The FNB Board of
Directors further considered the diversification of risk associated with
ownership of an institution that operates 19
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banks serving a broad geographic area that encompasses most of Maryland and
parts of Virginia and Delaware.
(iv) Other Possible Affiliation Partners. The FNB Board of Directors
considered, based in part on the advice of Scott & Stringfellow, possible
affiliation partners for FNB other than Mercshares, the prospects of such
other possible affiliation partners, and the likelihood that such other
potential partners would be able to make an offer directly comparable to
Mercshares' offer. Based upon the foregoing considerations, none of the
other affiliation possibilities considered by the FNB Board of Directors
was perceived by the FNB Board of Directors to present the advantages that
the Affiliation would provide, and as a result Mercshares was the only
institution which Scott & Stringfellow was authorized to contact.
(v) Opinion of FNB Financial Advisor. The FNB Board of Directors also
considered the opinion of Scott & Stringfellow as to the fairness, from a
financial point of view, of the terms of the Affiliation Agreement to the
FNB Shareholders. See "--Opinion of FNB Financial Advisor."
(vi) Certain Other Considerations. The FNB Board of Directors further
determined that the addition of resources resulting from the Affiliation
will enable the Bank to provide a wider and improved array of financial
services to consumers and businesses and to achieve added flexibility in
dealing with the changing competitive environment in its market area. In
addition, the FNB Board of Directors concluded that the Affiliation will
help provide the Bank with the financial resources needed to meet the
competitive challenges arising from recent and anticipated changes in the
banking and financial services industry.
THE FNB BOARD OF DIRECTORS BELIEVES THAT THE AFFILIATION AND THE
AFFILIATION AGREEMENT ARE IN THE BEST INTERESTS OF FNB AND THE FNB SHAREHOLDERS.
THE FNB BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FNB SHAREHOLDERS VOTE TO
APPROVE THE AFFILIATION AGREEMENT.
OPINION OF FNB FINANCIAL ADVISOR
FNB's Board of Directors retained the investment banking firm of Scott &
Stringfellow to evaluate the terms of the Affiliation Agreement and Scott &
Stringfellow has rendered its opinion to the Board of Directors of FNB that the
terms of the Affiliation Agreement are fair from a financial point of view to
the FNB Shareholders. In developing its opinion, Scott & Stringfellow reviewed
and analyzed: (1) the Affiliation Agreement; (2) the Registration Statement; (3)
FNB's audited financial statements for the four years ended December 31, 1993;
(4) FNB's unaudited financial statements for the three months ended March 31,
1993 and 1994, and other internal information relating to FNB prepared by FNB's
management; (5) information regarding the trading market for FNB Common Stock
and Mercshares Common Stock and the price ranges within which the respective
stocks have traded; (6) the relationship of prices paid to relevant financial
data such as net worth, loans, deposits and earnings in certain bank and bank
holding company affiliations and acquisitions in Virginia in recent years; (7)
Mercshares' annual reports to shareholders and its financial statements for the
four years ended December 31, 1993; and (8) Mercshares' unaudited financial
statements for the three months ended March 31, 1993 and 1994 and other internal
information relating to Mercshares prepared by Mercshares management. Scott &
Stringfellow has discussed with members of FNB's and Mercshares' management the
background of the Affiliation, the reasons and basis for the Affiliation, and
the business and future prospects of FNB and Mercshares individually and as a
combined entity. No instruction or limitations were given or imposed in
connection with the scope of or the examination or investigations made by Scott
& Stringfellow in arriving at its findings. Finally, Scott & Stringfellow has
conducted such other studies, analysis and investigations particularly of the
banking industry, and considered such other information as it deemed
appropriate, the material portion of which is described below. A copy of Scott
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& Stringfellow's opinion, which sets forth the assumptions made, matters
considered and qualifications made on the review undertaken, is attached as
Annex B hereto and should be read in its entirety.
Scott & Stringfellow used the information gathered to evaluate the
financial terms of the transaction using standard valuation methods, including
discounted cash flow analysis, market comparable analysis, comparable
acquisition analysis and dilution analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a discounted
cash flow analysis under various projections to estimate the fair market value
of FNB Common Stock. Among other things, Scott & Stringfellow considered a range
of asset and earnings growth for FNB of between 3% and 6%, required equity
capital levels between 7.5% and 8.5% of assets, and various dividend payout
ratios. A range of discount rates from 10% to 12% were applied to the cash flows
resulting from the projections during the first five years and the residual
values. The residual values were estimated by capitalizing the projected final
year earnings by the discount rates, less the projected long-term growth rate of
FNB's earnings. The discount rates, growth rates and capital levels were chosen
based on what Scott & Stringfellow, in its judgment, considered to be
appropriate taking into account, among other things, FNB's past and current
financial performance and conditions, the general level of inflation, rates of
return for fixed income and equity securities in the marketplace generally and
particularly in the banking industry. In all scenarios considered, the present
value of FNB Common Stock was calculated at less than the value of the
consideration to be received from Mercshares pursuant to the Affiliation.
Price to Earnings Ratio--Market Comparables. Using publicly available
information, Scott & Stringfellow estimated the value of FNB Common Stock using
the price to earnings ratios of certain other Virginia banks and bank holding
companies which, in Scott & Stringfellow's judgment, were appropriate for the
purpose of this analysis. The Virginia financial institutions included in this
analysis, all of which have publicly traded securities and which range in asset
size from $575 million to $14.4 billion, were Central Fidelity Banks, Inc.,
Crestar Financial Corp., F&M National Corporation, First Virginia Banks, Inc.,
Jefferson Bankshares, Inc., Piedmont BankGroup, Inc., Premier Bankshares, Inc.,
and Signet Banking Corp. (collectively the "Virginia Bank Group"). The value of
FNB Common Stock utilizing this approach was derived by the composite average
price to earnings ratio of the Virginia Bank Group, which was 11.0x, multiplied
by FNB's earnings of $2.73 per share for the trailing twelve-month period ended
March 31, 1994. The application of the price to earnings ratio resulted in an
implied equity value of FNB Common Stock of $29.91 per share, which based on the
market price of Mercshares Common Stock on the date of this Prospectus and Proxy
Statement was less than the value of the consideration to be received from
Mercshares pursuant to the Affiliation.
Price to Book Value Ratio--Market Comparables. Using publicly available
information, Scott & Stringfellow also estimated the value of FNB Common Stock
using the price to book value ratios of the Virginia Bank Group. The value of
FNB Common Stock utilizing this approach was derived by the composite average
price to book value ratio of the Virginia Bank Group, which was 1.63x,
multiplied by FNB's book value of $25.85 at March 31, 1994. The application of
the price to book value ratio resulted in an implied equity value of FNB Common
Stock of $42.13 per share, which based on the market price of Mercshares Common
Stock on the date of this Prospectus and Proxy Statement was less than the value
of the consideration to be received from Mercshares pursuant to the Affiliation.
Comparable Acquisition Analysis. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as net worth, loans,
deposits and earnings in 60 bank and bank holding company affiliations and
acquisitions in Virginia from 1983 through June 30, 1994, representing all such
transactions known to Scott & Stringfellow to have occurred during this period,
and in particular to all such transactions that have been announced or closed in
1994, with the proposed Affiliation and found the consideration to be received
from Mercshares to be within the relevant pricing ranges acceptable for such
recent transactions in the state of Virginia. Specifically, based upon the five
most recent transactions either closed or announced in 1994 in Virginia, other
than the Affiliation, the
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average price to book value in these transactions was 1.97, compared with 2.26
for the Affiliation, the average price to earnings ratio was 23.71, compared to
39.18 for the Affiliation, the average price to projected 1994 earnings was
17.96 compared with 17.27 for the Affiliation, the average premium to loans was
14.62% compared with 17.96% for the Affiliation, and the average premium to
deposits was 9.69% compared with 11.87% for the Affiliation. For purposes of
computing the information with respect to the Affiliation, Mercshares' closing
stock price of $20.25 on July 28, 1994 was used.
Analysis of Mercshares and Virginia Bank Group. Scott & Stringfellow
analyzed the performance and financial condition of Mercshares relative to the
Virginia Bank Group. Among the financial information compared was information
relating to tangible equity to assets, loans to deposits, net interest margin,
nonperforming assets, total assets, non-accrual loans, and efficiency ratio.
Additional information compared for the trailing twelve-month period ended March
31, 1994, was (i) price to book value ratio which was 1.31x for Mercshares,
compared to an average of 1.63x for the Virginia Bank Group, (ii) price to
earnings ratio which was 10.3x for Mercshares, compared to an average of 11.0x
for the Virginia Bank Group, (iii) return on assets which was 1.54% for
Mercshares, compared to an average of 1.37% for the Virginia Bank Group, (iv)
return on equity which was 12.98% for Mercshares, compared to an average of
15.35% for the Virginia Bank Group, and (v) a dividend yield of 3.58% for
Mercshares, compared to an average of 3.23% for the Virginia Bank Group.
Overall, in the opinion of Scott & Stringfellow, Mercshares' operating
performance and financial condition were better than the Virginia Bank Group
average and Mercshares' market value was reasonable when compared to the
Virginia Bank Group.
Dilution Analysis. Based upon publicly available financial information on
FNB and Mercshares, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of FNB and Mercshares.
Scott & Stringfellow concluded from this analysis that the transaction would
have a significant positive effect on FNB and the FNB Shareholders in that,
historical dividends per share, net income per share and book value per share of
Mercshares Common Stock to be received by the FNB Shareholders, after giving
effect to the Exchange Ratio, would represent a substantial increase in the
historical dividends per share, net income per share and book value per share of
FNB Common Stock, although there can be no assurance that pro forma amounts are
indicative of future dividends. See "COMPARATIVE UNAUDITED PER SHARE DATA."
The summary set forth above includes the material factors considered, but
does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Board of Directors of FNB or of the analyses performed by
Scott & Stringfellow. Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the process underlying the preparation of its
opinion.
Scott & Stringfellow is a full service investment banking and brokerage
firm headquartered in Richmond, Virginia, that provides a broad array of
services to corporations, financial institutions and state and local
governments. The Financial Institutions Group of Scott & Stringfellow actively
works with community banks in Virginia, North Carolina, and West Virginia on
these and other matters. As part of its investment banking practice, it is
continually engaged in the valuation of banks and bank holding companies and
their securities in connection with affiliations and acquisitions, negotiated
underwriting, and secondary distribution of listed and unlisted securities.
Scott & Stringfellow was selected by the FNB Board of Directors based upon its
expertise and reputation in providing valuation and affiliation and acquisition
and advisory services to banks and bank holding companies.
Pursuant to an engagement letter dated October 7, 1993 between FNB and
Scott & Stringfellow, in exchange for its services, Scott & Stringfellow has
received a fee of $50,000, and will receive from FNB at the Effective Date a fee
equal to 0.5% of the total market value of the consideration received by FNB
Shareholders in the Affiliation, less the $50,000 which has already been paid.
In addition, Scott &
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Stringfellow had earlier received from FNB a fee of $7,950 for various financial
advisory services rendered during 1993 related to certain preliminary matters
described above under the heading "Background to the Affiliation."
EFFECTIVE DATE
As soon as practicable after the performance of all agreements and
obligations of the parties under the Affiliation Agreement and upon fulfillment
or waiver of all conditions precedent contained therein, Mercshares and FNB will
execute and deliver Articles of Merger (the "Articles"), and will file the
Articles with the Virginia Commission and with the State Department of
Assessments and Taxation of the State of Maryland (the "Maryland SDAT"). The
Affiliation shall become effective on such date and time (the "Effective Date")
as set forth in the Articles as filed with the Maryland SDAT and the Virginia
Commission.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
Certificates representing shares of FNB Common Stock which have been
converted to shares of Mercshares Common Stock may at any time after the
Effective Date be surrendered to Mercantile-Safe Deposit and Trust Company, a
Maryland banking affiliate of Mercshares acting as exchange agent (the "Exchange
Agent"), and exchanged by the holders thereof for new certificates representing
the appropriate number of whole shares of Mercshares Common Stock determined by
the Exchange Ratio and for cash in lieu of any fractional shares.
No certificates for fractional shares of Mercshares Common Stock shall be
issued but, in lieu thereof, and solely as a mechanism for rounding
shareholdings to whole shares, Mercshares will pay cash for such fractional
shares on the basis of the closing price for Mercshares Common Stock (as
reported by The Nasdaq National Market) on the Effective Date (or if no closing
price is reported on that date, then the closing price on the next preceding day
on which there is a closing price), without interest, upon surrender of
certificates of FNB Common Stock representing such fractional shares. No such
holder shall be entitled to dividends, voting rights or any other rights of
shareholders in respect of any fractional share.
Shortly after the Effective Date, FNB Shareholders will receive transmittal
forms and instructions as to the time and method of surrendering their
certificates. Until so surrendered, certificates formerly representing shares of
FNB Common Stock (other than shares of dissenting shareholders as described
herein under the heading "Appraisal Rights of Dissenting Shareholders") will be
deemed for all corporate purposes to evidence the number of whole shares of
Mercshares Common Stock that a holder would be entitled to receive upon
surrender and the cash to be paid in lieu of fractional shares. Dividends and
other distributions, if any, that become payable on whole shares of Mercshares
Common Stock pending exchange of certificates representing shares of FNB Common
Stock will be retained by Mercshares or the Exchange Agent until surrender of
the certificates, at which time those dividends and any other distributions will
be paid without interest.
FNB SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. FNB SHAREHOLDERS SHOULD NOT RETURN
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material Federal income tax
consequences of the Affiliation; it is not intended to be a complete description
of those consequences:
(i) the Affiliation will qualify as a tax-free reorganization under
Section 368(a)(1)(A) of the Code;
(ii) No gain or loss will be recognized by the FNB Shareholders upon
their receipt of Mercshares Common Stock in exchange for FNB Common Stock
pursuant to the Affiliation;
(iii) the tax basis of the shares of Mercshares Common Stock received
by the FNB Shareholders will equal the tax basis of their FNB Common Stock
exchanged therefor (less any portion of such basis allocable to any
fractional interest in any share of Mercshares Common Stock);
(iv) assuming that an FNB Shareholder holds the FNB Common Stock as a
capital asset at the Effective Date, the holding period of the Mercshares
Common Stock received by such FNB Shareholder will include the holding
period of the FNB Common Stock exchanged therefor; and
(v) no gain or loss will be recognized by Mercshares, FNB or the Bank
in the Affiliation.
The obligation of FNB to consummate the Affiliation is subject to the
receipt of an opinion of Mays & Valentine, counsel to FNB, with respect to the
federal income tax consequences of the Affiliation, substantially to the effect
of paragraphs (i) through (iv) immediately above. Such opinion will not address
the state, local or foreign tax aspects of the Affiliation. FNB has agreed in
the Affiliation Agreement to use its best efforts and to cause the Bank to use
its best efforts to cause the Affiliation to qualify as a tax-free
reorganization under Section 368(a)(1)(A) of the Code.
Any cash received by FNB Shareholders, whether as a result of the exercise
of their dissenters' rights or in lieu of the issuance of fractional shares,
could result in taxable income to such FNB Shareholders. The receipt of such
cash generally will be treated as a sale or exchange of the stock resulting in
capital gain or loss measured by the difference between the cash received and an
allocable portion of the basis of the stock relinquished. The receipt of such
cash may be treated as a dividend and taxed as ordinary income in certain
limited situations.
The discussion set forth above is included for general information only. It
does not address the state, local or foreign tax aspects of the Affiliation. In
addition, it does not discuss the federal income tax considerations that may be
relevant to certain persons, and may not apply to certain holders subject to
special tax rules, including dealers in securities and foreign holders. The
discussion is based upon currently existing provisions of the Code, existing
Treasury regulations thereunder and current administrative rulings and court
decisions. All of the foregoing are subject to change and any such change could
affect the continuing validity of this discussion.
EACH FNB SHAREHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF THE AFFILIATION TO HIM, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
It is expected that the Affiliation will be accounted for as a pooling of
interests under generally accepted accounting principles. The obligation of
Mercshares to consummate the Affiliation is conditioned upon the receipt by
Mercshares of a letter from its independent certified public accountants to the
effect that the Affiliation qualifies for pooling of interests accounting
treatment under generally accepted accounting principles if consummated in
accordance with the Affiliation Agreement. Under the pooling of interests method
of accounting, the historical basis of the assets and liabilities of
21
<PAGE>
Mercshares and FNB will be combined at the Effective Date and carried forward at
their previously recorded amounts and the stockholders' equity accounts of FNB
will be combined on Mercshares' consolidated balance sheet. Income and other
financial statements of Mercshares issued after consummation of the Affiliation
will be restated retroactively to reflect the consolidated operations of
Mercshares and FNB as if the Affiliation had taken place prior to the periods
covered by such financial statements.
In order for the Affiliation to qualify for pooling of interests accounting
treatment, substantially all of the outstanding FNB Common Stock must be
exchanged for Mercshares Common Stock. FNB has agreed in the Affiliation
Agreement to use its, and to cause the Bank to use its, best efforts to cause
the Affiliation to qualify for pooling of interests treatment. In the event that
FNB Shareholders exercise their dissenters' rights of appraisal with respect to
an aggregate of 10% or more of the shares of FNB Common Stock outstanding or in
the event that one of the other conditions to pooling of interests accounting
treatment is not satisfied, the Affiliation would not qualify for the pooling of
interests method of accounting, and a condition to Mercshares' obligation to
consummate the Affiliation would not be fulfilled. See "--Appraisal Rights of
Dissenting Shareholders," and "--Conditions to Affiliation." Mercshares has the
option to waive such condition, in which case the Affiliation could nonetheless
be consummated. In such event, the Affiliation would be accounted for as a
purchase under generally accepted accounting principles. For a description of
purchase accounting treatment, see the discussion above under the heading
"COMPARATIVE UNAUDITED PER SHARE DATA".
Individuals who are affiliated with Mercshares and FNB have entered into
agreements with Mercshares providing that they will not sell, transfer or
otherwise dispose of shares of Mercshares Common Stock owned by them or, in the
case of affiliates of FNB, to be received by such persons in the Affiliation,
until such time as financial results covering at least 30 days of combined
operations of Mercshares and FNB have been published. See "CERTAIN OTHER
AGREEMENTS--Affiliate Undertakings."
RESALE OF MERCSHARES COMMON STOCK AFTER THE AFFILIATION BY CONTROLLING PERSONS
Under federal securities laws there are certain potential limitations on
the sale of Mercshares Common Stock received in the Affiliation that will affect
certain FNB Shareholders who may be controlling persons of FNB. Mercshares and
FNB believe that the only FNB Shareholders who may be deemed controlling persons
subject to these limitations are the current officers and directors of FNB who
have been advised of these restrictions and have agreed in writing to them.
CONDITIONS TO AFFILIATION
Consummation of the Affiliation is conditioned upon, among other things,
approval of the Affiliation Agreement by an affirmative vote of the majority of
the outstanding shares of FNB Common Stock entitled to vote thereon.
The obligation of Mercshares to consummate the Affiliation is also subject
to the prior satisfaction of certain further conditions including the following:
(1) the absence of any material adverse change in the consolidated balance
sheet, consolidated income statement, financial position, results of operations
or business of FNB or the Bank, except as provided in the Affiliation Agreement,
and the absence of any injunction against or impediment to consummation of the
Affiliation; (2) receipt of a letter from Mercshares' independent certified
public accountants to the effect that the Affiliation qualifies for pooling of
interests accounting treatment; (3) compliance by FNB and the Bank with certain
conditions, including limits on unapproved increases in compensation of
directors, officers or employees of FNB or the Bank or unapproved alterations in
benefits received by such individuals; (4) maintenance to Mercshares'
satisfaction of the composition of FNB's and the Bank's securities portfolio;
(5) absence of
22
<PAGE>
notices of dissent and demands for appraisal by holders of an aggregate of 10%
or more of the outstanding shares of FNB Common Stock (or of such smaller
percentage which, if exceeded, together with other factors, in the judgment of
Mercshares, could preclude accounting for the Affiliation as a pooling of
interests) pursuant to the provisions of Article 15 of the VSCA; (6) the absence
of any actual or threatened legal proceeding or impediment that in the
reasonable opinion of Mercshares might prevent the consummation of the
Affiliation; (7) the absence of any condition or event, actual or threatened,
which does or may adversely affect the tax-qualified status of any "Qualified
Plan" (as defined in the Affiliation Agreement) or which may result in costs for
unanticipated benefit liabilities with respect to any Qualified Plan; (8) the
accuracy and satisfaction of various other financial and legal representations
and conditions with respect to FNB and the Bank; (9) the receipt of certain
regulatory approvals; and (10) the effectiveness of the Registration Statement.
Mercshares may in its discretion waive conditions (1) through (8).
The obligation of FNB to consummate the Affiliation is subject to the
satisfaction of certain further conditions including the following: (1) receipt
of an opinion of counsel confirming certain of the consequences of the
Affiliation for FNB Shareholders as set forth above under the heading "Certain
Federal Income Tax Consequences;" and (2) the accuracy and satisfaction of
various financial and legal representations and conditions with respect to
Mercshares. FNB may in its discretion waive these conditions.
TREATMENT OF EMPLOYEE BENEFIT PLANS
Pursuant to the Affiliation Agreement and at the option of Mercshares,
after the Effective Date and through December 31, 1995, employees of FNB and the
Bank will be entitled to participate in Mercshares' employee benefit plans and
programs on substantially the same basis as similarly situated employees of
Mercshares or in plans and programs which, subject to certain conditions
provided in the Affiliation Agreement, are comparable to and provide for
participation on substantially the same basis as FNB's and the Bank's plans and
programs currently in effect.
EXCLUSIVE DEALING
FNB has agreed that while the Affiliation Agreement is in effect, neither
FNB nor any of its or the Bank's officers, directors, employees, agents or
representatives (including its investment bankers) shall, directly or
indirectly: (i) solicit or initiate any Acquisition Proposal (as hereinafter
defined) or take any other action to facilitate any inquiries or proposal that
constitutes or may reasonably be expected to lead to any Acquisition Proposal;
or (ii) recommend any Acquisition Proposal to FNB Shareholders or enter into or
participate in any negotiations or agreement with respect to any Acquisition
Proposal unless an unsolicited Acquisition Proposal is made and the FNB Board of
Directors shall conclude, based on written advice of counsel, that its fiduciary
obligations require consideration or acceptance or the recommendation of such
Acquisition Proposal, because it is more favorable to the FNB Shareholders from
a financial point of view than the Affiliation.
An "Acquisition Proposal" is defined in the Affiliation Agreement as
including any proposed (A) merger, consolidation, share exchange or similar
transaction involving FNB or the Bank, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of FNB or the Bank representing 10% or more of the consolidated assets of
FNB and the Bank, (C) issue, sale or other disposition of securities
representing 10% or more of the voting power of FNB or the Bank, (D) transaction
in which any person or group shall acquire beneficial ownership of 20% or more
of the outstanding FNB Common Stock or Bank common stock.
FNB has agreed that it will immediately advise Mercshares of, and
communicate to Mercshares the terms of, any such inquiry or proposal addressed
to FNB or the Bank or of which FNB or the Bank,
23
<PAGE>
or their respective officers, directors, employees, agents, or representatives
(including its investment bankers) has knowledge.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
The Affiliation Agreement provides that following the Effective Date,
Mercshares shall indemnify and hold harmless any person who has rights to
indemnification from FNB, to the same extent and on the same conditions as such
person is entitled to indemnification pursuant to the applicable provisions of
Title 13.1 of the VSCA and FNB's Articles of Incorporation, as in effect on the
date of the Affiliation Agreement, to the extent legally permitted with respect
to matters occurring on or prior to the Effective Date, including, without
limitation, the transactions contemplated in the Affiliation Agreement and the
Stock Option Agreement. Mercshares has also agreed to use its reasonable best
efforts to maintain FNB's existing directors' and officers' liability policy, or
another policy providing at least comparable coverage, covering persons who are
currently covered by such insurance of FNB for a period of three years after the
Effective Date on terms no less favorable than those in effect on the date of
the Affiliation Agreement.
TERMINATION
The Affiliation Agreement provides that it may be terminated and the
Affiliation abandoned at any time prior to the Effective Date: (a) by the mutual
consent of FNB and Mercshares; (b) by Mercshares if certain of the conditions
set forth in the Affiliation Agreement have not been met or waived by
Mercshares, or if at any time Mercshares receives information from any
regulatory authority, which by law is required to approve the Affiliation, or
which has authority to challenge the validity of the Affiliation in judicial
proceedings or otherwise, that provides a substantial basis for reasonably
concluding that the required regulatory approval will not be granted or the
Affiliation or such transactions will be so challenged; or if the FNB Board of
Directors recommends to the FNB Shareholders or accepts an Acquisition Proposal
or if a Purchase Event (as defined in the Stock Option Agreement) occurs; (c) by
FNB if certain conditions set forth in the Affiliation Agreement have not been
met or waived by FNB, or if in compliance with the provisions of the Affiliation
Agreement, it recommends to the FNB Shareholders or accepts an Acquisition
Proposal; and (d) by Mercshares or FNB if the Affiliation is not consummated by
March 31, 1995. The Affiliation Agreement provides that no party shall be
relieved of or released from any liability arising out of an intentional breach
of any provision thereof. See "CERTAIN OTHER AGREEMENTS--The Stock Option
Agreement."
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
An FNB Shareholder who objects to the Affiliation (a "Dissenting
Shareholder") and who complies with the provisions of Article 15 of Title 13.1
of the VSCA ("Article 15") may demand the right to receive a cash payment, if
the Affiliation is consummated, for the fair value of his stock immediately
before the Effective Date, exclusive of any appreciation or depreciation in
anticipation of the Affiliation unless such exclusion would be inequitable. In
order to receive payment, a Dissenting Shareholder must deliver to FNB prior to
the vote at the Annual Meeting a written notice of intent to demand payment for
his shares if the Affiliation is effectuated (an "Intent to Demand Payment") and
must not vote his shares to approve the Affiliation Agreement. An FNB
Shareholder who returns a signed proxy but fails to provide instructions as to
the manner in which such shares are to be voted will be deemed to have voted to
approve the Affiliation Agreement, and, therefore, to have waived his
dissenters' rights. An FNB Shareholder may vote against the Affiliation
Agreement, abstain from voting on the Affiliation Agreement or refrain from
voting on (by not returning the proxy or by not voting at the meeting) the
Affiliation Agreement without losing his right to assert dissenters' rights, as
long as such FNB Shareholder's Intent to Demand Payment is timely given. The
Intent to Demand
24
<PAGE>
Payment should be addressed to: Charles T. Lewis, President, Fredericksburg
National Bancorp, Inc., 2403 Fall Hill Avenue, P.O. Box 7207, Fredericksburg,
Virginia 22404-7207. A VOTE AGAINST OR AN ABSTENTION WITH REGARD TO THE
AFFILIATION AGREEMENT WILL NOT ITSELF CONSTITUTE A TIMELY WRITTEN NOTICE OF
INTENT TO DEMAND PAYMENT AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY
WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT.
An FNB Shareholder of record may assert dissenters' rights as to fewer than
all the shares registered in his name only if the FNB Shareholder dissents with
respect to all shares beneficially owned by any one person and notifies FNB in
writing (delivered or mailed to the name and address noted immediately above) of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of such a partial dissenter are determined as if the shares
as to which he dissents and his other shares were registered in the names of
different shareholders. A beneficial shareholder of FNB Common Stock may assert
dissenters' rights as to shares held on his behalf by a shareholder of record
only if (i) he submits to FNB the record shareholder's written consent to the
dissent not later than the time when the beneficial shareholder asserts
dissenters' rights, and (ii) he dissents with respect to all shares of which he
is the beneficial shareholder or over which he has power to direct the vote, and
(iii) he files an Intent to Demand Payment in a timely manner.
If the Affiliation is consummated, within 10 days after the Effective Date
Mercshares is required to deliver a notice in writing (a "Dissenter's Notice")
to each Dissenting Shareholder who has filed an Intent to Demand Payment and who
has not voted such shares to approve the Affiliation Agreement. The Dissenter's
Notice shall (i) state where the demand for payment (the "Payment Demand") shall
be sent and where and when stock certificates shall be deposited; (ii) supply a
form for demanding payment; (iii) set a date by which Mercshares must receive
the Payment Demand (which may not be fewer than 30 nor more than 60 days after
delivery of the Dissenter's Notice); and (iv) be accompanied by a copy of
Article 15. A Dissenting Shareholder who is sent a Dissenter's Notice must
submit the Payment Demand and deposit his stock certificates in accordance with
the terms of, and within the time frames set forth in, the Dissenter's Notice.
As a part of the Payment Demand, the Dissenting Shareholder must certify whether
he acquired beneficial ownership of the shares before or after the date of the
first public announcement of the terms of the proposed Affiliation (the
"Announcement Date"), which was March 29, 1994.
Except with respect to shares of FNB Common Stock acquired after the
Announcement Date, Mercshares shall pay a Dissenting Shareholder the amount
Mercshares estimates to be the fair value of his shares, plus accrued interest.
Such payment shall be made within 30 days of receipt of the Dissenting
Shareholder's Payment Demand. As to shares of FNB Common Stock acquired after
the Announcement Date, Mercshares is only obligated to estimate the fair value
of the shares, plus accrued interest, and to offer to pay this amount to the
Dissenting Shareholder conditioned upon the Dissenting Shareholder's agreement
to accept it in full satisfaction of his claim.
If a Dissenting Shareholder believes that the amount paid or offered by
Mercshares is less than the fair value of his shares of FNB Common Stock, or
that the interest due is incorrectly calculated, that Dissenting Shareholder may
notify Mercshares in writing of his own estimate of the fair value of his shares
and amount of interest due and demand payment of such estimate (less any amount
already received by the Dissenting Shareholder) (the "Estimate and Demand"). The
Dissenting Shareholder must notify Mercshares of the Estimate and Demand within
30 days after the date Mercshares makes or offers to make payment to the
Dissenting Shareholder.
Within 60 days after receiving the Estimate and Demand, Mercshares must
either commence a proceeding in the appropriate circuit court to determine the
fair value of the Dissenting Shareholder's shares and accrued interest, or
Mercshares must pay each Dissenting Shareholder whose demand remains unsettled
the amount demanded. If a judicial determination of the "fair value" of FNB
25
<PAGE>
Common Stock held by such FNB Shareholder is necessary, such a determination may
result in a value that is more than, less than, or equal to the consideration
which would have been paid by Mercshares pursuant to the Affiliation. If a
proceeding is commenced, the court must determine all costs of the proceeding
and must assess those costs against Mercshares, except that the court may assess
costs against all or some of the Dissenting Shareholders to the extent the court
finds that the Dissenting Shareholders did not act in good faith in demanding
payment of the Dissenting Shareholder's estimates.
The foregoing discussion is a summary of the material provisions of Article
15 and is not intended to be a complete statement of its provisions. The
foregoing discussion is qualified in its entirety by reference to the full text
of Article 15, which FNB Shareholders are strongly encouraged to review
carefully and which is included as Annex C to this Prospectus and Proxy
Statement. No further notice of the events giving rise to dissenters' rights or
any steps associated therewith will be furnished to FNB shareholders, except as
indicated above or otherwise required by law.
Any Dissenting Shareholder who perfects his right to be paid the fair value
of his shares will recognize gain or loss, if any, for Federal income tax
purposes upon the receipt of cash for his shares. The amount of gain or loss and
its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Code. See "THE AFFILIATION--Certain
Federal Income Tax Consequences."
26
<PAGE>
CERTAIN OTHER AGREEMENTS
THE STOCK OPTION AGREEMENT
As a condition and inducement to Mercshares' willingness to enter into the
Affiliation Agreement, FNB granted Mercantile the option (the "Option"),
exercisable only in certain circumstances which have not yet occurred, to
acquire up to 19.9% of the aggregate shares of FNB Common Stock that would be
outstanding immediately after the issuance of shares in respect of the Option,
at a price of $43.50 per share, pursuant to the Stock Option Agreement dated as
of March 30, 1994 (the "Stock Option Agreement"), by and between FNB and
Mercshares.
Certain aspects of the Stock Option Agreement may have the effect of
discouraging persons who might now or prior to the consummation of the
Affiliation be interested in acquiring all of or a significant interest in FNB
from considering or proposing such an acquisition.
EXERCISE OF THE OPTION. The Option is exercisable in whole or part, but
subject to any required regulatory approvals, at any time after a "Purchase
Event," which is defined in the Option Agreement as the occurrence of any of the
following events: (i) any person (other than Mercshares or any subsidiary of
Mercshares) shall have commenced a tender offer or exchange offer to purchase
any shares of FNB Common Stock such that upon consummation of such offer such
person would own or control 50% or more of the then outstanding FNB Common
Stock, and the FNB Board of Directors, within ten business days after such
tender or exchange offer has been commenced, fails to recommend against
acceptance of such offer by FNB Shareholders; (ii) FNB or any of its
subsidiaries shall have taken certain actions with respect to (A) a merger,
consolidation or similar transaction involving FNB or any of its material
subsidiaries, (B) a sale, lease or other disposition of 10% or more of the
consolidated assets of FNB and its subsidiaries, or (C) an issue, sale or other
disposition of securities (or rights to purchase securities convertible into
such securities) representing 10% or more of the voting power of FNB or any of
its subsidiaries, each with any person other than Mercshares or any of its
subsidiaries; (iii) any person (other than Mercshares or any of its
subsidiaries) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 20% or more of the then outstanding shares of FNB Common
Stock; or (iv) the FNB Shareholders shall not have approved the Affiliation
Agreement at the FNB Annual Meeting, or the FNB Annual Meeting shall not have
been held by December 31, 1994, in each case after any person (other than
Mercshares or any of its subsidiaries) shall have publicly announced a proposal
or an intention to make a proposal to engage in any transaction described in
clauses (i), (ii) or (iii) above, or the FNB Board of Directors shall have
withdrawn or adversely modified its recommendation that the FNB Shareholders
approve the Affiliation Agreement.
The Option shall terminate on the earliest to occur of (x) the Effective
Date, (y) 12 months after the later of (A) the first occurrence of a Purchase
Event or (B) Mercshares' receiving notice from FNB of such occurrence, or (z)
termination of the Affiliation Agreement prior to a Purchase Event.
Notwithstanding termination of the Option, Mercshares shall be entitled to
purchase shares of FNB Common Stock as to which it has exercised the Option
prior to such termination.
ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION. The number and type of
securities subject to the Option and the purchase price therefor will be
adjusted for any change in the FNB Common Stock by reason of a stock dividend,
split up, recapitalization, combination, exchange of shares or similar
transaction, such that Mercshares will receive (upon exercise of the Option) the
same number and type of securities as if the Option had been exercised
immediately prior to the occurrence of such event (or the record date therefor).
At Mercshares' option, the number of shares of FNB Common Stock subject to the
Option will also be adjusted in the event FNB issues additional shares of FNB
Common Stock (other than certain permitted issuances), such that the number of
shares of FNB Common Stock subject to the Option represents 19.9% of the
aggregate number of shares of FNB Common Stock that would be outstanding
immediately after the issuance of shares in respect of the Option upon full
exercise of the Option.
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<PAGE>
In the event FNB enters into any agreement (a) to merge or consolidate or
for a share exchange with any person, other than Mercshares or one of its
subsidiaries, such that either (x) FNB is not the surviving corporation, or (y)
FNB will be the surviving corporation, but in connection with such transaction,
the FNB Common Stock is exchanged for any other securities or other property or
the outstanding shares of the FNB Common Stock immediately prior to such
transaction represent less than 50% of the FNB Common Stock following such
transaction, or (b) to sell or otherwise transfer all or substantially all of
its assets to a person other than Mercshares or one of its subsidiaries, the
agreement governing the transaction must provide that, upon consummation of the
transaction, the Option will be converted into or exchanged for an option to
purchase securities of either the acquiring person, a person that controls the
acquiring person, or FNB (if FNB is the surviving entity), in all cases at the
option of Mercshares.
REGISTRATION RIGHTS. Mercshares has the right within three years of the
first exercise of the Option to require FNB to prepare and file up to two
registration statements under the Securities Act for the shares issued or
issuable upon exercise of the Option and to use its best efforts to qualify the
shares under any applicable state securities laws if necessary or desirable for
Mercshares to be able to sell the shares.
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
directors and officers of FNB owning an aggregate of 175,647 shares (22.3%) of
the outstanding FNB Common Stock (the "Supporting FNB Shareholders"), entered
into a Support Agreement dated as of March 29, 1994 (the "Support Agreement")
with Mercshares. Pursuant to the Support Agreement, each of the Supporting FNB
Shareholders has agreed (a) not to pledge, hypothecate, grant a security
interest in, sell, transfer or otherwise dispose of or encumber nor enter into
any agreement, arrangement or understanding (other than a proxy for purposes of
approving the Affiliation Agreement) which would restrict, establish a right of
first refusal to or otherwise relate to the transfer or voting of the shares of
FNB Common Stock owned or acquired by such Supporting FNB Shareholder during the
term of the Support Agreement; (b) not to directly or indirectly, solicit,
initiate or encourage inquiries or proposals from, or participate in discussions
or negotiations with, or provide any information to, any individual or entity
(other than Mercshares and its employees and agents) concerning any sale of
assets, sale or exchange of stock, merger, consolidation or similar transactions
involving FNB or the Bank, and to use his best efforts to assure that FNB or the
Bank takes no such steps; (c) to immediately advise Mercshares of any such
inquiry or proposal of which such Supporting FNB Shareholder has knowledge; (d)
unless Mercshares is in material default with respect to the Affiliation
Agreement, to vote his or her shares of FNB Common Stock in favor of the
Affiliation Agreement and the transactions contemplated thereby, and subject to
certain fiduciary duties, to use his best efforts to cause the Affiliation to be
effected. The terms of the Support Agreement expire upon the earlier to occur of
March 29, 1996 or the termination of the Affiliation Agreement.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the Affiliation Agreement,
the Supporting FNB Shareholders also executed a memorandum, undertaking and
agreement (the "Undertaking") pursuant to which they have undertaken to comply
with certain provisions of the federal securities laws and to be subject to
additional restrictions on the sale of shares of Mercshares Common Stock. See
"THE AFFILIATION--Accounting Treatment" and "--Resale of Mercshares Common Stock
After the Affiliation by Controlling Persons."
AGREEMENT WITH FNB SHAREHOLDER
As a separate matter, Carl D. Silver, an FNB Shareholder who owns 120,912
shares (15.3%) of FNB Common Stock, has agreed (i) not to dispose of his shares
of FNB Common Stock (or the voting power of such shares) before the FNB Annual
Meeting, and (ii) that he will vote all of his shares of FNB Common Stock to
approve the Affiliation Agreement, provided that the FNB Annual Meeting occurs
on or before December 31, 1994.
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<PAGE>
DESCRIPTION OF FNB
FNB was organized in 1982 as a Virginia corporation for the purpose of
serving as the parent holding company for the Bank. FNB does not engage in any
activities other than acting as a holding company for the Bank. Accordingly, the
principal business of FNB is conducted through the Bank.
As of March 31, 1994, FNB had total assets of approximately $233.4 million,
total deposits of approximately $210.2 million and total shareholders' equity of
approximately $20.4 million. FNB is the second largest independent financial
institution in its service area in terms of total assets and has the largest
deposit market share of any bank in the area.
The Bank is a community-oriented institution and provides a wide range of
deposit, loan and other general banking services to individuals, businesses,
institutions and governmental entities, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. The Bank also offers a
full line of trust services.
The Bank primarily serves the area of Fredericksburg, Spotsylvania and
Stafford Counties, Virginia. According to 1990 census data, this area has a
population base of approximately 170,000, which represents an increase of
approximately 36% over the 1980 census. The area's population is projected to
reach 200,000 by the year 2000.
FNB and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. As a national banking association, the Bank is regulated and
examined by the Office of the Comptroller of the Currency. FNB is registered as
a bank holding company under the BHCA and is, therefore, subject to regulation
and examination of the Board of Governors of the Federal Reserve System.
The Bank's Main Office is located in Fredericksburg, Virginia. The Bank
operates seven banking offices in its service area and two remote ATM sites. The
Bank leases four of its banking offices, including the Main Office, and owns the
remaining three offices.
As of December 31, 1993, the Bank employed 135 people on a full-time basis.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of FNB. This discussion and analysis should be read in conjunction
with FNB's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus and Proxy Statement.
OVERVIEW
Net income in 1993 was $1.1 million, compared to $2.2 million and $1.3
million in 1992 and 1991, respectively. The decrease in 1993 was principally due
to the cumulative effect of an adjustment of $936,000 (net of tax benefits) from
the adoption of FASB No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" on January 1, 1993. The writedown of other real estate
properties to recent appraisal values and the establishment of a reserve for
disposal costs in an aggregate amount of $290,000 also contributed to the lower
net income in 1993. The $900,000 increase in net income in 1992 over 1991 was
primarily due to the decrease in the provision for loan losses from $1.6 million
in 1991 to $515,000 in 1992. As a result of lower earnings in 1993, return on
average assets declined to 0.46%, compared to 1.05% and 0.65% for 1992 and 1991,
respectively. Return on average equity for 1993 was also down from 1992,
declining to 5.36% from 11.77% for 1992 and 7.21% for 1991.
Significant items impacting the change in earnings per share for 1993 and
1992 are summarized in the following table.
CHANGES IN PER SHARE EARNINGS
<TABLE> <CAPTION>
1993 1992
VS. VS.
1992 1991
--------- ---------
<S> <C> <C>
Earnings per share--prior period.............................................................. $ 2.85 $ 1.68
Net change during the year:
Interest income............................................................................. (2.05) (2.81)
Interest expense............................................................................ 1.60 2.88
Provision for loan losses................................................................... .24 1.42
Other income................................................................................ .67 .17
Personnel expense........................................................................... (.38) .09
Other operating expenses.................................................................... (.66) .03
Income tax.................................................................................. .25 (.61)
--------- ---------
Net increase (decrease) during the period................................................... (.33) 1.17
--------- ---------
Earnings per share before cumulative effect adjustment........................................ 2.52 2.85
Cumulative effect on prior years of accounting change......................................... (1.18) --
--------- ---------
Earnings per share..................................................................... $ 1.34 $ 2.85
--------- ---------
--------- ---------
</TABLE>
Assets continued to grow in 1993, increasing $14.0 million, or 6.3%, to
$235.6 million at December 31, 1993, compared to 8% and $16.4 million growth in
1992. Loans increased 8.2% or $11.0 million in 1993 after three years without
growth. Investment security growth moderated from the 19.5% or $10.1 million in
1992 to 12.0% and $7.4 million in 1993. Bank deposits reached $213.2 million in
1993, compared to $200.9 million in 1992.
For the first quarter of 1994, net income was $597,000, compared to a loss
of $499,000 for the comparable period in 1993. Net income per share for the
first quarter of 1994 was $.76 per share, compared to a loss of $.63 per share
for the comparable period in 1993. The loss for the first quarter of 1993
reflects a cumulative effect adjustment of $936,000 ($1.18 per share) from the
adoption of FASB No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" on January 1, 1993.
30
<PAGE>
At March 31, 1994, net loans were $141.4 million, up slightly over the
December 31, 1993 level of $141.0 million, and deposits were $210.2 million,
down 1.4% from December 31, 1993. Stockholders' equity at March 31, 1994 was
$20.4 million, an increase of 1.8% over the $20.0 million reported at December
31, 1993.
During the first quarter of 1994, nonperforming assets decreased $400,000
to $2.9 million, which represented 1.2% of total assets at March 31, 1994. The
allowance for loan losses at March 31, 1994 amounted to $2.5 million, or 1.75%
of net loans.
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, represents the Bank's primary source of earnings. Interest income from
tax exempt securities has been adjusted to a tax equivalent basis for
comparative purposes. The net interest margin, tax equivalent net interest
income divided by average earning assets, indicates the average effective rate
earned on these assets. The net interest margin is affected by fluctuations in
interest rates and volume as well as the mix of earning assets and interest
bearing deposits.
Tax equivalent net interest income as presented on the following table
decreased 3.0% during 1993 to $9.4 million. This decrease was primarily
attributable to interest rate variance. Average earning assets increased 6.6% or
$13.1 million during the year compared to an increase of 4.3% in 1992. During
1993, the yield on earning assets declined 126 basis points to 7.34%, moderating
slightly from the 155 basis point decline from 1991 to 1992. Interest-bearing
deposit costs declined $1.3 million or 100 basis points to 3.75% after a 170
basis point decline from 1991 to 1992.
Net interest margin declined from 4.84% at December 31, 1992 to 4.40% at
December 31, 1993. Net interest margin at December 31, 1992 declined 20 basis
points from 5.04% at December 31, 1991. The primary factor contributing to the
decline in net interest margin during this period was the low interest rate
environment, together with the level of earning assets shifting to lower
yielding investment securities as a result of weak loan demand.
31
<PAGE>
The following table sets forth, among other things, FNB's average interest
earning assets (on a tax equivalent basis), average interest-bearing
liabilities, the average yields on such assets and rates paid on such
liabilities, and the net interest margin for the periods indicated.
AVERAGE BALANCES/NET INTEREST INCOME/RATE
TAX EQUIVALENT BASIS
<TABLE> <CAPTION>
1993 1992 1991
--------------------------------- --------------------------------- --------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE
--------- --------- ----------- --------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (net of unearned
income)(1)....................... $ 135,588 $ 11,129 8.21% $ 133,925 $ 12,477 9.32% $ 140,395 $ 15,201
Investment securities:
Taxable........................ 57,160 3,400 5.95 49,017 3,712 7.57 35,494 2,992
Tax-exempt..................... 10,884 783 7.19 6,697 591 8.82 6,339 662
Federal funds sold............... 8,309 250 3.01 8,828 296 3.35 7,533 420
Interest-bearing deposits in
other banks...................... 208 18 8.65 629 54 8.59 1,082 97
--------- --------- --------- --------- --------- ---------
Total earnings assets...... $ 212,149 $ 15,580 7.34% $ 199,096 $ 17,130 8.60% $ 190,843 $ 19,372
Taxable equivalent
adjustment(2).................... 266 201 225
Less: allowance for loan
losses........................... 2,685 2,934 2,112
Total nonearning assets........ 19,798 18,208 16,904
--------- --------- ---------
Total assets............... $ 229,262 $ 214,370 $ 205,635
--------- --------- ---------
--------- --------- ---------
LIABILITIES:
Interest-bearing liabilities:
Savings, NOW and money market
deposit accounts................. $ 95,231 $ 2,972 3.12% $ 84,410 $ 3,354 3.97% $ 72,471 $ 3,944
Time deposits.................. 70,720 3,258 4.61 73,379 4,137 5.64 78,784 5,816
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities...................... $ 165,951 $ 6,230 3.75% $ 157,789 $ 7,491 4.75% $ 151,255 $ 9,760
Non-interest bearing liabilities:
Demand deposits................ 41,104 36,031 34,384
Other liabilities.............. 2,578 1,453 1,552
--------- --------- ---------
Total liabilities.......... $ 209,633 $ 195,273 $ 187,191
Stockholders' equity............. 19,629 19,097 18,444
--------- --------- ---------
Total liabilities and
stockholders' equity............. $ 229,262 $ 214,370 $ 205,635
--------- --------- ---------
--------- --------- ---------
Net interest income.............. $ 9,350 $ 9,639 $ 9,612
--------- --------- ---------
--------- --------- ---------
Average interest rate spread..... 3.59% 3.85%
Interest expense as a percent of
average earning assets........... 2.94% 3.76%
Net interest margin.............. 4.40% 4.84%
<CAPTION>
YIELD/
COST
-----------
ASSETS:
Loans (net of unearned
income)(1)....................... 10.83%
Investment securities:
Taxable........................ 8.43
Tax-exempt..................... 10.44
Federal funds sold............... 5.58
Interest-bearing deposits in
other banks...................... 8.96
Total earnings assets...... 10.15%
Taxable equivalent
adjustment(2)....................
Less: allowance for loan
losses...........................
Total nonearning assets........
Total assets...............
LIABILITIES:
Interest-bearing liabilities:
Savings, NOW and money market
deposit accounts................. 5.44%
Time deposits.................. 7.38
Total interest-bearing
liabilities...................... 6.45%
Non-interest bearing liabilities:
Demand deposits................
Other liabilities..............
Total liabilities..........
Stockholders' equity.............
Total liabilities and
stockholders' equity.............
Net interest income..............
Average interest rate spread..... 3.70%
Interest expense as a percent of
average earning assets........... 5.11%
Net interest margin.............. 5.04%
</TABLE>
- ---------------
(1) Average loan balances include nonaccrual loans. Interest income collected on
nonaccrual loans has been included.
(2) Tax exempt income has been adjusted to a tax equivalent basis using an
incremental rate of 34%.
32
<PAGE>
The following table analyzes changes in net interest income attributable to
changes in the volume of earning assets and interest bearing liabilities
compared to changes in interest rates. Nonaccruing loans are included in average
loans outstanding.
<TABLE> <CAPTION>
VOLUME AND YIELD/RATE ANALYSIS*
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 VS. 1992 1992 VS. 1991
--------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
--------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- --------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income............... $ 153 $ (1,501) $ (1,348) $ (677) $ (2,047) $ (2,724)
Investment securities
Taxable.................................. 558 (870) (312) 1,048 (328) 720
Tax-exempt............................... 317 (125) 192 36 (107) (71)
Other short-term investments................ (33) (49) (82) 46 (213) (167)
----------- --------- --------- ----------- --------- ---------
Total earning assets................... 995 (2,545) (1,550) 453 (2,695) (2,242)
Interest-Bearing Liabilities:
Savings, NOW, and money market deposit
accounts...................................... 396 (778) (382) 583 (1,173) (590)
Time deposits............................... (148) (731) (879) (378) (1,301) (1,679)
----------- --------- --------- ----------- --------- ---------
Total interest-bearing liabilities..... 248 (1,509) (1,261) 205 (2,474) (2,269)
----------- --------- --------- ----------- --------- ---------
Change in interest income..................... $ 747 $ (1,036) $ (289) $ 248 $ (221) $ 27
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>
- ---------------
* The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship
of the absolute dollar amounts of the change in each.
Other Income
Other income includes service charges, other fee related bank services
including mortgage originations, and gains on disposal of fixed assets and other
real estate owned. In 1993, other income totaled $2.4 million, an increase of
$524,000 or 28.1% over 1992. This increase was due primarily to increased
amounts of other operating income due to gains on the sale of real estate and
increased mortgage loan origination fees. Other income increased $133,000, or
7.7%, in 1992 over 1991. The increase was primarily due to the mortgage loan
origination fees generated by the Bank's residential mortgage loan program that
was started in 1992. Total service charges (which normally comprise about 50% of
total other income) have remained relatively flat over the past two years,
having increased 3.6% from December 31, 1991 to December 31, 1993.
Trust income declined 6.2% in 1993 due primarily to the continued low
interest rate environment. Fees increased 45% in 1993, after remaining
relatively flat in 1992 compared to 1991. The fees increase in 1993 resulted
from increased cashier check fees, letters of credit, and a new commercial loan
processing fee. Commissions declined 13.4% in 1993, which followed a 20.7%
decline in 1992. The decline in commissions during this period was primarily
attributable to reduced credit life insurance penetration.
Mortgage loan origination fees represented 11.1% of total other income in
1993 as the residential real estate department generated volume of $27.4 million
in loans. Lower residential mortgage interest rates generated high volume
refinancing during 1993. Mortgage loan origination fees were $70,000 in 1992 as
the residential real estate department was not fully operational until the
middle of the fiscal year.
Other operating income for 1993 varies significantly over 1992 due to
$414,094 in gains on the sale of other real estate owned.
33
<PAGE>
OTHER INCOME
<TABLE> <CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Trust income....................................................................... $ 395 $ 421 $ 394
Service charges.................................................................... 1,011 1,017 976
Fees............................................................................... 87 60 59
Commissions........................................................................ 129 149 188
Mortgage loan origination fees..................................................... 265 70 --
Other operating income............................................................. 501 147 114
--------- --------- ---------
Total other income.......................................................... $ 2,388 $ 1,864 $ 1,731
--------- --------- ---------
--------- --------- ---------
</TABLE>
Other Expenses
Noninterest expense represents FNB's overhead and is closely monitored for
productivity and improvement. A productivity study was completed in 1993 with
many efficiency recommendations implemented.
Other expenses increased 10.8% in 1993, compared to a 1.2% decline in 1992.
FDIC assessments increased 12.6% in 1993 following an increase of 13.1% in 1992.
The 1993 and 1992 increases are primarily attributable to FNB's 6.1% and 8.3%
deposit growth during such periods on increased FDIC rates. Stationery and
supply costs remained stable.
Salaries and employee benefits increased 7.8% in 1993 as salaries rose 5.3%
or $165,113 and benefits rose 18.3% or $135,384. The increase in benefits was
primarily from increased health insurance premiums. FNB changed its accounting
policy with respect to the Post Retirement Benefit Plan as of January 1, 1993.
See Notes 1 and 9 to the Audited Consolidated Financial Statements included
elsewhere herein.
Occupancy expense represented 10.6% of other expenses for 1993 and
increased 2.3% during 1993. Furniture and equipment expense comprised 7.8% of
overhead and increased 5.0% in 1993, primarily from equipment and data
processing lease and maintenance contracts.
Other operating expenses increased 22.9% in 1993 as Federal Reserve charges
increased 31.9% due to the Bank opting to reduce its compensating balances;
legal expenses increased from $65,090 in 1992 to $128,161 in 1993 primarily due
to other real estate and other legal matters. Loan workout issues and other real
estate expenses increased from $36,733 to $88,146. Appraisal expense increased
from $76,350 in 1992 to $168,353 in 1993, however when offset against appraisal
fees the net expenses were $17,228 in 1992 and $22,564 in 1993. The writedown of
other real estate properties to recent appraised values and the establishment of
a reserve for disposal costs resulted in expenses of $289,577 in 1993.
For 1992, other than FDIC premiums, all other categories of other expenses
were down slightly from 1991 levels.
OTHER EXPENSES
<TABLE> <CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and benefits.............................................................. $ 4,178 $ 3,877 $ 3,940
Occupancy.......................................................................... 890 870 879
Furniture and equipment............................................................ 657 626 658
FDIC premium....................................................................... 475 422 373
Other operating expense............................................................ 2,203 1,792 1,831
--------- --------- ---------
Total other expenses........................................................ $ 8,403 $ 7,587 $ 7,681
--------- --------- ---------
--------- --------- ---------
</TABLE>
34
<PAGE>
Loans
FNB's target loan to deposit ratio for lending activities is 70% to 75%.
This ratio has declined from 72.1% in 1991 to 67.4% in 1993.
In 1991 and 1992, deposits grew while loans declined; however, in 1993 loan
growth exceeded deposit growth, due in part to the fact that loan demand
increased during the second half of 1993 as the economy and consumer confidence
continued improving. Loans, net of unearned income, increased 8.2% to $143.7
million at December 31, 1993 from $132.8 million in 1992. At December 31, 1993,
approximately 82.5% of the loan portfolio consisted of real estate related
loans--32.4% one-to-four family residential properties, 15.3% revolving,
open-end lines of credit, 26.5% non-residential properties and 8.1% construction
and land development. Commercial loans comprised 7.3% of the portfolio and
consumer loans made up 9.4% as of year-end. All other loans, which consist
primarily of tax-exempt municipal loans, comprised less than 1% of the
portfolio.
The Bank experienced a strong demand for residential real estate loans due
to a high level of refinancing activity in the low interest rate environment.
The residential real estate department originated $27.4 million in loans during
1993, selling $12.7 million fixed rate mortgages in the secondary market and
retaining $14.7 million adjustable rate mortgages. Within the non-residential
real estate portfolio, $4.9 million in 15-year fixed rate mortgages were
retained in the portfolio.
Commercial real estate loans increased 9.0% during 1993 to $38.1 million,
of which 67.8% or $25.8 million is owner-occupied. Construction and land
development loans decreased 8.0% during 1993 to $11.6 million.
Commercial, financial and agricultural loan demand remained weak in 1993,
decreasing 13.7% to $10.5 million. The commercial loan efforts continue
concentrating on meeting small business needs within FNB's local market area.
Consumer installment loans, the most significant component of consumer
loans, increased 11.9% during 1993, reaching $12.1 million. This growth was the
result of an extremely competitive automobile financing effort which is
continuing into 1994. The Bank's credit card balances increased 36.6% at year
end 1993 to $1.4 million outstanding.
The following table presents information pertaining to the composition of
loans including unearned income for each of the dates indicated (rounded to
nearest thousand dollars). All such loans are attributable to domestic
operations.
<TABLE> <CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial...................................... $ 10,478 $ 12,148 $ 15,697 $ 32,347 $ 36,326
Real estate construction........................ 11,601 12,603 9,481 9,597 6,981
Real estate mortgage............................ 107,260 96,202 92,513 74,000 68,284
Consumer........................................ 13,515 11,841 16,900 25,203 32,658
All other loans................................. 1,116 880 963 1,039 1,088
----------- ----------- ----------- ----------- -----------
Total loans..................................... 143,970 133,674 135,554 142,186 145,337
Less: unearned discount.................... 243 899 1,806 2,609 3,408
----------- ----------- ----------- ----------- -----------
Loans--net............................... $ 143,727 $ 132,775 $ 133,748 $ 139,577 $ 141,929
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
35
<PAGE>
The following table presents the maturity distribution of the Bank's loans,
including unearned income, in the following categories as of December 31, 1993.
<TABLE> <CAPTION>
MATURITY SCHEDULE OF PERIOD END LOANS
----------------------------------------------------------------
1 YEAR OR LESS 1-5 YEARS AFTER 5 YEARS
-------------------- -------------------- --------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
RATE RATE RATE RATE RATE RATE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural....... $ 6,404 $ 2,154 $ 1,333 $ 566 $ 14 $ 7
Real Estate-Construction..................... $ 7,324 $ 2,386 $ 44 $ 1,409 $ 125 $ 313
</TABLE>
Of the $3,811,000 loans maturing after after one year, $1,516,000 or 40%,
have fixed interest rates, and $2,295,000, or 60%, have variable interest rates.
See Note 4 to the Audited Consolidated Financial Statements included
elsewhere herein for additional information on the Bank's loan portfolio.
Asset Quality
Provision and Allowance for Loan Losses. The provision for loan losses
represents the annual expense necessary to maintain an adequate allowance for
loan losses and to absorb future charge-offs in the loan portfolio. In
evaluating the adequacy of both the provision and allowance for loan losses,
management considers specific identification, specific and estimated pools,
homogeneous allocations, trends in delinquencies, local and national economic
trends, concentrations, commitments, off-balance sheet exposure, changes in
lending policies, and experience of lending management. The analysis includes
migration analysis supplemented by statistical regression analysis and
experience.
The provision for loan losses in 1993 was $325,000, a decrease of $190,000
or 36.9% from the 1992 provision of $515,000. The provision for loan losses was
.23% of average loans net of unearned income in 1993 compared to .39% in 1992.
Net charge-offs declined 36.6% in 1993 to $388,000 from $612,000 in 1992.
The ratio of net charge-offs to average losses in 1993 was .29% as compared to
.47% in 1992. Net commercial loan charge-offs increased $97,000 in 1993 to
$182,000. Real estate mortgage and consumer loans combined net charge-offs
declined $318,000 to $206,000 in 1993. Total recoveries in 1993 were $131,000
and $108,000 in 1992, representing 25.2% and 15.0% of loan losses, respectively.
The allowance for loan losses was 1.91% of 1993 year-end loans net of
unearned income and 2.11% of 1992 loans net of unearned income. The allowance
covered net charge-offs 7.1 times compared to 4.6 times in 1992. The allowance
for loan losses was 91.6% of nonperforming assets at December 31, 1993, compared
to 111.8% and 87.6% at December 31, 1992 and 1991, respectively. Management
believes the allowance is adequate based on current portfolio expectations,
measurements and characteristics.
36
<PAGE>
The following table summarizes changes in the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income......................... $ 143,727 $ 132,775 $ 133,748 $ 139,577 $ 141,929
Allowance for loan losses--beginning of period........ 2,803 2,900 1,602 1,433 1,414
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial.......................................... 214 101 181 771 958
Real estate construction............................ -- 6 23 -- --
Real estate mortgage................................ 209 317 105 3 --
Consumer............................................ 96 296 332 354 301
---------- ---------- ---------- ---------- ----------
Total charge-offs.............................. 519 720 641 1,128 1,259
Recoveries:
Commercial.......................................... 32 16 150 62 6
Real estate construction............................ -- 3 10 -- --
Real estate mortgage................................ 69 26 88 -- --
Consumer............................................ 30 63 59 70 50
---------- ---------- ---------- ---------- ----------
Total recoveries............................... 131 108 307 132 56
---------- ---------- ---------- ---------- ----------
Net charge-offs....................................... 388 612 334 996 1,203
Provision for loan losses............................. 325 515 1,632 1,165 1,222
---------- ---------- ---------- ---------- ----------
Allowance for loan losses--end of period.............. $ 2,740 $ 2,803 $ 2,900 $ 1,602 $ 1,433
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs to year-end average loans
outstanding during the period......................... .27% .46% .25% .71% .85%
Ratio of allowance for loan losses to year-end
loans................................................. 1.91% 2.11% 2.17% 1.15% 1.01%
</TABLE>
The following table presents a breakdown of the loan loss allowance by
major categories of loans for the last five years. Included in the table is the
percentage of loans in each category to total loans. Values assigned to loan
categories represent management's best estimates based on evaluation of the loan
portfolio, economic conditions, delinquency data and prior loss experience.
Allocations estimated for each of the categories below do not indicate that
charge-off loans in that amount are anticipated or will be required. There is no
precise method of predicting specific losses which may occur in segments of the
loan portfolio. The loan reserve account is available to absorb any and all
losses and is not limited to specific loan types.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE> <CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1993 1992 1991 1990
------------------------ ------------------------ ------------------------ ------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............. $ 196 7.3% $ 497 9.1% $ 348 11.6% $ 717 22.8%
Real estate
construction........... 854 8.1 639 4.3 437 7.0 403 6.7
Real estate mortgage... 1,450 74.5 1,434 77.0 2,106 68.2 158 52.0
Consumer............... 233 9.4 228 8.9 9 12.5 324 17.7
All other loans........ 7 0.7 5 0.7 -- 0.7 0 0.7
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total allowance for
loan losses at end of
period................. $ 2,740 100.0% $ 2,803 100.0% $ 2,900 100.0% $ 1,602 100.0%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1989
------------------------
% OF
LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- -----------
Commercial............. $ 501 25.0%
Real estate
construction........... -- 4.8
Real estate mortgage... 652 47.0
Consumer............... 280 22.5
All other loans........ 0 0.7
----------- -----------
Total allowance for
loan losses at end of
period................. $ 1,433 100.0%
----------- -----------
----------- -----------
</TABLE>
Non-Performing Assets. Non-performing assets increased from $2.5 million to
$3.0 million, however since 1991 there has been a $511,000 or 14.6% decline.
Non-accrual loans increased $644,000
37
<PAGE>
during 1993 resulting from one significant workout loan of $900,000. The Bank
has structured such workout loan to mature in January, 1995 and has reserved for
potential loss.
Restructured loans declined in 1993 due primarily to the low interest rate
environment resulting in the conformity of market rates of interest to the
restructured loan terms. Loans past due 90 days or more and still accruing
interest increased from $4,000 to $37,000 and include pending accident and
health claims, student loan guarantees, pending bankruptcies, and those in the
process of collection with definitive arrangements. The level of this category
is not material and complies with Bank policy.
Real estate acquired in foreclosure of loans at December 31, 1993 remained
at the approximate level of December 31, 1992 and 1991 at $1.8 million. This
category includes $283,000 in loans made by the Bank to finance the purchase
from it of certain foreclosed properties. These loans were performing in
accordance with their original terms at year end 1993.
Potential problem loans include performing loans, but credit problems cause
some doubt as to the borrowers' ability to comply with present terms and
conditions. For 1993, potential problem loans at $3,123,000 declined slightly
from the 1992 year-end levels. These loans are closely managed by the officer of
the account and the Bank's Problem Loan Committee.
Non-performing assets represent 2.1% of total loans net of unearned income
in 1993 and 1.9% and 2.6% in 1992 and 1991 respectively.
RISK ELEMENTS
<TABLE> <CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.............................................. $ 1,175 $ 531 $ 1,296 $ 562 $ 1,221
Restructured loans............................................ -- 363 354 96 100
Loans past due 90 days accruing interest...................... 37 4 13 597 587
--------- --------- --------- --------- ---------
Total non-performing loans............................. 1,212 898 1,663 1,255 1,908
Other real estate owned....................................... 1,778 1,610 1,838 390 295
--------- --------- --------- --------- ---------
Total non-performing assets............................ $ 2,990 $ 2,508 $ 3,501 $ 1,645 $ 2,203
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Potential problem loans................................ $ 3,123 $ 3,235 $ 1,656 $ 767 $ 698
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Interest is not accrued on any loan maintained on a cash basis, any loan
for which payment in full of principal or interest is not expected, or on any
loan when principal or interest is in default 90 days or more, unless the loan
is well secured and in the process of collection.
As of December 31, 1993, other than as set forth in the above table showing
the composition of the Bank's loan portfolio, the Bank did not have a loan
concentration comprising 10% of total loan balances.
Investment Securities
The investment securities portfolio continued to grow during 1993, reaching
$69.6 million at December 31, 1993, representing a 12.0% increase over the
December 31, 1992 level of $62.1 million. The portfolio at December 31, 1993
consisted of 34.0% U. S. Treasury securities, 42.8% Federal agency obligations,
18.7% obligations of state and political subdivisions and 4.5% other securities.
Portfolio emphasis continues to be upon safety and liquidity.
Acceptable levels of liquidity and capital volatility have been established
and are subject to change from ongoing reviews and careful monitoring. FNB
adopted FASB 115, "Accounting for Certain Investments in Debt and Equity
Securities" beginning January 1994. It is anticipated that the adoption of this
new accounting standard will not have a material impact on FNB.
38
<PAGE>
The market value of the portfolio on December 31, 1993 was $70.4 million,
with a tax equivalent yield of 6.3% and an average maturity of 3.25 years. FNB
has no securities (other than the U. S. Government and agency securities) the
aggregate book value of which exceeds 10% of FNB's stockholders' equity.
The following table presents information pertaining to the book value of
investments in the major categories of investments as of the end of each of the
latest three years. Securities are carried at amortized cost and are held for
investment.
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------------------------
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
Book Value:
U. S. government and agency securities........................... $ 53,443,314 $ 45,259,150 $ 36,537,444
Obligations of states and political subdivisions................. 13,022,871 11,384,549 7,455,952
Other securities................................................. 3,089,603 5,480,029 7,992,908
-------------- -------------- --------------
Total..................................................... $ 69,555,788 $ 62,123,728 $ 51,986,304
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The following table relates to the maturity of investments contained in the
portfolio on the date indicated. Yields have been computed on a
taxable-equivalent basis.
MATURITY ANALYSIS AS OF DECEMBER 31, 1993
<TABLE> <CAPTION>
ONE FIVE NO
ONE YEAR TO FIVE TO TEN OVER STATED
OR LESS YEARS YEARS TEN YEARS MATURITY TOTAL
----------- --------- --------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Book Values:
U. S. Treasury Securities:
Book value.................................. $ 5,777 $ 17,896 $ -- $ -- -- $ 23,673
Market value................................ 5,811 18,030 -- -- -- 23,841
Weighted average yield...................... 4.75% 4.58% -- -- -- 4.71%
U.S. Agency Securities:
Book value.................................. $ 1,020 $ 22,853 $ 4,006 $ 1,891 -- $ 29,770
Market value................................ 1,021 23,003 3,994 1,906 -- 29,924
Weighted average yield...................... 3.53% 5.94% 5.41% 7.50% -- 5.44%
State & Political Subdivisions:
Book value.................................. -- $ 10,874 $ 2,149 -- -- $ 13,023
Market value................................ -- 11,203 2,249 -- -- 13,452
Weighted average yield...................... -- 6.78% 7.70% -- -- 7.04%
Other Securities:
Book value.................................. $ 500 $ 1,797 -- -- $ 793 $ 3,090
Market value................................ 313 1,885 -- -- 793 3,191
Weighted average yield...................... 7.17% 7.14% -- -- 5.50% 6.66%
Total:
Book value.................................. $ 7,297 $ 53,420 $ 6,155 $ 1,891 $ 793 $ 69,556
Market value................................ 7,345 54,121 6,243 1,906 793 70,408
Weighted average yield...................... 5.18% 6.30% 6.60% 7.50% 5.50% 6.27%
</TABLE>
See Note 3 to the Audited Consolidated Financial Statements included
elsewhere herein for additional information on FNB's investment securities
portfolio.
39
<PAGE>
Deposits
Average deposits increased 6.84% (or $13.2 million) during 1993. This
follows average deposit growth of 4.4% in 1992 over 1991. Business development,
marketing efforts, product enhancements and cross selling have enabled FNB to
sustain this deposit performance. The deposit mix has changed significantly
since 1991, with the exception of NOW and money market accounts. The shift has
been from time deposits to savings accounts and demand deposits. This is
attributable to the consumer's preference for short term accounts in a low
interest rate environment.
Average savings deposits increased 21.7% in 1993 to $30.2 million and the
mix has changed from 10.2% of total deposits in 1991 to 14.6% in 1993. Average
time deposits declined 3.6% in 1993 to $70.7 million after a 6.9% decline in
1992. The average time deposit mix has decreased from 42.4% in 1991 to 37.9% in
1992 to 34.2% in 1993.
Average NOW and money market deposits increased 9.1% in 1993 reaching $65.0
million following a 11.5% increase in 1992 and 2.5% in 1991, however the mix has
remained between 28.8% and 31.4% of total deposits over this period. Average
demand deposits grew 14.1% in 1993 following 4.8% growth in 1992, resulting
primarily from aggressive business development. The demand deposit mix has
increased from 18.5% in 1991 to 19.9% in 1993.
The following table presents an analysis of average deposits for each of
the last three years. Also presented is a maturity analysis of certificates of
deposit in amounts of $100,000 or more at December 31, 1993.
<TABLE> <CAPTION>
AVERAGE DEPOSITS
DECEMBER 31,
----------------------------------------------------------------------
1993 1992 1991
---------------------- ---------------------- ----------------------
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average deposits:
Demand deposits................................ $ 41,104 -- $ 36,031 -- $ 34,384 --
Money market deposits.......................... 41,758 3.14% 38,529 4.01% 35,241 5.73%
NOW accounts................................... 23,256 2.87% 21,047 3.72% 18,210 5.10%
Time deposit................................... 70,720 4.61% 73,379 5.64% 78,784 7.38%
Savings accounts............................... 30,217 3.30% 24,834 4.14% 19,020 5.23%
----------- ----------- -----------
Total deposits............................ $ 207,055 $ 193,820 $ 185,639
</TABLE>
MATURITY SCHEDULE OF CERTIFICATES OF DEPOSIT IN
DENOMINATIONS OF $100,000 OR MORE
<TABLE> <CAPTION>
WITHIN THREE TO OVER PERCENT
THREE TWELVE ONE OF TOTAL
MONTHS MONTHS YEAR TOTAL DEPOSITS
--------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
At December 31, 1993.......................................... $ 1,947 $ 3,467 $ 2,375 $ 7,789 3.65%
</TABLE>
Stockholders' Equity
Total stockholders' equity on December 31, 1993 was $20.0 million compared
to December 31, 1992 stockholders' equity of $19.7 million. Stockholders' equity
was 8.49% of total assets at December 31, 1993 compared to 8.90% at December 31,
1992. Book value per share increased from $25.02 at December 31, 1992 to $25.39
at December 31, 1993.
40
<PAGE>
Tier I risk-based capital was 14.17% of risk-weighted assets at December
31, 1993 compared to 14.16% of risk-weighted assets at December 31, 1992. Total
risk-based capital was 15.42% at December 31, 1993 compared to 15.42% at
December 31, 1992. The risk-based guidelines apply percentages of perceived risk
of various assets, including off-balance sheet items as they relate to bank
capital and allowable allowance for losses.
<TABLE> <CAPTION>
DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Tier I:
Stockholders' Equity..................................................... $ 20,007 $ 19,718 $ 18,327
Tier II:
Allowance for loan losses(1)............................................. 1,774 1,753 1,779
----------- ----------- -----------
Total qualifying capital................................................. $ 21,781 $ 21,471 $ 20,106
Risk-weighted assets..................................................... $ 141,227 $ 139,212 $ 141,195
Tier I risk-based capital(2)............................................. 14.17% 14.16% 12.98%
Total risk-based capital(2).............................................. 15.42% 15.42% 14.24%
Leverage ratio(2)........................................................ 8.50% 8.96% 8.78%
</TABLE>
- ---------------
(1) Allowance limited to 1.25% of gross risk weighted assets.
(2) The minimum regulatory requirements for Tier 1 risk-based capital, total
risk-based capital and leverage ratios at the date of this Prospectus and
Proxy Statement are 4%, 8% and 4%, respectively.
Accounting Rule Changes
In November 1992, Statement of Financial Accounting No. 112, "Employers'
Accounting for Postemployment Benefits" was issued. FNB does not provide
postemployment benefits, and consequently, this statement will have no effect on
its financial statements.
In May, 1993, Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" was issued. The statement
becomes effective 1995. FASB No. 114 generally requires impaired loans to be
measured on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as an expedient at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. FNB has not addressed the potential future
impact of the application of this statement.
See Note 1 to the Audited Consolidated Financial Statements included
elsewhere herein for discussion on FASB No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which was adopted January 1, 1994.
Interest Rate Sensitivity and Liquidity
Asset and liability management's primary function is to assure adequate
liquidity and maintain a balance between rate sensitive assets and liabilities.
Liquidity management involves meeting cash flow requirements of the Bank's loan
and deposit customers. Interest rate sensitivity management strives to attain
consistent net income growth through interest rate cycles while avoiding
fluctuations of the net interest margin. The Bank's Asset and Liability
Management Committee formulates strategies for maintaining adequate liquidity
and an interest sensitive asset and liability mix that enhances the net interest
margin with minimal risk.
Liquidity needs are met with short term marketable U.S. Government and
agency securities within the Bank's available for sale investment securities
category and federal funds sold. Pursuant to the
41
<PAGE>
Bank's investment policy, a minimum of $15 million will be maintained in this
category supplemented by lines of credit with correspondent banks and the
Federal Home Loan Bank totalling $17.5 million. During 1993, none of these lines
of credit were used. The weighted life of the investment portfolio is 3.25 years
with laddered maturities to stabilize this source of funding. The Bank relies on
a stable base of core deposits increasing through business development.
Additional sources of liquidity include the difference between asset maturities
and repayments and liability maturities.
The interest rate gap reflects the earlier of the maturity or repricing
date for various assets and liabilities on a specified date. The mismatching of
asset and liability repricing creates "gaps" or measures interest rate
sensitivity. At December 31, 1993, FNB had $34.2 million more in liabilities
than assets subject to repricing within one year and was, therefore, in a
liability-sensitive position. A liability-sensitive institution's net interest
margin and net interest income generally will be impacted favorably by declining
interest rates, while that of an asset-sensitive institution generally will be
impacted favorably by increasing interest rates.
FNB's goal is to limit interest rate exposure to a relatively neutral
range. Managing interest rate exposure includes maintaining a strong balance
sheet and core deposit growth, assuming minimal interest rate risk, and
practicing prudent financial management policies.
INTEREST RATE GAP ANALYSIS
<TABLE> <CAPTION>
DECEMBER 31, 1993
-----------------------------------------------------------------------------
OVER 3 OVER 6 OVER 1
MONTHS MONTHS TOTAL YEAR AND
3 MONTHS THROUGH THROUGH WITHIN NON-INTEREST
OR LESS 6 MONTHS 12 MONTHS 12 MONTHS SENSITIVE TOTAL
------------ ---------- ---------- ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans.................................. $ 54,794 $ 16,955 $ 28,816 $ 100,565 $ 43,162 $ 143,727
Securities............................. 1,711 1,315 6,463 9,489 60,067 69,556
Federal funds sold..................... 3,095 0 0 3,095 0 3,095
------------ ---------- ---------- ------------ ------------ -----------
Total earning assets................ $ 59,600 $ 18,270 $ 35,279 $ 113,149 $ 103,229 $ 216,378
------------ ---------- ---------- ------------ ------------ -----------
Interest-bearing Liabilities:
Savings deposits....................... 33,028 33,028 33,028
NOW and money market deposit
accounts................................. 65,227 65,227 65,227
Time deposits.......................... 16,335 12,684 20,113 49,132 20,153 69,285
------------ ---------- ---------- ------------ ------------ -----------
Total interest-bearing
liabilities.............................. $ 114,590 $ 12,684 $ 20,113 $ 147,387 $ 20,153 $ 167,540
------------ ---------- ---------- ------------ ------------ -----------
Non-interest bearing liabilities....... 0 0 0 0 48,838 48,838
------------ ---------- ---------- ------------ ------------ -----------
Total............................. $ 114,590 $ 12,684 $ 20,113 $ 147,387 $ 68,991 $ 216,378
Net interest gap......................... $ (54,990) $ 5,586 $ 15,166 $ (34,238) $ 34,238
Cumulative interest rate gap............. $ (54,990) $ (49,404) $ (34,238)
</TABLE>
42
<PAGE>
Return on Equity and Assets
The following table presents information regarding the return on assets,
return on equity, dividend payout ratio and ratio of equity to assets for each
of the last three years:
<TABLE> <CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Return on assets (net income divided by average total assets).................... 0.46% 1.05% 0.65%
Return on equity (net income divided by average equity).......................... 5.36 11.77 7.21
Dividend payout ratio (dividends declared per share divided by net income per
share)........................................................................... 74.89 35.06 59.39
Equity to assets ratio (average equity divided by average total assets).......... 8.56 8.91 8.97
</TABLE>
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Results of Operations
Net income for the first quarter of 1994 was $597,000, or $.76 per share,
compared to a loss of $499,000, or $.63 loss per share for the comparable period
in 1993. The loss for the first quarter of 1993 reflects a cumulative effect
adjustment of $936,000 (net of tax benefits) or ($1.18 per share) from the
adoption of FASB No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" on January 1, 1993. The annualized return on assets and
equity was 1.02% and 11.72%, respectively, for the first quarter of 1994. Due to
the cumulative effect adjustment of $936,000 and the resultant loss taken during
the first quarter of 1993, the annualized return on assets and equity is not a
meaningful number for comparative purposes.
Net Interest Income. Net interest income of $2.3 million for the first
quarter of 1994 was approximately the same as for the comparable period in 1993.
While interest income on loans increased 4.5% during the first quarter of 1994
over the comparable period in 1993, total interest income declined 3.1% from the
first quarter of 1993 due primarily to the reduced yield from the securities
portfolio. Total interest expense was down 10.6% from the first quarter of 1993,
which served to offset the decline in interest income. The net interest margin
increased to 4.51% for the first quarter of 1994, up from the 4.40% at December
31, 1993.
Other Income and Expenses. Other income for the first quarter of 1994
increased to $468,000, a 12.5% increase over the comparable period in 1993. This
increase was primarily due to increased loan origination fees. Other expenses
increased less than 1% over the level reported for the first quarter of 1993. A
13.6% decline in other operating expenses offset increases in personnel and
occupancy expenses.
Asset Quality
Nonperforming assets at March 31, 1994 were $2.9 million, compared to $3.3
million at December 31, 1993 and $4.0 million at March 31, 1993. Nonaccrual
loans declined by $1.1 million from December 31, 1993 to $73,000 at March 31,
1994.
Net loan charge-offs were $228,000 through the first quarter of 1994, down
from $350,000 for the comparable period in 1993. At March 31, 1994, the
allowance for loan losses was $2.5 million, compared to $2.7 million and $2.6
million at December 31 and March 31, 1993, respectively. The allowance for loan
losses represented 1.75% of net loans at March 31, 1994, compared to 1.91% and
1.99% of net loans at December 31 and March 31, 1993, respectively.
As a result of its improved asset quality, FNB did not make a provision for
loan losses for the first quarter of 1994. The provision for the comparable
period in 1993 was $150,000.
43
<PAGE>
See Note 4 to FNB's Unaudited Consolidated Financial Statements included
elsewhere herein for additional information on the allowance for loan losses.
Financial Condition
Total assets declined to $233.4 million at March 31, 1994, down $2.1
million, or 0.9%, from $235.5 million at December 31, 1993. Loan growth during
the first quarter remained flat which, when combined with the 2.2% decline in
the securities portfolio, resulted in a slight decline in earning assets to
$212.7 million. Other real estate owned declined 5.9% from December 31, 1993 to
March 31, 1994, and is, in management's opinion, indicative of an improving
economy and a lower unemployment rate.
Loans. Loans during the first quarter increased to $141.4 million, up
slightly from $141.0 million at December 31, 1993. During the first quarter of
1994, all types of loans secured by real estate declined from December 1993
levels, except for residential home equity lines which increased 3.7% to $22.8
million at March 31, 1994. Overall, loans secured by real estate declined 1.24%,
or $1.5 million, during the first quarter of 1994. Commercial loans increased
10.5% to $11.6 million for the first quarter of 1994. Consumer loans also
increased during the first quarter of 1994, up 3.6% to $14.0 million. The loan
to deposit ratio at March 31, 1994 was 67.29% compared to 66.12% at December 31,
1993.
See Note 3 to FNB's Unaudited Consolidated Financial Statements included
elsewhere herein for additional information on FNB's loan portfolio.
Deposits. During the first quarter of 1994, the Bank experienced some
outflow of deposits, down 1.4% from December 31, 1993. The recent rate
adjustments by the Federal Reserve have, in management's opinion, tended to
reinforce the reluctance of consumers to shift deposits.
Securities Portfolio.
FNB adopted Statement of Financial Accounting Standards No. 115 in the
first quarter of 1994. Accordingly, for the first quarter of 1994 and for future
reporting periods, the securities portfolio will consist of two components,
securities held-to-maturity and securities available for sale. Securities are
classified as securities held-to-maturity when management has the intent and FNB
has the ability at the time of purchase to hold the securities to maturity.
Securities held-to-maturity are carried at cost adjusted for amortization of
premiums and accretion of discounts. Securities classified as available for sale
are reported at fair value, with unrealized gains or losses excluded from
earnings and reported as a component of stockholders' equity. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, general liquidity needs and other similar factors. The total market
value of the securities portfolio was $68.0 million as of March 31, 1994, with
approximately $19.7 million classified as available for sale. The unrealized
loss on securities held available for sale at March 31, 1994 was $46,284 (on an
after tax basis) as reflected in stockholders' equity.
See Note 2 to FNB's Unaudited Consolidated Financial Statements included
elsewhere herein for additional information on FNB's securities portfolio.
Stockholders' Equity and Liquidity. Stockholders' equity increased 1.8% to
$20.4 million during the period December 31, 1993 to March 31, 1994. FNB
reported a leverage ratio of 8.73% and a total risk-weighted capital ratio of
15.61% at March 31, 1994. FNB declared and paid a $.25 per share cash dividend
during the first quarters of 1994 and 1993.
Liquidity needs are met with short-term marketable U.S. Treasury and agency
securities within the Bank's securities available for sale category and federal
funds sold. A minimum of $15 million will be maintained in this category,
supplemented by $17.5 million in lines of credit with correspondent banks and
the Federal Home Loan Bank, none of which were used during the first quarter of
1994. The Bank further relies on a stable base of core deposits and funds
provided from the difference between
44
<PAGE>
asset maturities and repayments and liability maturities. The Bank continued to
experience a relatively high degree of liquidity during the first quarter of
1994.
Recent Developments
In May 1994 an action was brought against the Bank by certain of its
retired employees. The suit was brought in the United States District Court for
the Eastern District of Virginia, Richmond Division, and alleges, among other
things, violations of ERISA. The plaintiffs are seeking (i) a judgment declaring
that the Bank is obligated to provide them with health care benefits, including
the payment of health insurance premiums, for the duration of their lives and of
those of their spouses, (ii) injunctive relief requiring the Bank to provide
such benefits, and (iii) costs and expenses. On June 10, 1994, the United States
District Court granted the plaintiffs' motion to preliminarily enjoin the Bank,
pending a final determination on the merits, from terminating or modifying its
current practice of providing health care benefits, including the payment of
medical insurance premiums, for plaintiff retirees, their spouses and any
eligible dependents. FNB believes that the Bank is not required to provide the
benefits asserted, and the Bank intends to defend this action vigorously.
However, the outcome cannot be predicted with certainty and, should the
plaintiffs be successful in their claims, the amounts that could be required for
health benefits could be materially greater than the amounts which have already
been provided for in FNB's financial statements. See Note 9 to the Audited
Consolidated Financial Statements included elsewhere herein for additional
information on the provisions previously made by FNB for postretirement
benefits.
45
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES
AND FNB COMMON STOCK
The rights of FNB Shareholders currently are governed by the VSCA, FNB's
Articles of Incorporation, and FNB's By-laws. Upon consummation of the
Affiliation, FNB Shareholders will become stockholders of Mercshares, which is a
Maryland corporation. Their rights as stockholders of Mercshares will be
governed by the MGCL, Mercshares' Articles of Incorporation, and Mercshares'
By-laws. The following is a summary comparison of the material differences in
the rights of holders of FNB Common Stock and Mercshares Common Stock under
governing provisions of their respective constituent documents and the VSCA and
MGCL. This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, the MGCL, the VSCA and the
constituent documents of FNB and Mercshares.
VOTING REQUIREMENTS
Pursuant to the VSCA and FNB's Articles of Incorporation, an amendment to
the articles of incorporation, a plan of merger or exchange or a transaction
involving the sale of all or substantially all of its assets requires the vote
of a majority of all votes entitled to be cast on such transaction by each
voting group entitled to vote on the transaction if the proposed action has been
approved and recommended by at least two-thirds of the directors then in office,
and the affirmative vote of holders of eighty percent (80%) of the outstanding
shares if not so approved by the directors. Under the MGCL and Mercshares'
Articles of Incorporation, an amendment to the Mercshares' Articles of
Incorporation, a merger or consolidation (except in certain circumstances), or a
sale of all or substantially all of the assets of Mercshares requires the
approval of two-thirds of the outstanding shares of Mercshares Common Stock and
any other class entitled to vote thereon. Therefore, upon consummation of the
Affiliation, former FNB Shareholders will be subject to the rules applicable to
Mercshares, pursuant to which any of the transactions described immediately
above will require the approval of two-thirds of the outstanding shares of
Mercshares Common Stock, whether or not the directors approve the transaction.
The VSCA does not require a shareholder vote of the surviving corporation
in a merger if (i) the merger agreement does not amend the existing articles of
incorporation such that the amendment would otherwise require shareholder
approval, (ii) each outstanding share of the surviving corporation before the
merger is unchanged after the merger, and (iii) the number of voting or
participating shares to be issued by the surviving corporation in the merger
does not exceed 20% of the voting or participating shares, respectively,
outstanding immediately prior to such issuance. The MGCL does not require a
stockholder vote of the surviving corporation in a merger if the merger does not
amend the surviving corporation's articles of incorporation or change its
outstanding stock and the number of shares to be issued by the surviving
corporation in the merger does not exceed 15% of the shares outstanding
immediately before the merger becomes effective.
DISSENTER'S RIGHTS
Under the VSCA, a dissenting shareholder of a corporation participating in
certain transactions, such as certain mergers or consolidations, may, under
varying circumstances, receive cash in the amount of the fair value of his
shares (as may be ultimately determined by a court) in lieu of the consideration
he would otherwise receive in any such transaction. Unless otherwise provided in
the articles of incorporation, the VSCA does not generally require such
dissenters' rights of appraisal with respect to (i) a sale of assets comprising
less than all or substantially all of a corporation's assets, (ii) an amendment
to the articles of incorporation, (iii) a merger, share exchange or sale of
property by a corporation having shares which are either listed on a national
securities exchange or widely-held (i.e., by at least 2,000 record
shareholders), if such shareholder received cash or shares of the surviving
corporation or any other listed or widely-held corporation, or (iv) shareholders
of a corporation surviving a merger if no vote of the shareholders of the
surviving corporation is required to approve the merger.
46
<PAGE>
The MGCL has similar provisions. Under the MGCL, a stockholder does not
have appraisal rights in a merger or consolidation if such stockholder's stock
is listed on a national exchange or is designated as a security listed on The
Nasdaq National Market or if such stockholder's stock is that of the surviving
corporation in the merger and the merger does not alter or change such stock.
STOCKHOLDER POWER TO CALL A SPECIAL MEETING
Under the MGCL, the board of directors and other persons specified in the
corporation's articles of incorporation or by-laws and the holder or holders of
25% or more of the voting stock of a corporation may call a special
stockholders' meeting. Under the VSCA and FNB's By-laws, the Board of Directors,
the Chairman of the Board, the President, and any three or more shareholders
owning, in the aggregate, not less than 25% of the stock of the corporation may
call a special meeting of the shareholders. Upon consummation of the
Affiliation, no individual or group of former FNB Shareholders who become
holders of Mercshares Common Stock solely as a result of the Affiliation will
own a sufficient number of Mercshares Common Stock to call a special meeting of
stockholders.
NOTICE OF SPECIAL MEETING
Pursuant to FNB's By-laws, notice of any special meeting of FNB
Shareholders must be mailed not less than 10 days, nor more than 50 days prior
to the date fixed for the meeting. In the case of a special meeting called for
the purposes of acting on an amendment to the articles of incorporation or plan
of merger or similar transaction, notice shall be given not less than 25 days
nor more than 50 days before the date of the meeting.
Under Mercshares' By-laws and the MGCL, notice for a special meeting of
holders of Mercshares Common Stock must be provided not less than 10 days nor
more than 90 days before the meeting.
PREFERRED STOCK
FNB's Articles of Incorporation do not authorize the issuance of Preferred
Stock. Mercshares' Articles of Incorporation authorize the issuance of two
million shares of preferred stock. The Mercshares' Board of Directors may
reclassify already classified, but unissued, classes of the preferred stock and
may alter the rights, privileges and restrictions on the unissued preferred
stock. Currently, no preferred stock of Mercshares is outstanding.
INSPECTION OF STOCKHOLDER LISTS
Under the VSCA, FNB Shareholders may inspect a list of FNB Shareholders
during the 10-day period prior to any shareholder meeting at FNB's principal
place of business. FNB Shareholders of record for at least six months or who
hold at least 5% of all the outstanding shares may inspect shareholder lists at
any time, provided that the appropriate request is made.
Under the MGCL, holders of Mercshares Common Stock only may inspect
stockholder lists if such stockholder has been a stockholder of record for at
least six months and owns 5% of the outstanding stock of the corporation,
provided that the appropriate request is made. Upon consummation of the
Affiliation, no former FNB Shareholder who becomes a holder of Mercshares Common
Stock solely as a result of the Affiliation will own a sufficient number of
shares of Mercshares Common Stock to have the right to inspect Mercshares'
stockholder lists.
QUALIFICATION, NOMINATION AND NUMBER OF DIRECTORS
Under FNB's By-laws and applicable regulations, a director must be an FNB
Shareholder owning continuously throughout his tenure as director FNB Common
Stock having a market value of at least $1,000. Under FNB's By-laws, the number
of FNB directors must be between 5 and 25 and may be changed each year by
resolution of the directors or the FNB Shareholders; provided, however, that the
FNB Board of Directors may not increase the number of FNB directors by more than
two in any one year. Currently, FNB has 11 directors. FNB's By-laws provide
specific requirements by which non-management nominees may be nominated for the
election of directors.
Under the MGCL and Mercshares' Articles of Incorporation and By-laws,
directors have no stock ownership requirements. The number of directors set by
the By-laws is 18 and may be decreased or
47
<PAGE>
increased to not less than seven nor more than 30 by amendment of the By-laws by
stockholders or directors. Mercshares' By-laws do not prescribe the method by
which stockholders may nominate directors.
INDEMNIFICATION
Under the VSCA, a corporation may indemnify a director against liability if
the director (1) conducted himself in good faith, (2) believed that his official
conduct was in the best interests of the corporation and all other non-official
conduct was not opposed to the corporation's best interests, or (3) in the case
of a criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. A corporation may not indemnify a director in connection with a
proceeding in which the director is adjudged liable on the basis that he
received an improper personal benefit. A director also cannot be indemnified in
connection with a proceeding by or in the right of the corporation in which the
director is adjudged liable to the corporation. However, in such a proceeding
the liability of the director may be limited to the monetary amount specified in
the corporation's articles of incorporation, except to the extent that the
liability is a result of the director's willful misconduct or knowing violation
of law. To the fullest extent permitted by the VSCA, the FNB Articles of
Incorporation indemnify all directors, officers, employees, agents or
consultants of FNB or of any corporation a majority of the voting stock of which
is owned by FNB. Subject to the statutory exceptions, FNB's Articles of
Incorporation limit liability of any director, officer, employee, agent or
consultant of FNB in connection with a proceeding by or in the right of the
corporation to $1.00 per transaction, occurrence or course of conduct.
Under the MGCL, a corporation may indemnify any director, officer, or agent
made a party to any proceeding by reason of service in that capacity unless: (i)
the act or omission of the director, officer or agent was material to the matter
giving rise to the proceeding, and was committed in bad faith or was the result
of active and deliberate dishonesty; (ii) the director, officer, or agent
actually received an improper personal benefit; or (iii) in a criminal
proceeding, the director, officer or agent had reasonable cause to believe that
the act or omission was unlawful. However, in a proceeding by or in the right of
the corporation, indemnification may not be made in respect of a proceeding in
which the director, officer, employee or agent shall have been adjudged to be
liable to the corporation. Mercshares' Articles of Incorporation indemnify
former and current directors and officers to the maximum extent permitted under
the MGCL, and provides that Mercshares' Board of Directors may indemnify
employees and agents of Mercshares to the same extent.
Under the MGCL, and Mercshares' Articles of Incorporation the liability of
Mercshares' directors and officers to Mercshares or its stockholders for money
damages is limited: (i) to the extent it is proved that the person actually
received improper benefit or profit, for the amount of such benefit or profit,
and (ii) to the extent that a judgment adverse to the person is entered in a
proceeding based on a finding that such person's actions or failure to act was
the result of active and deliberate dishonesty and was material to the cause of
action adjudicated at the proceeding.
BUSINESS COMBINATION AND AFFILIATION STATUTES
The MGCL imposes conditions and restrictions on certain "business
combinations" (including, among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance of equity securities) between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's stock (an "Interested
Stockholder"). Unless approved in advance by the board of directors, or
otherwise exempted by the statute, such a business combination is prohibited for
a period of five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. After such five-year period, a
business combination with an Interested Stockholder must be: (a) recommended by
the corporation's board of directors; and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's common stockholders receive a
"fair price" (as defined in the statute) for their shares and
48
<PAGE>
the consideration is received in cash or in the same form as previously paid by
the Interested Stockholder for his shares.
The VSCA also provides similar restrictions on "affiliated transactions"
(including, among other various transactions, mergers, share exchanges, sales,
leases, or other dispositions of material assets, issuances of securities,
dissolutions, and similar transactions) with an "interested shareholder"
(generally the beneficial owner of more than 10% of any class of the
corporation's outstanding voting shares). During the three years following the
date a shareholder becomes an interested shareholder, any affiliated transaction
with the interested shareholder must be approved by both a majority of the
"disinterested directors" (those directors who were directors before the
interested shareholder became an interested shareholder or who were recommended
for election by a majority of disinterested directors) and by the affirmative
vote of the holders of two-thirds of the corporations's voting shares other than
shares beneficially owned by the interested shareholder. The foregoing
requirements do not apply to affiliated transactions if, among other things, a
majority of the disinterested directors approve the interested shareholder's
acquisition of voting shares making such a person an interested shareholder
prior to such acquisition. Beginning three years after the shareholder becomes
an interested shareholder, the corporation may engage in an affiliated
transaction with the interested shareholder if (i) the transaction is approved
by the holders of two-thirds of the corporation's voting shares, other than
shares beneficially owned by the interested shareholder, (ii) the affiliated
transaction has been approved by a majority of the disinterested directors, or
(iii) subject to certain additional requirements, in the affiliated transaction
the holders of each class or series of voting shares will receive consideration
meeting specified fair price and other requirements designed to insure that all
shareholders receive fair and equivalent consideration, regardless of when they
tendered their shares.
On March 29, 1994, the directors of FNB by the requisite vote adopted a
resolution that exempts Mercshares from the restrictions of the affiliated
transactions provisions of the VSCA.
CONTROL SHARE ACQUISITION STATUTES
Under the MGCL's control share acquisition law, voting rights of shares of
stock of a Maryland corporation acquired by an acquiring person at ownership
levels of 20%, 33 1/3% and 50% of the outstanding shares are denied unless
conferred by a special stockholder vote of two-thirds of the outstanding shares
held by persons other than the acquiring person and officers and directors of
the corporation or, among other exceptions, such acquisition of shares is made
pursuant to a merger agreement with the corporation or the corporation's
articles of incorporation or by-laws permit the acquisition of such shares prior
to the acquiring person's acquisition thereof. Unless a corporation's charter or
bylaws provide otherwise, the statute permits such corporation to redeem the
acquired shares at "fair value" if the voting rights are not approved or if the
acquiring person does not deliver a "control share acquisition statement" to the
corporation on or before the tenth day after the control share acquistion. The
acquiring person may demand a stockholder's meeting to consider authorizing
voting rights for control shares subject to certain disclosure obligations and
payment of certain costs. If voting rights are approved for more than fifty
percent of the outstanding stock, objecting stockholders may have their shares
appraised and repurchased by the corporation for cash.
Under the VSCA's control share acquisitions law, voting rights of shares of
stock of a Virginia corporation acquired by an acquiring person at ownership
levels of 20%, 33 1/3%, and 50% of the outstanding shares may, under certain
circumstances, be denied unless conferred by a special shareholder vote of a
majority of the outstanding shares entitled to vote for directors, other than
shares held by the acquiring person and officers and directors of the
corporation or, among other exceptions, such acquisition of shares is made
pursuant to a merger agreement with the corporation or the corporation's
articles of incorporation or by-laws permit the acquisition of such shares prior
to the acquiring person's acquisition thereof. If authorized in the
corporation's articles of incorporation or by-laws, the statute also permits the
corporation to redeem the acquired shares at the average per share price paid
for them if the voting rights are not approved or if the acquiring person does
not file a "control share acquisition statement" with the corporation within
sixty days of the last acquisition of such shares. If voting rights are approved
for control shares comprising more than fifty percent of the corporation's
outstanding stock, objecting shareholders may have the right to have their
shares repurchased by the corporation for "fair value."
49
<PAGE>
DESCRIPTION OF MERCSHARES CAPITAL STOCK
GENERAL
Mercshares is authorized to issue up to 67,000,000 shares of Mercshares
Common Stock. On March 31, 1994, 45,908,886 shares of Mercshares Common Stock
were issued and outstanding and were held of record by 7,885 holders. Mercshares
is also authorized to issue 2,000,000 shares of preferred stock, without par
value (the "Mercshares Preferred Stock"). The Mercshares Preferred Stock is
subject to classification and reclassification by the Board of Directors. No
shares of Mercshares Preferred Stock are issued and outstanding.
COMMON STOCK
The holders of Mercshares Common Stock are entitled to receive such
dividends as are declared by the Mercshares Board of Directors out of funds
legally available therefor. Each holder of Mercshares Common Stock is entitled
to one vote per share on all matters requiring a vote of stockholders. In the
event of liquidation, holders of Mercshares Common Stock will be entitled to
receive pro rata any assets distributable to stockholders in respect of shares
held by them. Holders of shares of Mercshares Common Stock do not have
preemptive rights except as may be granted by the Board of Directors. The shares
of Common Stock to be issued hereunder will be fully paid and non-assessable.
There is no provision for cumulative voting with respect to the Common Stock of
Mercshares. Mercshares Common Stock is publicly traded and quoted on The Nasdaq
National Market under the symbol "MRBK."
PURCHASE RIGHTS
Certain rights which under certain circumstances are exercisable for the
purchase of Mercshares Preferred Stock or exchangeable for Mercshares Preferred
Stock or Mercshares Common Stock ("Rights") attach to each share of Mercshares
Common Stock (including shares of Mercshares Common Stock issuable pursuant to
the Affiliation Agreement) pursuant to the Shareholders Protection Rights
Agreement adopted by the Board of Directors of Mercshares in September, 1989, as
amended. In general, the Rights become exercisable within 10 days after a person
(together with any affiliate of such person) acquires or makes a tender offer or
an exchange offer for the beneficial ownership of 10% or more of the outstanding
Mercshares Common Stock or at such earlier or later time as the Mercshares Board
of Directors may determine. Until the Rights become exercisable, they will not
be separable from the Mercshares Common Stock and will automatically trade with
the Mercshares Common Stock. Shares of Mercshares Common Stock issued to FNB
Shareholders in exchange for FNB Common Stock will be accompanied by such
Rights. Rights can have a deterrent effect on unsolicited takeover attempts and,
therefore, may delay or prevent a change in control of Mercshares.
50
<PAGE>
ELECTION OF FNB DIRECTORS
The By-laws of FNB provide that the FNB Board of Director shall consist of
not less than five nor more than 25 directors with the exact number within such
limits to be fixed from time to time by a resolution of the full FNB Board of
Directors or by resolution of the FNB Shareholders. The number of directors to
be elected at the FNB Annual Meeting has been fixed at 11 by resolution of the
FNB Board of Directors.
The persons named below, all of whom are members of the present Boards of
Directors of FNB and the Bank, will be nominated for election to serve until the
consummation of the Affiliation or, if the Affiliation is not consummated, until
the next annual meeting of shareholders and until their successors are elected
and qualified. The directors of the Bank will not change as a result of the
Affiliation. Other nominations may be made at the FNB Annual Meeting in
accordance with the procedures set forth in the FNB By-laws, which are as
follows: nominations, other than those made by or on behalf of the existing
management of FNB, shall be made in writing and shall be delivered or mailed to
the President, not less than 14 days nor more than 50 days prior to any meeting
of FNB Shareholders called for the election of directors, provided, however,
that if less than 21 days' notice of the meeting is given to FNB Shareholders,
such nomination shall be mailed or delivered to the President of FNB not later
than the close of business on the seventh day following the day on which the
notice of meeting was mailed. Such notification shall contain the following
information to the extent known to the notifying shareholders: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the total number of shares of stock of FNB that will be voted for
each proposed nominee; (d) the name and resident address of the notifying
shareholder; and (e) the number of shares of stock of FNB owned by the notifying
shareholder. Nominations not made in accordance with these procedures may, in
his discretion, be disregarded by the Chairman of the meeting and upon his
instructions, the vote tellers may disregard all votes cast for each such
nominee.
<TABLE> <CAPTION>
NUMBER OF SHARES OF
SERVED AS COMMON STOCK
DIRECTOR BENEFICIALLY
NOMINEE AND (AGE) SINCE(1) PRINCIPAL OCCUPATION DURING PAST FIVE YEARS OWNED(2)
- ------------------------------ ----------- ------------------------------------------------ --------------------
<S> <C> <C> <C>
Leland L. Baker Jr. (60) 1973 Attorney-at-law, member of the firm Hicks, Baker 11,328(3)
& Peterson, Fredericksburg, Virginia 1.4%
John H. Chichester (56) 1984 President, Washington, Chichester and Clark, 24,656%
(general insurance agency) Fredericksburg, 3.1
Virginia; Member, Virginia General Assembly
since 1978.
George C. Freeman, Jr. (62) 1973 President, Hilb, Rogal and Hamilton Co. (general 13,176(3)
insurance agency), Fredericksburg, Virginia. 1.7%
Thomas C. Goodloe (79) 1979 President, P. C. Goodloe & Son, Inc., (general 13,680(3)
contractor), Fredericksburg, Virginia. 1.7%
DuVal Q. Hicks, Jr. (74) 1959 Retired, formerly a member of the law firm 81,200(3)
Hicks, Baker & Peterson, Fredericksburg, 10.3%
Virginia; Chairman of the Board of Directors
of FNB since 1982, Chairman of the Bank Board
since 1990.
John A. Jamison (77) 1987 Retired Circuit Judge of the Fifteenth Judicial 3,008
Circuit, serving from 1972 to 1987; a member *
of the Bank Board 1969-1972 and re-elected
effective January 1, 1987.
</TABLE>
51
<PAGE>
<TABLE> <CAPTION>
NUMBER OF SHARES OF
SERVED AS COMMON STOCK
DIRECTOR BENEFICIALLY
NOMINEE AND (AGE) SINCE(1) PRINCIPAL OCCUPATION DURING PAST FIVE YEARS OWNED(2)
- ------------------------------ ----------- ------------------------------------------------ --------------------
<S> <C> <C> <C>
Charles T. Lewis (64) 1972 President of FNB and the Bank since July 1994; 5,196
formerly served as Assistant to the President *
of the Bank from January to June, 1994;
President of FNB and the Bank from 1990 to
January 1994; and Bank employee since 1950.
Charles A. McCormack (52) 1988 President, Rappahannock Construction Company, 2,750
Inc. (general contractor for grading and *
utilities), Fredericksburg, Virginia.
William E. Milby (55) 1990 Vice President of FNB since 1990; Executive Vice 1,040
President and Cashier of the Bank since *
January 1, 1991, Cashier since 1989; Bank
employee since 1977.
J. William Poole (60) 1973 Manager, Radio Station WFLS, Fredericksburg, 3,572(3)
Virginia. *
Frank C. Silvey, Jr. (69) 1971 Retired, formerly served as President, Silvey 16,016%
Oldsmobile-Cadillac-Datsun, Fredericksburg, 2.0
Virginia.
</TABLE>
- ---------------
* Represents less than 1.0% of the total outstanding shares.
(1) Refers to the year in which the nominee was first elected to the Board of
Directors of the Bank or FNB. All nominees who were Bank directors prior to
1983 were first elected to the Board of Directors of FNB at the 1983 Annual
Meeting, except Mr. Hicks who has served as a director since 1982.
(2) For purposes of this table, beneficial ownership has been determined as of
April 30, 1994 in accordance with the provisions of Rule 13d-3 of the
Exchange Act under which, in general, a person is deemed to be the
beneficial owner of a security if he has or shares the power to vote or
direct the voting of the security or the power to dispose of or direct the
disposition of the security.
(3) Includes shares owned by spouses and dependent children for Messrs. Baker,
3,520; Freeman, 600; Goodloe, 1,680; Hicks 58,200; and Poole, 8; with
respect to which they do not have or share voting power and/or investment
power.
BOARD COMMITTEES AND ATTENDANCE
The members of the FNB Board of Directors also serve as members of the
Board of Directors of the Bank. The FNB Board of Directors does not have any
standing committees. Accordingly, the information in the succeeding paragraphs
relating to committees, directors' attendance, compensation, transactions and
indebtedness, and indebtedness of management refer to the Board of Directors of
the Bank, with the exception that the following discussion of compensation of
directors and meeting attendance includes information with respect to fees paid
to FNB directors and the number of and attendance at FNB Board of Directors'
meetings.
The Board of Directors of the Bank has, among others, standing audit and
compensation committees entitled the Examining and Compliance Committee and the
Officers Committee, respectively. The Board of Directors of the Bank does not
have a nominating committee.
The Examining and Compliance Committee consists of the following directors:
Frank C. Silvey, Jr., Chairman, John A. Jamison, Charles A. McCormack, Leland L.
Baker, J. William Poole, and George C. Freeman, Jr. This committee's primary
function is to ensure that the directors' examination is performed by the
accounting firm employed by the Bank and to determine whether adequate internal
audit controls and procedures are being maintained. The Examining and Compliance
Committee held ten meetings during 1993.
The Officers Committee consists of the following directors: DuVal Q. Hicks,
Jr., Chairman, Frank C. Silvey, Jr., Thomas C. Goodloe, J. William Poole, and
George C. Freeman, Jr. The duty and function of this committee is to study and
report to the Board of Directors of the Bank for its consideration all
52
<PAGE>
matters affecting the officers of the Bank or the appointment of new or
additional officers, including the salaries and duties of all officers. The
Officers Committee held three meetings during 1993.
During 1993, the Board of Directors of the Bank met twice monthly for a
total of twenty-four meetings, and the FNB Board of Directors met eight times.
Every director attended at least 75% of the total board meetings and meetings of
the committees of which he was a member, except John H. Chichester, a member of
the Virginia General Assembly, who attended 72% of the total board meetings and
68% of the meetings of the committees of which he was a member.
COMPENSATION OF DIRECTORS
Directors of FNB receive $25.00 per meeting attended.
In 1993, Directors of the Bank received an annual retainer of $9,600, plus
$50.00 per committee meeting attended ($100.00 for Bank Discount Committee and
Bank Executive Committee meetings attended.) Messrs. Lewis and Milby, as
executive officers of FNB and the Bank, receive no additional compensation for
attendance at committee meetings of the Board of Directors of the Bank.
EXECUTIVE COMPENSATION
The following table presents information concerning the annual and
long-term compensation of Mr. Charles T. Lewis, who was the only executive
officer whose salary and bonus was greater than $100,000 for each of the listed
years. This table presents compensation for services rendered in all capacities
in 1993, 1992 and 1991.
SUMMARY COMPENSATION TABLE
<TABLE> <CAPTION>
ANNUAL COMPENSATION(1)
----------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION(3) COMPENSATION(4)
- ----------------------------------------------- --------- ----------- ----------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles T. Lewis 1993 $ 145,000 $ 519 -- $ 6,318
President/Chief 1992 135,000 519 -- 7,325
Executive Officer 1991 135,000 0 -- --
</TABLE>
- ---------------
(1) Mr. Lewis received no deferred compensation during the reporting periods.
(2) All bonuses included in this column were paid as Christmas bonuses.
(3) The amount of compensation in the form of perquisites, other personal
benefits or other income properly categorized according to the disclosure
rules adopted by the Commission did not exceed the lesser of $50,000 or 10%
of the total annual salary and bonus reported in any of the years reported
for Mr. Lewis, and therefore, is not required to be reported.
(4) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the Commission, as informally interpreted by the Commission's Staff, amounts
of All Other Compensation are excluded for fiscal year 1991. Amounts of All
Other Compensation for fiscal year 1992 consist of $6,090 paid by FNB and
the Bank for an excess life insurance policy premium, and a contribution of
$1,235 made by FNB and the Bank on behalf of Mr. Lewis under the Stock Bonus
and Tax Credit Employee Stock Ownership Plan. Such plan is discussed below
under the heading "Other Plans." For 1993, the full amount of All Other
Compensation relates to the life insurance policy premiums.
MANAGEMENT MATTERS
Mr. Charles T. Lewis has been appointed as President of FNB and the Bank in
view of the voluntary resignation in June 1994 of Mr. Gregory R. Bosiack, who
decided to pursue another business opportunity outside of the banking industry.
Mr. Lewis, who served as President of FNB and the Bank since 1990, had announced
his plans in September of 1993 to retire at the end of 1994. In December of
1993, Mr. Bosiack accepted FNB and the Bank's offer to succeed Mr. Lewis, and he
assumed office in January of 1994. A committee has been formed to search for a
new President.
53
<PAGE>
RETIREMENT PLAN
The Bank has a noncontributory Defined Benefit Pension Plan (the
"Retirement Plan") designed to assist its employees in providing for their
retirement income security. All employees who complete at least 1,000 hours of
service each year are automatically eligible to participate. All contributions
to the Retirement Plan are made by the Bank. Employees become fully vested after
five years of credited service. Benefits are equal to one percent of the highest
average annual earnings for any consecutive five-year period up to covered
compensation, plus 1.65 percent of such compensation in excess of covered
compensation, multiplied by the number of years of credited service, up to a
maximum of 35 years. As a minimum annual retirement benefit under the Retirement
Plan, a participant will receive an amount equal to $60.00 multiplied by the
number of years of credited service if this amount is greater than the benefits
compounded under the foregoing method. Remuneration covered by the Retirement
Plan consists of a participant's total earnings, including overtime payments,
bonuses, and commissions. The normal retirement age under the Retirement Plan is
65. Reduced benefits are available as early as age 55 if at least ten years of
credited service have been completed. Cash benefits under the Retirement Plan
generally commence on retirement, death, or other termination of employment, and
are payable in various forms, generally at the election of the participant.
The following table shows estimated annual retirement benefits to employees
in the average annual compensation and years of service classifications set
forth below. Such estimates are subject to deductions for Social Security
amounts. The table is for participants born in 1940 and retiring in 2005.
<TABLE> <CAPTION>
HIGHEST FIVE-YEAR YEARS OF SERVICE
------------------------------------------
AVERAGE COMPENSATION 10 YEARS 20 YEARS 30 YEARS 35 YEARS
- ------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 15,000........................................................... $ 1,500 $ 3,000 $ 4,500 $ 5,250
25,000............................................................. 2,500 5,000 7,500 8,750
35,000............................................................. 3,500 7,000 10,500 12,250
50,000............................................................. 5,793 11,586 17,379 22,275
70,000............................................................. 9,093 18,186 27,279 31,825
100,000............................................................ 14,043 28,086 42,129 49,150
</TABLE>
The estimated annual benefit payable under the Retirement Plan is $77,834
for Mr. Lewis who is credited with the maximum years of service. The estimated
benefits are based on each employee's pay level as of December 31, 1993.
OTHER PLANS
Effective January 1, 1984, FNB and the Bank adopted a Stock Bonus and Tax
Credit Employee Stock Ownership Plan (the "ESOP"). All officers and employees of
FNB and the Bank (other than straight-time hourly paid employees) are eligible
to participate in the ESOP as of the January 1, 1984 effective date, or on any
subsequent January 1 or July 1, after completion of one year of service and
attainment of age 21.
Under the ESOP, FNB or the Bank will make contributions in cash necessary
to service loans to the ESOP and may make additional discretionary contributions
in cash or stock of FNB (the "ESOP Contribution"). In addition, FNB or the Bank
will make further contributions designed to satisfy certain non-discrimination
requirements of the Internal Revenue Service, if such requirements should ever
become applicable (the "Top-Heavy Contribution"). Participants in the ESOP are
neither required nor permitted to make contributions.
ESOP and Top-Heavy Contributions become fully vested when a participant
retires at age 65 (or takes or qualifies for early retirement at or after age 55
and after completing ten years of service), becomes permanently or totally
disabled after completing at least five years of service, or dies while employed
by FNB or the Bank. If a participant leaves before the occurrence of one of
these events, the ESOP and Top-Heavy Contributions allocated to his account will
become 40% vested after four years of service, and 100% vested after five years
of service.
54
<PAGE>
Distribution of benefits under the ESOP to a participant or beneficiary is
made after death, retirement, or termination of employment in a single payment
consisting of cash and, to the extent allocated to his account, stock of FNB.
Each participant or beneficiary may direct that all distributions be made in the
form of stock of FNB or, conversely, may direct that all distributions be made
in the form of cash.
COMPENSATION COMMITTEE AND COMPENSATION COMMITTEE REPORT
The Officers Committee (the "Compensation Committee"), a standing committee
of the Board of Directors of the Bank, is responsible for all matters affecting
officer compensation, including that of executive officers.
Report of the Compensation Committee
Unlike many corporations which regularly include incentive payments, stock
options and other performance bonuses in their total compensation program for
executive officers, the Bank's compensation program has traditionally relied
almost exclusively on base salary as its primary component. Factors used by the
Compensation Committee in setting base salaries for its executive officers are
typically subjective, such as perceived performance, years of service to the
Bank and expectations as to future contributions to the leadership of FNB and
the Bank. Neither the profitability of FNB nor the market value of its stock are
directly considered in setting executive officer base compensation.
Compensation in 1993 for Charles T. Lewis, the president of FNB and the
Bank in 1993, was established in accordance with the principles outlined above.
Prior to becoming President in 1990, Mr. Lewis served as the Bank's Executive
Vice President and Cashier for sixteen years. During 1993, Mr. Lewis informed
the Board of Directors of his plans to retire in September 1994, concluding a
career with the Bank which began in 1950.
<TABLE>
<S> <C>
George C. Freeman, Jr. J. William Poole
Thomas C. Goodloe Frank C. Silvey, Jr.
DuVal Q. Hicks, Jr., Chairman
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In the calendar year 1993, and up to the present time, there were
transactions between the Bank and Messrs. Freeman, Goodloe, Hicks, Poole and
Silvey, or their associates, all consisting of extensions of credit by the Bank
in the ordinary course of its business. Each transaction was made on
substantially the same terms, including interest rates, collateral and repayment
terms, as those prevailing at the time for comparable transactions with the
general public. In the opinion of management, none of the transactions involve
more than the normal risk of collectibility or present other unfavorable
features. During 1993, the Bank paid the sum of $87,852 for certain insurance
services to Hilb, Rogal and Hamilton of Fredericksburg, of which George C.
Freeman, Jr. is President.
Messrs. Freeman, Goodloe, Hicks, Poole and Silvey have capital stock
ownership interests in Fredricksburg National Corporation ("FNC"). Their
interests, together with the interests of other FNB directors and executive
officers who own shares in FNC, aggregate 27.0% of the total ownership of such
corporation. FNB and the Bank have engaged in certain transactions with FNC
during 1993 which are more fully described below under the heading "Certain
Business Relationships."
PERFORMANCE GRAPH
The following Performance Graph compares the yearly percentage change in
FNB's cumulative total shareholder return with the cumulative total return of
the Standard & Poors' Composite 500 Stock Index and the Independent Bank Index,
(a weighted index of 21 financial institutions located in Alabama, Florida,
Georgia, North Carolina, South Carolina, Tennessee and Virginia, as calculated
and published by the Carson Medlin Company, investment bankers) for the last
five fiscal years. In the Independent Bank Index, individual results were
weighted by the market capitalization of each institution in the survey relative
to the entire peer group.
55
<PAGE>
FNB Common Stock is not traded on any exchange and no established public
trading market exists for FNB Common Stock. Thus, for purposes of creating the
Performance Graph the market prices for FNB's stock are based upon known sales
occurring at or near the end of each calendar quarter. The market values of FNB
Common Stock as shown in the Performance Graph are adjusted to reflect the
effect of the four-for-one stock split in 1992.
[Graph]
(The Performance Graph is not included in this electronic submission.
Presented below is the table of data points used in the graph as required by
Rule 304(d) of Regulation S-T).
<TABLE> <CAPTION>
1988 1989 1990 1991
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fredericksburg National Bancorp, Inc.................................. 100 105 118 110
Independent Bank Index-Weighted....................................... 100 109 96 105
S&P 500 Index......................................................... 100 132 128 167
<CAPTION>
1992 1993
Fredericksburg National Bancorp, Inc.................................. 123 118
Independent Bank Index-Weighted....................................... 144 166
S&P 500 Index......................................................... 179 197
----------- -----------
</TABLE>
56
<PAGE>
CERTAIN TRANSACTIONS WITH DIRECTORS
In calendar year 1993, and up to the present time, there were transactions
between the Bank and certain of its officers, directors and their known
associates, all consisting of extensions of credit by the Bank in the ordinary
course of its business. Each transaction was made on substantially the same
terms, including interest rates, collateral and repayment terms, as those
prevailing at the time for comparable transactions with the general public. In
the opinion of management, none of the transactions involve more than the normal
risk of collectibility or present other unfavorable features. Thus, the Bank has
had, and the Bank expects to have in the future, banking transactions in the
ordinary course of its business with its directors, officers, and principal
shareholders and their associates, on the same terms, including interest rates,
collateral, and repayment terms on loans, as those prevailing at the same time
for comparable transactions with others.
The Bank purchased its fire and casualty insurance, blanket bond, and other
insurance through two firms whose principals are members of the Board of
Directors; namely, Hilb, Rogal and Hamilton of Fredericksburg, George C.
Freeman, Jr., President, and Chichester, Inc. (formerly Chichester-Graves
Insurance) of which John H. Chichester is a partner. During 1993, the Bank paid
the sum of $87,852 to Hilb, Rogal and Hamilton which includes $41,268
pre-payment of 1994 premiums and $79,196 to Chichester, Inc.
CERTAIN BUSINESS RELATIONSHIPS
The Bank leases its Main Office and its Courtland Branch from FNC. The
Bank's payments under the Main Office and Courtland Branch leases represented a
substantial portion of FNC's consolidated gross revenue in 1993. The Bank's
payments under the two leases were less than five percent of the Bank's
consolidated gross revenues in 1993. FNC was organized by and has as its board
of directors those persons who comprise the board of directors of FNB and the
Bank. All of the members of the FNB Board of Directors and all of the executive
officers of FNB (with the exception of Messrs. Jamison and Milby) own shares of
stock in FNC. Those directors and executive officers of FNB having ownership
interests in FNC own 27.0% of the capital stock of FNC. However, no one director
or executive officer owns, of record or beneficially, in excess of a ten percent
equity interest in FNC. Of the 233 shareholders of FNC, more than 75% are also
FNB Shareholders.
The lease for the Main Office was restated in 1977 for the purpose of
enabling FNC to obtain a $2,550,000 mortgage loan. The loan was called in March,
1992, under the mortgagee's right to declare the loan due and payable at the end
of 15 years. The loan was assumed by the Bank under the same terms and
conditions of the original mortgage for the principal balance due at the time of
$1,726,143. The mortgage carries an interest rate of 9 1/2%, and is repayable
over 25 years in monthly installments of $22,290 each. The total rent under the
Main Office lease for 1993 was $347,865. The primary term of the restated lease
continues through April 1, 2002. The Bank has the option of extending the lease
an additional 25 years, with options to purchase subject to certain conditions
stated in the lease.
The Courtland Branch lease calls for rent based on the payments necessary
from the lessor to amortize the cost of the branch over 20 years at 1% over its
actual borrowing rate. The Bank has agreed to provide financing for FNC at its
usual lending rate for adjustable rate mortgages, which as of the date of this
Prospectus and Proxy Statement is 7.75%. Total rent paid in 1993 was $60,168.
The lease term is 10 years with an option to renew for an additional 10 years.
The Bank also has the option to purchase the property for fair market value
during the 10th year of the original term or between the 6th and 10th year of
the renewal term.
57
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Presented below are all of those persons who, to the knowledge of FNB, own
beneficially more than five percent of outstanding FNB Common Stock as of June
30, 1994.
<TABLE> <CAPTION>
NAME AND ADDRESS OF AMOUNT OF AND NATURE OF PERCENT OF
BENEFICIAL OWNERS BENEFICIAL OWNERSHIP(1) CLASS
- ---------------------------------------------------------------------------- ------------------------ -------------
<S> <C> <C>
Elizabeth Y. Hicks.......................................................... 81,200(2) 10.3%
1129 Hanover Street
Fredericksburg, VA 22401
Carl D. Silver.............................................................. 120,912 15.3%
P. O. Box 7566
Fredericksburg, VA 22404
Directors and Officers of FNB............................................... 175,622 22.3%
</TABLE>
- ---------------
(1) For the purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Exchange Act under
which, in general, a person is deemed to be the beneficial owner of a
security if such person has or shares the power to vote or direct the voting
of the security or the power to dispose of or direct the disposition of the
security, or has the right to acquire beneficial ownership of the security
within sixty days.
(2) Includes 22,896 shares held by Mrs. Hicks' husband, DuVal Q. Hicks, Jr., who
is Chairman of the Board of both FNB and the Bank.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered hereby and the Affiliation will be passed upon for Mercshares by
Venable, Baetjer and Howard, Baltimore, Maryland. William J. McCarthy, a
principal of William J. McCarthy, P.C., which is a partner in Venable, Baetjer
and Howard, is a director of Mercshares. Certain legal matters in connection
with the Affiliation will be passed upon for FNB by Mays & Valentine, Richmond,
Virginia.
EXPERTS
The financial statements incorporated in this Prospectus and Proxy
Statement by reference to the Annual Report on Form 10-K of Mercshares for the
three years ended December 31, 1993 have been audited by Coopers & Lybrand,
independent certified public accountants, whose reports thereon are incorporated
herein by reference in reliance upon the report of said firm and upon the
authority of said firm as experts in auditing and accounting.
The financial statements included in and incorporated in this Prospectus
and Proxy Statement by reference to the Annual Report on Form 10-K of FNB for
the year ended December 31, 1993 have been audited by Yount, Hyde & Barbour,
P.C. independent certified public accountants, whose reports thereon are
incorporated herein by reference in reliance upon the report of said firm and
upon the authority of said firm as experts in auditing and accounting. The
financial statements included in and incorporated in this Prospectus and Proxy
Statement by reference to the Annual Report on Form 10-K of FNB for the two
years ended December 31, 1992 have been audited by Bowling, Franklin & Co.,
independent certified public accountants, whose reports thereon are incorporated
herein by reference in reliance upon the report of said firm and upon the
authority of said firm as experts in auditing and accounting.
Yount, Hyde & Barbour, P.C. independent certified public accountants have
been independent accountants for FNB for the fiscal year ending December 31,
1993, and have been selected to continue in such position for fiscal year ending
December 31, 1994. The accounting firm was selected upon the recommendation of
the Examining and Compliance Committee of the Bank to replace Bowling, Franklin
& Co. as FNB's independent accounting firm effective May 6, 1993. This decision
was made following a formal bidding process. The principal accountant's report
for either of the past two fiscal years has not contained an adverse opinion or
a qualified opinion, nor were either of such reports
58
<PAGE>
qualified or modified as to uncertainty, audit scope or accounting principles.
During the period January 1, 1991 through the date of termination on May 6, 1993
there were no disagreements with Bowling, Franklin & Co. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. During such period, there were no "reportable events" as
described in Item 304(a)(1)(v) of Regulation S-K.
Representatives of Yount, Hyde & Barbour, P.C. are expected to be present
at the FNB Annual Meeting, will have an opportunity to make a statement if they
so desire, and are expected to be available to respond to appropriate questions.
59
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE> <CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Reports............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992.............................................. F-4
Consolidated Statements of Income for the Three Years Ended December 31, 1993............................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three Years
Ended December 31, 1993................................................................................. F-6
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1993......................... F-7
Notes to Consolidated Financial Statements................................................................ F-8
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1994 and December 31, 1994.................................... F-24
Consolidated Statements of Income for the Three Months
Ended March 31, 1994 and 1993........................................................................... F-25
Consolidated Statements of Changes in Stockholders' Equity for the Three Months
Ended March 31, 1994 and 1993........................................................................... F-26
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1994 and 1993.................. F-27
Notes to Unaudited Conslidated Financial Statements for the Three Months
Ended March 31, 1994 and 1993........................................................................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
FREDERICKSBURG NATIONAL BANCORP, INC.
Fredericksburg, Virginia
We have audited the accompanying consolidated balance sheet of
Fredericksburg National Bancorp, Inc. and Subsidiary as of December 31, 1993,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of Fredericksburg National Bancorp, Inc. and Subsidiary for
the years ended December 31, 1992 and 1991 were audited by other auditors whose
report dated January 28, 1993, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1993 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Fredericksburg National Bancorp, Inc. and Subsidiary as of December 31, 1993,
and the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
As described in Notes 1 and 6 to the consolidated financial statements, the
Corporation in 1991 adopted Statement of Financial Accounting Standards Number
96 dealing with income taxes. As permitted by this Standard, its provisions were
adopted without restatement of amounts for 1990. Also as discussed in Notes 1
and 6, the Corporation in 1992 adopted Statement of Financial Accounting
Standards Number 109 dealing with income taxes. As permitted by this Standard,
its provisions were adopted without restatement of amounts for 1991.
As described in Notes 1 and 9 to the consolidated financial statements, the
Corporation in 1993 adopted Statement of Financial Accounting Standards Number
106 dealing with postretirement benefits.
YOUNT, HYDE & BARBOUR
Winchester, Virginia
January 27, 1994
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
FREDERICKSBURG NATIONAL BANCORP, INC.
Fredericksburg, Virginia
We have audited the accompanying consolidated balance sheet of
Fredericksburg National Bancorp, Inc. and Subsidiary as of December 31, 1992 and
the related statements of consolidated income, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Fredericksburg National Bancorp, Inc. and Subsidiary as of December 31, 1992 and
the results of its operations and its cash flows for each of the two years in
the period ended December 31, 1992, in conformity with generally accepted
accounting principles.
As described in Notes 1 and 6 to the consolidated financial statements, the
Company in 1991 adopted Statement of Financial Accounting Standards Number 96
dealing with income taxes. As permitted by this Standard, its provisions were
adopted without restatement of amounts for 1990. Also as discussed in Notes 1
and 6, the Company in 1992 adopted Statement of Financial Accounting Standards
109. As permitted by this Standard, its provisions were adopted without
restatement of amounts for 1991.
BOWLING, FRANKLIN & CO.
Fredericksburg, Virginia
January 28, 1993
F-3
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
<TABLE> <CAPTION>
1993 1992
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2)......................................... $ 10,935,324 $ 7,027,150
Interest-bearing deposits in other banks................................. -- 250,000
Investment securities (Approximate market value 1993, $70,407,943; 1992,
$62,811,601) (Note 3)......................................................... 69,555,788 62,123,728
Federal funds sold....................................................... 3,095,000 12,275,000
Loans (net of unearned income) (Note 4).................................. 143,727,101 132,775,160
Less: allowance for possible loan losses (Note 4)........................ 2,739,909 2,802,945
---------------- ----------------
Loans, net.......................................................... 140,987,192 129,972,215
Bank premises and equipment, net (Note 5)................................ 5,409,588 5,949,854
Other real estate owned.................................................. 1,778,390 1,609,554
Other assets............................................................. 3,786,610 2,381,156
---------------- ----------------
Total assets........................................................ $ 235,547,892 $ 221,588,657
---------------- ----------------
---------------- ----------------
LIABILITIES
Deposits:
Noninterest-bearing deposits............................................. $ 45,674,525 $ 40,548,566
Interest-bearing deposits................................................ 167,540,219..... 160,389,459
---------------- ----------------
Total deposits...................................................... 213,214,744 200,938,025
Accrued interest on deposits............................................. 479,263 571,284
Other liabilities (Notes 7 and 9)........................................ 1,846,492 361,139
---------------- ----------------
Total liabilities................................................... $ 215,540,499 $ 201,870,448
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
STOCKHOLDERS' EQUITY (Note 14)
Common stock, $1.00 par value, authorized 1,000,000 shares; issued
788,112 shares in 1993 and 1992............................................... 788,112 788,112
Surplus.................................................................. 810,830 810,830
Retained earnings........................................................ 18,447,451 18,183,267
---------------- ----------------
20,046,393 19,782,209
Less: guaranteed bank loan of employee stock ownership plan (Note 7)........ 39,000 64,000
---------------- ----------------
Total stockholders' equity.......................................... $ 20,007,393 $ 19,718,209
---------------- ----------------
Total liabilities and stockholders' equity.......................... $ 235,547,892 $ 221,588,657
---------------- ----------------
---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE> <CAPTION>
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans..................................... $ 11,129,178 $ 12,477,055 $ 15,200,787
Investment securities:
U. S. government and agency securities...................... 2,948,234 2,973,046 2,269,891
State and political subdivisions............................ 658,687 541,394 437,158
Other securities............................................ 310,638 587,460 721,604
Interest on federal funds sold................................. 249,696 295,846 419,508
Interest on deposits in banks.................................. 17,708 54,126 96,801
-------------- -------------- --------------
Total interest income..................................... $ 15,314,141 $ 16,928,927 $ 19,145,749
-------------- -------------- --------------
INTEREST EXPENSE
Interest on deposits (Note 15)................................. $ 6,230,053 $ 7,491,049 $ 9,759,640
-------------- -------------- --------------
NET INTEREST INCOME.............................................. $ 9,084,088 $ 9,437,878 $ 9,386,109
Provision for possible loan losses (Note 4).................... 325,000 515,000 1,632,665
-------------- -------------- --------------
Net interest income after provision for
possible loan losses........................................ $ 8,759,088 $ 8,922,878 $ 7,753,444
-------------- -------------- --------------
OTHER INCOME
Trust department income........................................ $ 395,234 $ 421,061 $ 393,465
Service charges and fees....................................... 1,578,420 1,392,674 1,335,902
Gains on securities............................................ -- 376 1,557
Gain on other real estate owned................................ 414,094 49,811 --
-------------- -------------- --------------
Total other income........................................ $ 2,387,748 $ 1,863,922 $ 1,730,924
-------------- -------------- --------------
OTHER EXPENSES
Salaries....................................................... $ 3,300,875 $ 3,135,762 $ 3,161,045
Employee benefits (Notes 8 and 9).............................. 876,998 741,614 788,939
Occupancy expenses, net (Notes 10 and 12)...................... 890,285 870,315 878,735
Furniture and equipment expenses (Note 5)...................... 657,226 625,526 657,785
Stationery and supplies........................................ 206,017 210,338 220,669
FDIC insurance................................................. 474,767 421,743 372,880
Other operating expenses....................................... 1,997,063 1,581,960 1,610,675
-------------- -------------- --------------
Total other expenses...................................... $ 8,403,231 $ 7,587,258 $ 7,680,728
-------------- -------------- --------------
Income before income taxes and cumulative
effect adjustment........................................... $ 2,743,605 $ 3,199,542 $ 1,803,640
Income taxes (Note 6).......................................... 754,994 951,403 473,026
-------------- -------------- --------------
Net income before cumulative effect of a change in accounting
principle........................................................ 1,988,611 2,248,139 1,330,614
Cumulative effect on prior years of accounting change, net of
applicable income taxes of
$482,344 (Note 9)........................................... 936,315 -- --
-------------- -------------- --------------
NET INCOME................................................ $ 1,052,296 $ 2,248,139 $ 1,330,614
-------------- -------------- --------------
-------------- -------------- --------------
EARNINGS PER COMMON SHARE (Note 14)
Earnings before cumulative effect adjustment................... $ 2.52 $ 2.85 $ 1.68
Cumulative effect on prior years of accounting change.......... (1.18) -- --
-------------- -------------- --------------
Net income per share...................................... $ 1.34 $ 2.85 $ 1.68
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding............................ 788,112 788,196 790,436
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE> <CAPTION>
GUARANTEED BANK
LOAN OF
COMMON RETAINED EMPLOYEE STOCK
STOCK SURPLUS EARNINGS OWNERSHIP PLAN
----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1990.................................. $ 790,916 $ 927,946 $ 16,122,942 $ (103,000)
Redemption of 600 shares of common stock.................. (600) (25,650)
Net income................................................ 1,330,614
Cash dividends ($1.00 per share).......................... (790,316)
Reserve for unrealized loss on mutual funds............... 60,000
Decrease in guarantee of employee stock ownership plan
loan........................................................ 14,000
----------- ----------- -------------- ---------------
BALANCE, December 31, 1991.................................. $ 790,316 $ 902,296 $ 16,723,240 $ (89,000)
Redemption of 2,204 shares of common stock................ (2,204) (91,466)
Net income................................................ 2,248,139
Cash dividends ($1.00 per share).......................... (788,112)
Decrease in guarantee of employee stock ownership plan
loan........................................................ 25,000
----------- ----------- -------------- ---------------
BALANCE, December 31, 1992.................................. $ 788,112 $ 810,830 $ 18,183,267 $ (64,000)
Net income................................................ 1,052,296
Cash dividends ($1.00 per share).......................... (788,112)
Decrease in guarantee of employee stock ownership plan
loan........................................................ 25,000
----------- ----------- -------------- ---------------
BALANCE, December 31, 1993.................................. $ 788,112 $ 810,830 $ 18,447,451 $ (39,000)
----------- ----------- -------------- ---------------
----------- ----------- -------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE> <CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received..................................................... $ 15,356,164 $ 17,064,033 $ 19,370,961
Fees and commissions received......................................... 1,973,654 1,811,230 1,718,306
Interest paid......................................................... (6,322,074) (7,770,634) (9,869,553)
Cash paid to suppliers and employees.................................. (7,835,335) (7,437,933) (7,432,659)
Income taxes paid..................................................... (784,229) (930,914) (932,865)
------------- ------------- -------------
Net cash provided by operating activities......................... $ 2,388,180 $ 2,735,782 $ 2,854,190
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturing investment securities.......................... $ 31,410,317 $ 19,566,657 $ 12,859,140
Purchase of investment securities..................................... (38,784,311) (29,280,711) (23,989,648)
(Increase) decrease in loans to customers............................. (11,723,545) (210,908) 4,090,096
Purchase of loans..................................................... (338,420) (212,599) (1,402,683)
Proceeds from loans sold.............................................. -- -- 1,150,000
Proceeds from sale of other real estate............................... 1,305,759 1,278,431 153,000
Investment in other real estate....................................... (326,013) (64,761) (87,807)
Purchase of premises and equipment.................................... (167,657) (577,317) (876,050)
Proceeds from sale of premises and equipment.......................... -- 200 --
Other miscellaneous investments--net.................................. (524,743) 84,083 (143,772)
------------- ------------- -------------
Net cash (used in) investing activities........................... $ (19,148,613) $ (9,416,925) $ (8,247,724)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, and savings accounts... $ 14,340,109 $ 21,212,713 $ 4,788,196
Net increase (decrease) in time deposits.............................. (2,063,390) (5,815,064) 2,120,559
Dividends paid........................................................ (788,112) (788,663) (810,546)
Redemption of common stock............................................ -- (93,670) (26,250)
------------- ------------- -------------
Net cash provided by financing activities......................... $ 11,488,607 $ 14,515,316 $ 6,071,959
------------- ------------- -------------
Increase (decrease) in cash, due from banks and federal funds sold...... $ (5,271,826) $ 7,834,173 $ 678,425
Cash, due from banks and federal funds sold
Beginning............................................................. 19,302,150 11,467,977 10,789,552
------------- ------------- -------------
Ending................................................................ $ 14,030,324 $ 19,302,150 $ 11,467,977
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income............................................................ $ 1,052,296 $ 2,248,139 $ 1,330,614
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 354,954 352,459 345,200
Net premium amortization on securities.............................. 191,934 73,116 (8,466)
Cumulative effect on prior years of accounting change............... 936,315 -- --
Provision for possible loan losses.................................. 325,000 515,000 1,632,665
Provision for possible losses on other real estate acquired......... 340,077 105,000 132,875
Provision for deferred income taxes................................. (3,313) 88,308 (432,534)
(Gains) on securities............................................... -- (375) (1,557)
(Gains) losses on fixed assets and other real estate................ (413,702) (19,403) 19,989
(Increase) decrease in accrued income receivable.................... (149,911) 19,684 182,617
(Increase) in other assets.......................................... (244,935) (299,499) (139,768)
(Decrease) in accrued interest and other liabilities................ (535) (346,647) (207,445)
------------- ------------- -------------
Net cash provided by operating activities......................... $ 2,388,180 $ 2,735,782 $ 2,854,190
------------- ------------- -------------
------------- ------------- -------------
Supplemental schedule of non-cash investing and financing activities:
Other real estate acquired in settlement of loans..................... $ 1,230,951 $ 677,056 $ 2,464,822
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and practices of the Corporation and subsidiary
conform to generally accepted accounting principles and prevailing practices in
the banking industry.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
Fredericksburg National Bancorp, Inc. (the "Corporation") and The National Bank
of Fredericksburg (the "Bank"), which became a wholly-owned subsidiary as of
January 1, 1983. Material intercompany balances and transactions have been
eliminated.
PRESENTATION OF CASH FLOWS. For purposes of reporting cash flows, cash and
due from banks include cash on hand, amounts due from banks (including cash
items in process of clearing) and federal funds sold. Cash flows from deposits,
loans originated by the Bank and federal funds purchased and sold are reported
net.
TRUST DEPARTMENT ASSETS. Assets of the trust department, other than trust
cash on deposit at the Bank, are not included in these financial statements
because they are not assets of the Bank.
SECURITIES. Investment securities (other than marketable equity securities)
are stated at cost, adjusted for amortization of premiums and discounts, both
computed by the effective yield method.
Marketable equity securities are stated at the lower of cost or market. A
valuation allowance representing the excess of cost over market is established
by charges to stockholders' equity. The Corporation has the ability and the
intent to hold investment securities to maturity.
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investment in Debt and Equity Securities," will be effective January 1,
1994.
This statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in three
categories and accounted for as follows:
a. Debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
b. Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains
and losses included in earnings.
c. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
stockholders' equity.
It is anticipated that this new accounting standard will not have a
material impact on the Corporation's financial statements in future years.
LOANS. Loans are stated at the amount of unpaid principal, reduced by
unearned discount and fees and an allowance for possible loan losses.
The allowance for possible loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. The allowance
is increased by provisions charged to operating expense and reduced by net
charge-offs. The Bank makes continuous credit reviews of the loan portfolio
F-8
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and considers current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining the adequacy
of the allowance balance.
Unearned interest on discounted loans is amortized to income over the life
of the loans, using the interest method. Interest on installment loans is
deferred and taken into income daily on the sum-of-the-digits method. For all
other loans, interest is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.
LOAN FEES AND COSTS. In 1988 the Bank adopted the provisions of Statement
of Financial Accounting Standards No. 91, "Accounting for Non-refundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases," for lending transactions entered into and commitments granted
on or after January 1, 1988. Statement 91 requires that loan origination and
commitment fees and certain direct loan origination costs be deferred and the
net amount amortized as an adjustment of the related loan's yield. The Bank is
generally amortizing these amounts over the contractual life of the related
loans. However, for mortgage loans generally made for a 15 year term, the Bank
has anticipated prepayments and used an estimated economic life of nine years.
Commitment fees based on a percentage of a customers's unused line of credit and
fees related to standby letters of credit are recognized over the commitment
period. Credit card fees are recognized ratably over 12 months.
BANK PREMISES AND EQUIPMENT. Bank premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is computed on the
straight-line basis on Bank premises and leasehold improvements and both the
straight-line and accelerated methods on furniture and equipment. It is the
Bank's policy to capitalize additions and improvements and amortize the cost
thereof over the estimated useful life which ranges from five to forty years.
Maintenance, repairs and renewals are expensed as they are incurred.
PENSION PLAN. The Bank has a noncontributory pension plan covering
substantially all full-time employees. The Corporation computes the net periodic
pension cost of the plan in accordance with Statement of Financial Accounting
Standards No. 87, "Employer's Accounting for Pensions."
OTHER REAL ESTATE OWNED. Other real estate owned is carried at the lower of
estimated fair value less estimated selling cost or the carrying amount of the
loan. A reserve for other real estate owned is maintained to recognize estimated
declines in value that might occur and estimated selling cost. Provisions for
estimated decrease in fair value and estimated selling cost, net losses on the
sale of other real estate owned and net direct operating expense attributable to
these assets are included in net expenses of other real estate owned. Assets,
other than real estate, acquired in settlement of loans are recorded as other
assets. When loans are made in connection with the disposition of other real
estate owned, the loans continue to be carried in other real estate, unless the
terms including down payment are substantially similar to loans to outside
borrowers.
PROVISION FOR INCOME TAXES. Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets
F-9
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and liabilities are adjusted for the effects of the changes in tax laws and
rates on the date of enactment. See Note 6 for further discussion of income
taxes.
POSTRETIREMENT BENEFITS. The Corporation provides certain health care and
life insurance benefits for all retired employees that meet eligibility
requirements. Effective January 1, 1993 the Corporation adopted Financial
Accounting Standards Board Statement No. 106 to account for its share of the
costs of those benefits. Under that Statement, the Corporation's share of the
estimated costs that will be paid after retirement is generally being accrued by
charges to expense over the employees' active service periods to the dates they
are fully eligible for benefits. Prior to 1993, the Corporation expensed its
share of costs as they were paid.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
As a member of the Federal Reserve System, the Bank is required to maintain
certain average reserve balances. These reserve balances include usable vault
cash and amounts on deposit with the Federal Reserve. For the final weekly
reporting period in the years ended December 31, 1993 and 1992, the amount of
daily average required balances were approximately $4,604,000 and $2,105,000
respectively.
The increase in the required average daily balances between 1992 and 1993
resulted from management's decision to increase balances maintained at the
Richmond Federal Reserve Bank to partially offset check clearing fees. These
were excess funds from reduced loan demand and low yielding alternative
investment opportunities.
NOTE 3. INVESTMENT SECURITIES
The book value and approximate market value of investment securities as of
December 31, 1993 and 1992 are summarized as follows:
<TABLE> <CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED APPROXIMATE
BOOK VALUE GAINS LOSSES MARKET VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
December 31, 1993
U. S. Treasury securities............................ $ 23,673,041 $ 180,895 $ 12,764 $ 23,841,172
U. S. Government agencies and
corporations...................................... 29,770,273 244,404 90,879 29,923,798
States and political subdivisions.................... 13,022,871 429,848 756 13,451,963
Other securities..................................... 3,089,603 101,407.... 0 3,191,010
-------------- ----------- ----------- --------------
$ 69,555,788 $ 956,554 $ 104,399 $ 70,407,943
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
December 31, 1992
U. S. Treasury securities............................ $ 14,132,031 $ 111,406 $ 88,765 $ 14,154,672
U. S. Government agencies and
corporations...................................... 31,127,119 491,275 46,906 31,571,488
States and political subdivisions.................... 11,384,549 127,865 34,878 11,477,536
Other securities..................................... 5,480,029 134,582 6,706 5,607,905
-------------- ----------- ----------- --------------
$ 62,123,728 $ 865,128 $ 177,255 $ 62,811,601
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
F-10
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 3. INVESTMENT SECURITIES--(CONTINUED)
The book value and approximate market value of investment securities as of
December 31, 1993 by contractual maturity are shown below. Maturities may differ
from contractual maturity in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any penalties.
Therefore these securities are not included in the maturity categories in the
following summary.
<TABLE> <CAPTION>
DECEMBER 31, 1993
------------------------------
APPROXIMATE
BOOK VALUE MARKET VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.......................................................... $ 7,298,540 $ 7,345,009
Due after one year through five years............................................ 46,322,574 46,868,367
Due after five years through ten years........................................... 9,704,735 9,962,848
Mortgage-backed securities....................................................... 5,437,189 5,438,969
No stated maturity............................................................... 792,750 792,750
-------------- --------------
$ 69,555,788 $ 70,407,943
-------------- --------------
-------------- --------------
</TABLE>
There were no sales of securities during 1993, 1992 and 1991.
Investment securities with a book value of $1,723,685 and $1,662,553 at
December 31, 1993 and 1992, respectively, were pledged as collateral for public
deposits as required by law.
NOTE 4. LOANS
Loans are stated at their face amount net of unearned income and can be
classified as follows:
<TABLE> <CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Construction and land development.................................................. $ 11,601 $ 12,603
Secured by 1-4 family residential properties:
Revolving, open-end loans extended under lines of credit........................ 21,939 18,147
All other....................................................................... 46,601 42,703
Secured by nonfarm, nonresidential properties...................................... 38,059 34,911
Secured by farmland................................................................ 661 440
Commercial and industrial loans (except loans secured
primarily by real estate).......................................................... 10,478 12,149
Loans to individuals for household, family and other
personal expenditures.............................................................. 13,515 11,841
All other loans...................................................................... 1,116 880
----------- -----------
Total loans................................................................... 143,970 133,674
Less unearned income on loans................................................. 243 899
----------- -----------
Loans......................................................................... $ 143,727 $ 132,775
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 4. LOANS--(CONTINUED)
Activity in the provision for possible loan losses is summarized as
follows:
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of the year....................................... $ 2,802,945 $ 2,900,445 $ 1,601,849
Provision, during the year......................................... 325,000 515,000 1,632,665
Charge-offs during the year........................................ (519,576) (720,995) (641,109)
Recoveries during the year......................................... 131,540 108,495 307,040
------------- ------------- -------------
Balance, end of the year............................................. $ 2,739,909 $ 2,802,945 $ 2,900,445
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Loans past due 90 days or more and non-accrual loans are summarized as
follows:
<TABLE> <CAPTION>
DECEMBER 31,
--------------------------------------------------
1993 1992
------------------------ ------------------------
LOANS 90 LOANS 90
DAYS OR DAYS OR
MORE PAST NON- MORE PAST NON ACCRUAL
DUE ACCRUAL LOANS DUE LOANS
--------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Real estate loans............................................. $ 22,454 $ 1,100,163 $ 0 $ 531,200
Installment loans............................................. 13,318 0 3,675 0
Commercial and all other loans................................ 0 74,962 0 0
--------- ------------- ----------- -----------
Total.................................................. $ 35,772 $ 1,175,125 $ 3,675 $ 531,200
--------- ------------- ----------- -----------
--------- ------------- ----------- -----------
</TABLE>
If interest on nonaccrual loans had been recognized, such income would have
been approximately $65,991, $39,615 and $52,614 for the years ended December 31,
1993, 1992 and 1991 respectively.
Troubled debt restructuring on loans which had been renegotiated because of
the borrower's inability to comply with the original terms totaled $342,164 at
December 31, 1992. There were none at December 31, 1993.
NOTE 5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment included in the financial statements at
December 31 were as follows:
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land, land improvements and buildings............................................... $ 4,534,447 $ 4,860,108
Furniture and equipment............................................................. 3,407,396 3,279,806
Leasehold improvements.............................................................. 376,277 364,172
------------- -------------
$ 8,318,120 $ 8,504,086
Less accumulated depreciation....................................................... 2,908,532 2,554,232
------------- -------------
Total........................................................................ $ 5,409,588 $ 5,949,854
------------- -------------
------------- -------------
</TABLE>
Total depreciation expense was $354,954, $352,459 and $345,200 for the
years ended December 31, 1993, 1992 and 1991, respectively.
F-12
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 6. ACCOUNTING CHANGE AND INCOME TAX MATTERS
The Corporation adopted FASB No. 96 ("Accounting for Income Taxes") in
1991, in advance of the required adoption date. FASB No. 96 requires the
adoption of the liability method and results in recognizing current income
changes in the valuation of deferred tax amounts which result from changes in
statutory tax rates. The Standard also requires deferred tax liabilities to be
computed at tax rates expected to be in effect when any temporary differences
reverse. FASB No. 96 prohibits the recognition of net deferred tax assets unless
they can be realized by tax refunds from statutory carry back of tax losses and
credits. FASB No. 96 was adopted prospectively, rather than by a restatement of
prior years' financial statements. The cumulative effect of adopting this
Standard increased the 1991 provision for income taxes by $10,970 and reduced
1991 net income per common share by approximately $.02. The Corporation adopted
FASB No. 109 ("Accounting for Income Taxes") as of January 1, 1992. This
adoption has no effect on the 1992 provision for income taxes. Regulatory
accounting limits the applications of FASB No. 109 for 1992, but this limitation
has no effect on the Corporation.
Net deferred tax assets consist of the following components:
<TABLE> <CAPTION>
DECEMBER 31,
----------------------------------------
1993 1992 1991
------------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Reserve for loan losses............................................... $ 693,390 $ 718,918 $ 758,448
Post retirement benefits.............................................. 499,147 0 0
Other real estate owned............................................... 115,627 56,100 45,178
Credit life insurance................................................. 6,667 11,506 24,611
Legal fees............................................................ 14,632 -- --
------------- ----------- ------------
$ 1,329,463 $ 786,524 $ 828,237
------------- ----------- ------------
------------- ----------- ------------
Deferred tax liabilities:
Accrued pension expense............................................... $ 156,810 $ 89,669 $ 40,055
Accumulated discount accretion........................................ 274 78 0
Premises and equipment................................................ 238,900 244,015 237,729
Mortgage loan interest................................................ 41,841 46,781 54,861
------------- ----------- ------------
$ 437,825 $ 380,543 $ 332,645
------------- ----------- ------------
Total net deferred tax assets.................................... $ 891,638 $ 405,981 $ 495,592
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1993, 1992 and 1991 consists of the following:
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
Current tax expense....................................................... $ 758,307 $ 861,792 $ 905,560
Deferred tax (benefit).................................................... (3,313) 89,611 (432,534)
----------- ----------- ------------
$ 754,994 $ 951,403 $ 473,026
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-13
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 6. ACCOUNTING CHANGE AND INCOME TAX MATTERS--(CONTINUED)
The income tax provision differs from the amount of income tax determined
by applying the U. S. federal income tax rate to pretax income for the years
ended December 31, 1993, 1992 and 1991 due to the following:
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1992 1991
------------ ------------- ------------
<S> <C> <C> <C>
Computed "expected" tax expense........................................ $ 932,824 $ 1,087,844 $ 613,230
Reduction in taxes resulting from:
Tax-exempt municipal income.......................................... (188,233) (146,271) (157,656)
Dividends to ESOP.................................................... (9,313) (8,500) (11,241)
Other................................................................ (511) 0 0
Increase in taxes resulting from:
Disallowed interest expense.......................................... 20,227 15,127 16,645
Effect of implementing FASB No. 96................................... 0 0 10,970
Other................................................................ 0 3,203 1,078
------------ ------------- ------------
$ 754,994 $ 951,403 $ 473,026
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
NOTE 7. LOAN GUARANTEE
The Corporation has guaranteed loans of its employee stock ownership plan.
This guarantee is in the amount of $39,000 and $64,000 at December 31, 1993 and
1992, respectively. It is reflected as a liability and an offsetting reduction
in stockholders' equity. As payments are made on the loan by the plan, the
recorded liability will be decreased and stockholders' equity will be increased.
NOTE 8. EMPLOYEE BENEFIT PLANS OTHER THAN POSTRETIREMENT BENEFITS
The Bank has a non-contributory defined benefit pension plan covering all
full-time employees. Pension costs included in the Statements of Income amounted
to $3,157 in 1993, $6,681 in 1992 and $11,206 in 1991, which included
amortization of prior service cost over ten years. The Bank's policy is to fund
pension cost accrued to the extent a deduction is allowed for federal income tax
purposes and the payment for 1993 was based upon the amount required for income
tax purposes.
Pension expense includes the following components:
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Service cost--benefits earned during the period......................... $ 100,272 $ 106,239 $ 103,786
Interest cost on projected benefit obligation........................... 251,040 235,489 209,508
Expected return on plan assets.......................................... (292,533) (274,614) (242,608)
Gain or loss to the extent recognized................................... 4,811 0 953
Amortization of unrecognized net asset existing at date of initial
adoption, January 1, 1987............................................... (40,500) (40,500) (40,500)
Amortization of unrecognized prior service cost......................... (19,933) (19,933) (19,933)
------------ ------------ ------------
Net pension cost........................................................ $ 3,157 $ 6,681 $ 11,206
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-14
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 8. EMPLOYEE BENEFIT PLANS OTHER THAN POSTRETIREMENT BENEFITS--(CONTINUED)
The following table sets forth the plan's estimated funded status and
amounts recognized in the consolidated balance sheets at December 31, 1993, 1992
and 1991.
<TABLE> <CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefits of
$2,521,911, $2,196,733 and $2,133,936................................ $ 2,535,149 $ 2,208,481 $ 2,146,867
------------- ------------- -------------
Projected benefit obligation for service rendered to date.......... $ 3,434,616 $ 3,245,844 $ 2,896,394
Plan assets at fair market value..................................... 3,994,820 3,744,094 3,327,053
------------- ------------- -------------
Projected benefit obligation in excess of (or less than) plan
assets............................................................... $ (560,204) $ (498,250) $ (430,659)
Unrecognized prior service cost.................................... 179,400 199,333 219,266
Unrecognized net loss from past experience different from that
assumed.............................................................. (404,401) (329,314) (311,415)
Unrecognized net asset at January 1, 1987 being recognized over 15
years (Net of amortization of $283,500, $243,000 and
$202,500)............................................................ 324,000 364,500 405,000
------------- ------------- -------------
(Prepaid) pension costs.............................................. $ (461,205) $ (263,731) $ (117,808)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligation
was 8% and 6% respectively. The expected long-term rate of return on plan assets
was 8%.
The Corporation has adopted an "Employee Stock Ownership Plan" which covers
all full-time employees. The plan provides an additional retirement benefit for
the employee and employee ownership of Fredericksburg National Bancorp, Inc.,
through investments in the Corporation's stock. In addition, the plan may
purchase additional stock through outside borrowing. The Corporation is
obligated to make further contributions to the plan if the dividends received
and other income is not sufficient to pay its obligations. Additionally, the
Corporation may be required to make additional contributions or acquisitions of
its stock to provide funds for withdrawing participants. The Corporation
contributed $34,700, $24,000 and $35,000 for the years ended December 31, 1993,
1992 and 1991, respectively.
NOTE 9. POSTRETIREMENT BENEFIT PLAN AND ACCOUNTING CHANGE
The Corporation sponsors postretirement health care and life insurance
plans for all employees that meet eligibility requirements. The plans are
contributory, with retiree contributions that are adjustable annually based on
various factors, some of which are discretionary. The plans are unfunded.
As stated in Note 1, the Corporation changed its accounting policy with
respect to the plans as of January 1, 1993. In conjunction therewith, the
Corporation charged net income for the year ended December 31, 1993 with the
$936,315 ($1.18 per common share) cumulative effect of the change in accounting,
which amount represented the after-tax effect of fully accruing the $1,418,659
unfunded accumulated postretirement benefit obligation existing at that date.
The change in accounting policy had the additional effect of reducing 1993
income before the cumulative effect of the change in accounting by $32,617.
F-15
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 9. POSTRETIREMENT BENEFIT PLAN AND ACCOUNTING CHANGE--(CONTINUED)
Net periodic postretirement benefit costs included the following components
for the year ended December 31, 1993:
<TABLE>
<S> <C>
Service cost-benefits attributable to service
during the year................................................ $ 16,527
Interest on accumulated postretirement
benefit obligation............................................. 103,955
-----------
$ 120,482
-----------
-----------
</TABLE>
Postretirement benefit cost recognized in 1992 and 1991 under the
Corporation's prior accounting policy was $50,030 and $36,920, respectively.
The following table sets forth the plans' funded status reconciled with the
liability recognized in the accompanying balance sheet at December 31, 1993.
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ (537,214)
Other fully eligible participants....................................... (717,597)
Other active participants............................................... (143,036)
--------------
$ (1,397,847)
Plan assets............................................................... --
--------------
Accumulated postretirement benefit obligation in excess of plan assets.... $ (1,397,847)
Unrecognized transition obligation........................................ --
Unrecognized net experience losses (gains)................................ (76,114)
--------------
Obligation included on balance sheet............................... $ (1,473,961)
--------------
--------------
</TABLE>
The Corporation's health care costs have been frozen based on the 1993 rate
levels. Retiree contributions will be adjusted annually to cover any rate
increases. Therefore, future rate increases will have no impact on the
Corporation's accumulated postretirement benefit obligation and service and
interest cost components of net periodic postretirement benefit costs.
The weighted average discount rate used in estimating the accumulated
postretirement benefit obligation at December 31, 1993 and 1992 was 7.5%.
F-16
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 10. LEASES
The Bank occupies its principal office under a net operating lease which
expires March 15, 2000, with a renewal option of twenty-five years. Rent is 1%
above the interest rate the landlord pays for its temporary or permanent
financing of the property multiplied by the total cost of the project. Rent for
the years 1993, 1992 and 1991 amounted to $347,865 per year. The Bank has an
option to purchase this property between March 15, 1980 and March 14, 1999, at
its then fair market value.
In addition to the property described above, the Bank is leasing some of
its facilities under long-term operating leases ranging from five to twenty
years including renewal options at an annual rent of approximately $172,436.
The Bank incurred rental expense of $614,359, $606,359 and $693,741 in
1993, 1992 and 1991. Minimum rental commitments under noncancelable leases
effective December 31, 1993, in the aggregate are as follows:
<TABLE> <CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, COMMITMENT
- -------------------------------------------------------------------- -------------
<S> <C>
1994................................................................ $ 510,365
1995................................................................ 482,599
1996................................................................ 454,402
1997................................................................ 399,921
1998................................................................ 352,489
Later Years......................................................... 420,336
-------------
Total........................................................ $ 2,620,122
-------------
-------------
</TABLE>
NOTE 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risks
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit, interest rate, or liquidity risk in excess
of the amounts recognized in the balance sheets. The contract amounts of those
instruments express 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,
standby letters of credit and financial guarantees written is represented by the
contractual 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. Collateral or other security is required to the extent it
would be for on-balance sheet instruments.
Financial instruments whose contract amount represents credit risk:
<TABLE>
<S> <C>
Credit cards................................................................. $ 4,604,317
Standby letters of credit and financial guarantees........................... 1,707,114
Lines of credit.............................................................. 4,357,792
Unfunded portion of home equity lines of credit.............................. 21,091,425
Other loan commitments....................................................... 10,330,491
--------------
Total................................................................. $ 42,091,139
--------------
--------------
</TABLE>
F-17
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK-- (CONTINUED)
Commitments to Extend Credit
These are legally binding agreements to lend to a customer. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The Bank evaluates each customer's
credit worthiness 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 assessment of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties and residential properties.
Standby Letters of Credit
These instruments are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Concentrations of Credit Risk
The Bank is a local community Bank serving the credit needs of businesses
and individuals primarily in the City of Fredericksburg, Virginia and the
Counties of Spotsylvania and Stafford, Virginia.
NOTE 12. TRANSACTIONS WITH RELATED PARTIES
The Bank has had, and expects to have in the future, banking transactions
with its directors and principal officers and associates of such persons on
similar terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions of others.
An analysis of such loans (exclusive of loans to any such person which in
aggregate did not exceed $60,000) is shown below:
<TABLE> <CAPTION>
BALANCE
BEGINNING OF LOAN BALANCE
YEAR NEW LOANS REPAYMENTS END OF YEAR
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1993........................................ $ 3,702,949(1) $ 2,275,001 $ 3,304,640 $ 2,673,310
1992........................................ 4,657,508 1,395,590 2,488,634 3,564,464(1)
</TABLE>
- ---------------
(1) Balance at end of year 1992 and at beginning of year 1993 do not agree due
to differences in composition of related parties with loans exceeding
$60,000 as of the end of the corresponding year.
The Bank leases its Main Office and Courtland Branch from Fredericksburg
National Corporation, which is a related party. The rent expense on these leases
was $412,907, $420,727 and $423,566, respectively.
NOTE 13. RETAINED EARNINGS
Dividends which may be paid by the Bank to the Corporation are restricted.
The approval of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any
F-18
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 13. RETAINED EARNINGS--(CONTINUED)
calendar year exceeds the Bank's net profits, as defined for that year combined
with its retained net profits for the two preceding calendar years. As of
December 31, 1993, aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent Corporation, without prior
regulatory approval, totalled approximately $2,100,000 or 10.5% of consolidated
net assets.
Banking regulations also require the Bank to maintain certain minimum
capital levels in relation to Bank assets. New regulations require a ratio of
risk-based capital to assets of at least 8% by December 31, 1992. The Bank's
risk-based capital, as defined by regulation, was 15.43% at December 31, 1993
compared to 15.42% at December 31, 1992. In addition, banks are required to
maintain a leverage ratio of at least 3%. At December 31, 1993 and 1992, the
Bank's leverage ratio was 8.50%, compared to 8.96% at December 31, 1992.
NOTE 14. COMMON STOCK SPLIT
On April 28, 1992 the Board of Directors took action to increase the number
of authorized shares from 250,000 shares to 1,000,000 shares. A four-for-one
split of the Company's common stock was effected through the distribution of
three additional shares for each share of stock issued. In addition, the par
value of the common stock was reduced from $4 to $1 per share. As a result,
there was no change in the capital accounts. Amounts per share and number of
shares have been restated to give retroactive effect to the stock split.
NOTE 15. INTEREST EXPENSE
Certificates of deposits of $100,000 or more outstanding at December 31,
1993, 1992 and 1991 were $7,788,688, $9,323,185 and $10,699,100, respectively.
The related interest expense for the years then ended was $384,855, $530,928,
and $820,428, respectively.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized by the balance sheet, for which it is
practical to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. This Standard excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
F-19
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Short Term Investments. For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment Securities and Interest Bearing Deposits with Banks. For
securities and deposits held for investment, fair value equals the quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market price for similar securities.
Loans Receivable. The fair value is estimated by discounting future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities. The fair value of demand deposits, savings deposits
and certain money market deposits is the amount payable at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using
rates currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit. Commitments to
extend credit and standby letters of credit are made at market interest rates
and have either variable interest rates or are short-term. Taking into account
the terms remaining, the credit risk and future expected cash flows, these
instruments have no material market value.
The estimated fair value of the bank's financial instruments are as
follows:
<TABLE><CAPTION>
DECEMBER 31, 1993
-----------------------------------
CARRYING AMOUNTS FAIR VALUE
----------------- ----------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investment............................................. $ 14,030,324 $ 14,030,324
Investment securities...................................................... 69,555,788 70,407,943
Loans...................................................................... 143,727,101 154,934,000
Less allowance for losses.................................................. (2,739,909) (2,739,909)
----------------- ----------------
$ 224,573,304 $ 236,632,358
FINANCIAL LIABILITIES:
Deposits................................................................... $ 213,214,744 $ 213,838,708
</TABLE>
F-20
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 17. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Financial statements for Fredericksburg National Bancorp, Inc. (not
consolidated) are presented below:
FREDERICKSBURG NATIONAL BANCORP, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
<TABLE> <CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
ASSETS
Cash........................................................................... $ 338 $ 1,862
Other receivable............................................................... 1,207 2,026
Investment in subsidiary....................................................... 20,044,848 19,778,321
Dividends receivable........................................................... 197,028 197,028
-------------- --------------
Total assets.............................................................. $ 20,243,421 $ 19,979,237
-------------- --------------
-------------- --------------
LIABILITIES
Dividends payable.............................................................. $ 197,028 $ 197,028
ESOP loan guarantee............................................................ 39,000 64,000
-------------- --------------
Total liabilities......................................................... $ 236,028 $ 261,028
-------------- --------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock--par value $1, authorized, 1,000,000 shares,
issued, 788,112 shares...................................................... $ 788,112 $ 788,112
Capital in excess of par value................................................. 810,830 810,830
Retained earnings.............................................................. 18,447,451 18,183,267
-------------- --------------
20,046,393 19,782,209
Less: Guaranteed bank loan of employee stock ownership plan...................... 39,000 64,000
-------------- --------------
Total stockholders' equity................................................ $ 20,007,393 $ 19,718,209
-------------- --------------
Total liabilities and stockholders' equity................................ $ 20,243,421 $ 19,979,237
-------------- --------------
-------------- --------------
</TABLE>
F-21
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 17. PARENT COMPANY ONLY FINANCIAL STATEMENTS--(CONTINUED)
FREDERICKSBURG NATIONAL BANCORP, INC.
(PARENT ONLY)
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE> <CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
INCOME
Dividends received from subsidiary................................. $ 788,112 $ 888,282 $ 816,566
EXPENSES
Operating expenses................................................. 3,550 5,960 3,335
------------- ------------- -------------
Income before income taxes and equity in undistributed net
income of subsidiary................................................. 784,562 882,322 813,231
Income taxes (benefit).......................................... (1,207) (2,026) (1,134)
------------- ------------- -------------
Income before equity in undistributed net income
of subsidiary................................................. 785,769 884,348 814,365
Equity in undistributed net income of subsidiary................ 266,527 1,363,791 516,249
------------- ------------- -------------
Net Income.................................................... $ 1,052,296 $ 2,248,139 $ 1,330,614
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-22
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 17. PARENT COMPANY ONLY FINANCIAL STATEMENTS--(CONTINUED)
FREDERICKSBURG NATIONAL BANCORP, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE> <CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Dividends received................................................. $ 788,112 $ 888,833 $ 836,796
Cash paid to suppliers............................................. (3,550) (5,960) (3,335)
Income taxes refund received....................................... 2,026 1,134 1,721
------------- ------------- -------------
Net cash provided by operating activities..................... 786,588 884,007 835,182
------------- ------------- -------------
Cash Flows from Financing Activities
Dividends paid..................................................... (788,112) (788,663) (810,546)
Redemption of common stock......................................... 0 (93,670) (26,250)
------------- ------------- -------------
Net Cash (Used in) Financing Activities....................... (788,112) (882,333) (836,796)
------------- ------------- -------------
Increase (decrease) in cash........................................ (1,524) 1,674 (1,614)
Cash:
Beginning.......................................................... 1,862 188 1,802
------------- ------------- -------------
Ending............................................................. $ 338 $ 1,862 $ 188
------------- ------------- -------------
------------- ------------- -------------
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income......................................................... $ 1,052,296 $ 2,248,139 $ 1,330,614
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in accrued income receivable................ 819 (341) 20,817
(Increase) in equity in undistributed income of subsidiary...... (266,527) (1,363,791) (576,249)
Decrease in unrealized loss on mutual funds of subsidiary....... 0 0 60,000
------------- ------------- -------------
Net Cash Provided by Operating Activities..................... $ 786,588 $ 884,007 $ 835,182
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-23
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 (UNAUDITED) AND DECEMBER 31, 1993
<TABLE> <CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................................................. $ 9,690 $ 10,935
Securities held to maturity (aggregate market value $48,047 at
March 31, 1994 and $70,407 at December 31, 1993)................................. 48,356 69,556
Securities available for sale....................................................... 19,703 --
Federal funds sold and securities purchased under agreements to resell.............. 3,220 3,095
Loans (net of $113 and $243 unearned income and $2,512 and $2,740 allowance for loan
losses)............................................................................... 141,433 140,987
Bank premises and equipment, net.................................................... 5,367 5,410
Other real estate owned............................................................. 1,672 1,778
Other assets........................................................................ 3,993 3,787
----------- -------------
Total assets................................................................ $ 233,434 $ 235,548
----------- -------------
----------- -------------
LIABILITIES
Deposits:
Noninterest-bearing deposits..................................................... $ 42,645 $ 45,674
Interest-bearing deposits........................................................ 167,554 167,541
----------- -------------
Total deposits.............................................................. 210,199 213,215
Accounts payable and accrued liabilities............................................ 2,863 2,326
----------- -------------
Total liabilities........................................................... $ 213,062 $ 215,541
----------- -------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 1,000,000 shares; issued 788,112 shares at
March 31, 1994 and December 31, 1993.................................................. 788 788
Surplus............................................................................. 811 811
Retained earnings................................................................... 18,847 18,447
----------- -------------
20,446 20,046
Less: guaranteed bank loan of employee stock ownership plan...................... (28) (39)
Less: Unrealized loss on securities available for sale........................... (46) --
----------- -------------
Total stockholders' equity.................................................. $ 20,372 $ 20,007
----------- -------------
Total liabilities and stockholders' equity.................................. $ 233,434 $ 235,548
----------- -------------
----------- -------------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-24
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
<TABLE> <CAPTION>
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans................................................................. $ 2,868 $ 2,745
Interest and dividends on investment securities:
Taxable interest income................................................................. 718 923
Interest income exempt from federal income taxes........................................ 136 114
Dividends............................................................................... 1 1
Federal funds sold and securities under agreements to resell............................... 19 80
--------- ---------
Total interest income................................................................. $ 3,742 $ 3,863
--------- ---------
INTEREST EXPENSE
Interest on deposits....................................................................... $ 1,409 $ 1,578
Interest on short-term borrowings.......................................................... 2 --
--------- ---------
Total interest expense................................................................ $ 1,411 $ 1,578
--------- ---------
NET INTEREST INCOME.......................................................................... $ 2,331 $ 2,285
Provision for loan losses.................................................................. -- 150
--------- ---------
Net interest income after provision for possible loan losses............................... $ 2,331 $ 2,135
--------- ---------
OTHER INCOME
Commission and fees from fiduciary activities.............................................. $ 99 $ 99
Service charges on deposit accounts........................................................ 234 230
Other operating income..................................................................... 135 87
--------- ---------
Total other income.................................................................... $ 468 $ 416
--------- ---------
OTHER EXPENSES
Salaries and employee benefits............................................................. $ 1,088 $ 1,010
Occupancy expenses, net.................................................................... 238 218
Furniture and equipment expenses........................................................... 153 158
Other operating expenses................................................................... 488 565
--------- ---------
Total other expenses.................................................................. $ 1,967 $ 1,951
--------- ---------
Income before income taxes and cumulative effect adjustment................................ $ 832 $ 600
Income taxes............................................................................... 235 163
--------- ---------
Net income before cumulative effect of a change in accounting principle.................... $ 597 $ 437
Cumulative effect on prior years of accounting change...................................... -- (936)
--------- ---------
NET INCOME (LOSS)..................................................................... $ 597 $ (499)
--------- ---------
--------- ---------
EARNINGS PER COMMON SHARE
Earnings before cumulative effect adjustment............................................... $ .76 $ .55
Cumulative effect on prior years of accounting change...................................... -- (1.18)
--------- ---------
Net income per share.................................................................. $ .76 $ (.63)
--------- ---------
--------- ---------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-25
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
<TABLE> <CAPTION>
RESERVE FOR UNREALIZED LOSS ON
COMMON CAPITAL RETAINED GUARANTEED BANK SECURITIES
STOCK STOCK EARNINGS LOANS OF ESOP AVAILABLE FOR SALE TOTAL
----------- ----------- --------- ------------------- ------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992................ $ 788 $ 811 $ 18,183 $ (64) $ 19,718
Net income (loss)....................... (499) (499
Cash dividend ($0.25 per share)......... (197) (197
Change in guaranteed bank loans--ESOP... 11 11
----------- ----------- --------- ------ ------ ---------
BALANCE, March 31, 1993................... $ 788 $ 811 $ 17,487 $ (53) $ 0 $ 19,033
----------- ----------- --------- ------ ------ ---------
----------- ----------- --------- ------ ------ ---------
BALANCE, December 31, 1993................ $ 788 $ 811 $ 18,447 $ (39) $ 20,007
Net income.............................. 597 597
Cash dividend ($0.25 per share)......... (197) (197)
Change in guaranteed bank loans--ESOP... 11 11
Change in unrealized loss on securities
available for sale........................ (46) (46)
----------- ----------- --------- ------ ------ ---------
BALANCE, March 31, 1994................... $ 788 $ 811 $ 18,847 $ (28) $ (46) $ 20,372
----------- ----------- --------- ------ ------ ---------
----------- ----------- --------- ------ ------ ---------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-26
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
<TABLE> <CAPTION>
1994 1993
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received............................................................. $ 3,866,982 $ 3,899,870
Fees and commissions received................................................. 435,835 393,899
Interest paid................................................................. (1,184,955) (1,361,354)
Cash paid to suppliers and employees.......................................... (2,043,273) (2,096,570)
Income taxes paid............................................................. (23,843) (12,675)
-------------- --------------
Net cash provided by operating activities................................ $ 1,050,746 $ 823,170
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturing investment securities.................................. $ 2,920,363 $ 8,865,771
Purchase of investment securities............................................. (1,499,530) (10,442,154)
(Increase) decrease in loans to customers..................................... (488,543) 769,890
Proceeds from sale of other real estate....................................... 167,806 --
Investment in other real estate............................................... -- (141,013)
Purchase of premises and equipment............................................ (45,222) (34,701)
Other miscellaneous investments--net.......................................... (12,659) (124,828)
-------------- --------------
Net cash (used in) investing activities.................................. $ 1,042,215 $ (1,107,035)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts, and savings
accounts........................................................................ $ (2,447,464) $ 1,432,290
Net increase (decrease) in time deposits...................................... (568,132) (212,911)
Dividends paid................................................................ (197,028) (197,028)
-------------- --------------
Net cash provided by financing activities................................ $ (3,212,624) $ 1,022,351
-------------- --------------
Increase (decrease) in cash, due from banks and federal funds sold.............. $ (1,119,663) $ 738,486
Cash, due from banks and federal funds sold
Beginning..................................................................... 14,030,325 19,302,150
-------------- --------------
Ending........................................................................ $ 12,910,662 $ 20,040,636
-------------- --------------
-------------- --------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income.................................................................... $ 597,497 $ (499,657)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 88,113 88,772
Decline in OREO............................................................ -- 10,000
Cumulative effect on prior years of accounting change...................... -- 936,315
Provision for possible loan losses......................................... -- 150,000
(Gains) losses on fixed assets and other real estate....................... 959 392
(Increase) decrease in accrued income receivable........................... 92,509 5,312
(Increase) in other assets................................................. (302,674) (284,616)
(Decrease) in accrued interest and other liabilities....................... 574,342 416,652
-------------- --------------
Net cash provided by operating activities................................ $ 1,050,746 $ 823,170
-------------- --------------
-------------- --------------
Supplemental schedule of non-cash investing and financing activities:
Other real estate acquired in settlement of loans............................. $ 64,190 $ 961,665
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-27
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instruction to Form 100 and Article 10 of Regulations S-X for interim
financial information. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1994, are not necessarily
indicative of the results to be expected for the entire year.
NOTE 2. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
Investments as of March 31, 1994 and December 31, 1993 are summarized
below:
<TABLE> <CAPTION>
MARCH 31, 1994 DECEMBER 31, 1993
------------------------------- -------------------------------
GAIN
BOOK MARKET (LOSS) BOOK MARKET GAIN
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Treasury Securities....................... $ 10,373 $ 10,166 $ (207) $ 23,673 $ 23,841 $ 168
U.S. Government Agencies....................... 22,674 22,386 (288) 29,770 29,92 153
Obligation of State and Political
Subdivisions..................................... 13,012 13,135 123 13,023 13,452 429
Stock of Federal Reserve Banks................. -- -- -- 793 793 --
Corporate Bonds................................ 2,297 2,360 63 2,297 2,398 101
--------- --------- --------- --------- --------- ---------
Total Securities Held to Maturity......... $ 48,356 $ 48,047 $ (309) $ 69,556 $ 70,407 $ 851
--------- --------- ---------
--------- --------- ---------
Securities Available For Sale:
U.S. Treasury Securities....................... $ 13,263 $ 13,212 $ (51)
U.S. Government Agencies....................... 5,717 5,698 (19)
Obligation of State and Political
Subdivisions..................................... -- -- --
Stock of Federal Reserve Banks................. 793 793 --
Corporate Bonds................................ -- -- --
Total Securities Available For Sale....... $ 19,773 $ 19,703 $ (70)
--------- --------- ---------
Total Securities.......................... $ 68,129 $ 67,750 $ (379)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
NOTE 3. LOANS
The consolidated loan portfolio, stated at face amount, is composed of the
following:
<TABLE> <CAPTION>
MARCH 31, 1994 DECEMBER 31, 1993
--------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Construction and land development......................................... $ 9,687 $ 11,601
Secured by 1-4 family residential properties:
Revolving, open-end loans extended under lines of credit............... 22,753 21,939
All other.............................................................. 46,335 46,601
Secured by nonfarm nonresidential properties.............................. 37,951 38,059
Secured by farmland....................................................... 657 661
Commercial and industrial loans (except loans secured primarily by real
estate)..................................................................... 11,577 10,478
Loans to individuals for household, family and other personal
expenditures................................................................ 14,001 13,515
All other loans............................................................. 1,097 1,116
--------------- ------------------
Total loans.......................................................... 14$4,058...... $ 143,970
Less unearned income on loans............................................... 113 243
--------------- ------------------
Total loans.......................................................... $ 143,945 $ 143,727
--------------- ------------------
--------------- ------------------
</TABLE>
The Bank had loans of $1,175,000 as of December 31, 1993 in a non-accrual
category and $73,000 as of March 31, 1994.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE> <CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1994 1993
--------------- ---------------------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period..................................... $ 2,740 $ 2,803
Charge-offs:
Commercial, financial and agricultural........................... -- 136
Real estate--construction........................................ --
Real estate--mortgage............................................ 225 203
Installment loans to individuals................................. 15 24
--------------- --------
$ 240 $ 363
Recoveries:
Commercial, financial and agricultural........................... 4 4
Real estate--construction........................................ -- --
Real estate--mortgage............................................ -- 2
Installment loans to individuals................................. 8 7
--------------- --------
$ 12 $ 13
Net charge-offs.................................................... 228 350
Provision for loan losses.......................................... -- 150
--------------- --------
Balance at end of period.................................... $ 2,512 $ 2,603
--------------- --------
--------------- --------
Ratio of net charge-offs during the period to average loans
outstanding during the period...................................... .16% .26%
--------------- --------
--------------- --------
</TABLE>
F-29
<PAGE>
FREDERICKSBURG NATIONAL BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
5. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Earnings per share are computed by dividing net income for the applicable
period by the daily average shares outstanding during the period as follows:
<TABLE>
<S> <C> <C>
MARCH 31, 1994 MARCH 31, 1993
--------------- ---------------
Net income (loss).............................................................. $ 597,497 $ (499,657)
Average shares outstanding..................................................... 788,112 788,112
Net income (loss) per share.................................................... $ .76 $ (0.63)
</TABLE>
F-30
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF AFFILIATION AND MERGER
DATED MARCH 29, 1994
BY AND BETWEEN
MERCANTILE BANKSHARES CORPORATION
AND
FREDERICKSBURG NATIONAL BANCORP, INC.
AND
PLAN OF MERGER
A-1
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION AND MERGER
BETWEEN MERCANTILE BANKSHARES CORPORATION
AND FREDERICKSBURG NATIONAL BANCORP, INC.
(SOLE SHAREHOLDER OF THE NATIONAL BANK OF FREDERICKSBURG)
TABLE OF CONTENTS
<TABLE> <CAPTION>
PARAGRAPH SUBJECT PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 The Affiliation.............................................................................. A-6
1.2 Conversion of Fredericksburg Stock........................................................... A-6
1.3 Shareholder List............................................................................. A-6
1.4 "Best Efforts" Requirement................................................................... A-6
1.5 Definitions.................................................................................. A-6
1.6 Representations and Warranties of the Corporation............................................ A-6
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a) Bank Holding Company Status............................................................. A-6
(b) Federal Reserve Application............................................................. A-6
(c) Good Standing........................................................................... A-6
(d) Capitalization.......................................................................... A-6
(e) SEC Registration of Common Stock........................................................ A-7
(f) Financial Statements.................................................................... A-7
(g) Material Changes........................................................................ A-7
(h) Conflicting Agreements.................................................................. A-7
(i) Validly Issued Stock.................................................................... A-7
(j) Due Authorization....................................................................... A-7
(k) Anti-dilution Clause.................................................................... A-8
(l) ESOP.................................................................................... A-8
</TABLE>
<TABLE>
<S> <C> <C>
1.7 Representations and Warranties of Fredericksburg............................................. A-8
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a) Corporate Status........................................................................ A-8
(b) Capitalization.......................................................................... A-8
(c) Stockholder List Accuracy............................................................... A-9
(d) Number of Stockholders.................................................................. A-9
(e) Director's Shares--Title................................................................ A-9
(f) Unpaid Dividends........................................................................ A-9
(g) Compliance with Laws and Regulatory Orders.............................................. A-9
(h) Employment Agreements, Leases, Material Contracts, List of Securities, Community A-9
Reinvestment Act Statement, Financial Reports, Material Changes, Losses and
Liabilities.............................................................................
(i) Accuracy of Financial Statements........................................................ A-10
(j) Stock Issuance, Distributions since September 30, 1993.................................. A-10
(k) Litigation.............................................................................. A-10
(l) Tax Returns and Liability............................................................... A-10
(m) Brokers................................................................................. A-11
(n) Employee Plans.......................................................................... A-11
(o) Title to Personalty..................................................................... A-12
(p) No Conflicting Agreements............................................................... A-13
(q) Condition of Personal Property.......................................................... A-13
</TABLE>
A-2
<PAGE>
<TABLE><CAPTION>
PARAGRAPH SUBJECT PAGE
- ------------- --------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(r) Laws Relating to Real Estate..................................................... A-13
(s) Title to Real Estate............................................................. A-13
(t) Condition of Real Estate......................................................... A-13
(u) Environmental Matters............................................................ A-13
(v) Credit Card Matters.............................................................. A-13
(w) Special Virginia Matters......................................................... A-14
</TABLE>
<TABLE>
<S> <C> <C>
1.8 Access to Records and Information; Operation of Business..................................... A-14
1.9 Audits, Income and Capital Account Requirements, Certified Financial Statements, Accuracy of A-15
Representations, Loan Portfolio, Deposit and Other Liabilities and Expenses, Loan
Portfolio, Nature of Expenses, Securities List Accuracy....................................
1.10 Regulatory Approvals......................................................................... A-16
1.11 Best Efforts Regarding Pooling and Tax Free Reorganization................................... A-16
1.12 Exclusive Dealing............................................................................ A-16
1.13 Conditions to the Corporation's Obligation................................................... A-17
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a) Federal Reserve Approval................................................................ A-17
(b) Other Regulatory Approvals.............................................................. A-17
(c) SEC Registration........................................................................ A-17
(d) Stockholders Agreements................................................................. A-17
(e) Pooling Letter.......................................................................... A-18
(f) Lessor Consents......................................................................... A-18
(g) Other Consents.......................................................................... A-18
(h) Dividends............................................................................... A-18
(i) Stock Issuance, Evidences of Indebtedness, Distributions................................ A-18
(j) Employment Benefit Plans................................................................ A-18
(k) Sale of Securities...................................................................... A-18
(l) Other Approvals......................................................................... A-19
(m) Limit on Dissenters..................................................................... A-19
(n) Other Offices........................................................................... A-19
(o) Material Adverse Conditions............................................................. A-19
(p) Legal Proceedings and Impediments....................................................... A-19
(q) Qualified Plans--Material Adverse Conditions............................................ A-19
(r) Executive Certificate................................................................... A-19
</TABLE>
<TABLE>
<S> <C> <C>
1.14 Conditions to Fredericksburg's Obligations................................................... A-19
1.15 Lease Renewal................................................................................ A-20
1.16 Fairness Opinion............................................................................. A-20
1.17 Confidentiality.............................................................................. A-20
2.1 Effective Date............................................................................... A-21
2.2 Corporation's Obligations in Accomplishing the Affiliation................................... A-21
2.3 Fredericksburg's Obligations in Accomplishing the Affiliation................................ A-21
2.4 Stockholder Approval......................................................................... A-21
2.5 Effect of the Affiliation.................................................................... A-22
2.6 Terms of the Affiliation..................................................................... A-22
2.7 Confirmatory Deeds........................................................................... A-22
</TABLE>
A-3
<PAGE>
<TABLE><CAPTION>
PARAGRAPH SUBJECT PAGE
- ------------- --------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
2.8 Procedural Matters........................................................................... A-22
2.9 Benefit Plans................................................................................ A-22
2.10 Indemnification.............................................................................. A-23
2.11 Public Announcements......................................................................... A-23
2.12 Non-survival of Representations, Warranties and Covenants.................................... A-23
3.1 Termination.................................................................................. A-23
3.2 Effect of Termination........................................................................ A-24
3.3 Amendment.................................................................................... A-24
3.4 Expenses..................................................................................... A-24
3.5 Notices...................................................................................... A-24
3.6 Counterparts................................................................................. A-25
3.7 Binding Effect; No Third-Party Rights........................................................ A-25
3.8 Applicable Law............................................................................... A-25
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBIT A Form of Stock Option Agreement...........................................................Omitted
EXHIBIT B Plan of Merger....................................................................... A-27
SCHEDULE 1 Schedule of Offices......................................................................Omitted
SCHEDULE 2 Director Stock Holdings..................................................................Omitted
SCHEDULE 3 Employee Plans...........................................................................Omitted
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION AND MERGER
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 29th day of March, 1994, by and between Mercantile Bankshares Corporation,
a body corporate of the State of Maryland (the "Corporation"), and
Fredericksburg National Bancorp, Inc., a Virginia business corporation
("Fredericksburg"), and sole shareholder of The National Bank of Fredericksburg
(the "Bank").
WITNESSETH, that for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable consideration,
the parties hereto agree as follows:
RECITALS
A. The Corporation is an ordinary business corporation duly organized and
existing under the laws of the State of Maryland with its principal office at
Mercantile Bank & Trust Building, Two Hopkins Plaza, Baltimore, Maryland. It is
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended.
B. Fredericksburg is a business corporation duly organized and existing
under the laws of the State of Virginia with its principal office at 2403 Fall
Hill Avenue, Fredericksburg, Virginia. It is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended.
C. The Bank is a national bank with its main office in Fredericksburg,
Virginia and other offices at the locations listed on Schedule 1 hereto (the
"Schedule of Offices"). It is a wholly-owned subsidiary of Fredericksburg.
D. The affiliation provided for herein will be submitted to the Board of
Governors of the Federal Reserve Board (the "Federal Reserve"), the Virginia
State Corporation Commission (the "Commission"), and to other regulatory
agencies for approval.
E. The Boards of Directors of the Corporation and Fredericksburg have
respectively approved this Agreement and authorized its execution on their
behalf.
F. As an inducement to the willingness of the Corporation to enter into
this Agreement, the Corporation expects to enter into a Stock Option Agreement
with Fredericksburg in the form attached as Exhibit A (the "Stock Option
Agreement") pursuant to which Fredericksburg will grant to the Corporation an
option on the terms and conditions therein contained to purchase up to that
number of shares of Fredericksburg common stock as would equal 19.9% of the
aggregate shares of Fredericksburg's common stock that would be outstanding
immediately upon full exercise of the option.
A-5
<PAGE>
ARTICLE I
GENERAL PROVISIONS
1.1 The Affiliation. Subject to the terms, provisions, and conditions of
this Agreement, the Bank shall become affiliated with the Corporation by the
merger of Fredericksburg with and into the Corporation pursuant to the
procedures described in Article II of this Agreement (the "Affiliation") and the
Plan of Merger attached as Exhibit B and incorporated herein by this reference
(the "Plan of Merger").
1.2 Conversion of Fredericksburg Stock. The Affiliation shall be
accomplished on the basis of 2.84 shares of the Corporation's $2.00 par value
Common Stock (the "Common Stock") for each share of issued and outstanding
common stock of Fredericksburg in accordance with Paragraph 3(b) of the Plan of
Merger. Fractional shares shall be treated as provided in Paragraph 3(d) of the
Plan of Merger.
1.3 Shareholder List. Within five days after the date of this Agreement,
Fredericksburg shall furnish to the Corporation a list containing the names and
addresses of all current holders of common stock of Fredericksburg as the same
appear on the stock registration books of Fredericksburg and the number of
shares held by each.
1.4 "Best Efforts" Requirement. The Corporation and Fredericksburg shall
each use its best efforts, and Fredericksburg shall cause the Bank to use its
best efforts, to consummate the transactions contemplated in this Agreement.
1.5 Definitions. Any term defined anywhere in this Agreement shall have the
meaning ascribed to it for all purposes of this Agreement (unless expressly
noted to the contrary). In addition:
(a) the term "best knowledge" when used with respect to a party shall
mean the knowledge, after due and diligent inquiry, of any "Executive
Officer" of such party, as such term is defined in Regulation 0 of the
Federal Reserve Board;
(b) the term "Previously Disclosed" by a party shall mean information
set forth in a written disclosure letter that is delivered by that party to
the other party prior to the execution of this Agreement and specifically
designated as information "Previously Disclosed" pursuant to this
Agreement.
1.6 Representations and Warranties of the Corporation. The Corporation
represents and warrants to, and agrees with, Fredericksburg as follows:
(a) The Corporation is a registered bank holding company under the
Bank Holding Company Act of 1956, as amended.
(b) The Corporation will, as promptly as practicable, cause the filing
of an application with the Federal Reserve, and with any state regulatory
agencies as may be required, for approval of the Affiliation, and prosecute
such applications in good faith and with diligence.
(c) The Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland and has the
corporate power and authority to carry on its business as it is now
conducted.
(d) As of February 28, 1994, the authorized capital stock of the
Corporation consists of 2,000,000 shares of Preferred Stock, no par value
("Mercantile Preferred"), and 67,000,000 shares of Common Stock, $2.00 par
value, (being the "Common Stock" identified above as the Common Stock into
which shares of common stock of Fredericksburg will be converted pursuant
to the provisions of this Agreement). As of February 28, 1994, no shares of
Mercantile Preferred were
A-6
<PAGE>
outstanding and 45,896,836 shares of Common Stock were outstanding; all of
the aforesaid outstanding shares of Common Stock were validly issued, and
are fully paid and nonassessable. Under the Corporation's Shareholders
Protection Rights Agreement adopted September 12, 1989, as amended, each
share of issued and outstanding Common Stock carries a right to purchase
additional securities of the Corporation under certain circumstances.
(e) The Corporation will, with the cooperation of Fredericksburg,
prepare and file with the Securities and Exchange Commission ("SEC") as
soon as practicable a Registration Statement (including both a prospectus
and a Fredericksburg proxy statement) (the "Registration Statement") under
the Securities Act of 1933 (the "Securities Act") with respect to the
shares of Common Stock issuable upon consummation of the Affiliation and
under the Securities Exchange Act of 1934 (the "Exchange Act") with respect
to the Fredericksburg proxy statement that will be distributed to the
shareholders of Fredericksburg for purposes of their vote on the
Affiliation and shall use all reasonable efforts to have the Registration
Statement declared effective by the SEC. The Corporation shall also take
any action required under state blue sky or securities laws in connection
with the issuance of the shares of Common Stock in the Affiliation.
(f) The Corporation has delivered to Fredericksburg copies of its
consolidated financial statements for the year ended December 31, 1993
containing the following consolidated financial statements of the
Corporation (the "Corporation's Financial Statements"): consolidated
balance sheets as of December 31, 1993 and 1992 and statements of
consolidated income, consolidated cash flows, and consolidated changes in
stockholders' equity for each of the three years in the period ended
December 31, 1993, together with the notes thereto, certified by Coopers &
Lybrand, independent public accountants, all of which are true and complete
in all material respects, have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
covered by such consolidated financial statements, and present fairly the
consolidated financial position, consolidated cash flows, results of their
operations, and changes in stockholders equity of the Corporation and its
subsidiaries at the close of business at the dates of, and for the periods
covered by, the Corporation's Financial Statements.
(g) Since December 31, 1993, there has not been any material adverse
change in the Corporation's consolidated balance sheet, consolidated income
statement, financial position, results of operations, or business. No
material loss is presently realizable or anticipated with respect to any
asset included in the Corporation's Financial Statements (except to the
extent provided for therein), and there is no material liability, actual or
contingent, known or anticipated, of a character that should be disclosed
in such financial statements and that is not disclosed therein, other than
liabilities arising in the ordinary course of business since December 31,
1993, which are not materially adverse.
(h) Neither the execution and delivery of this Agreement nor the
carrying out of the transactions contemplated hereunder will result in any
material violation, termination, modification of, or be in conflict with,
any terms of any material contract or other instrument to which the
Corporation is a party, or of any judgment, decree, or order applicable to
the Corporation, or result in the creation of any material lien, charge, or
encumbrance upon any of the properties or assets of the Corporation.
(i) The Common Stock deliverable pursuant to this Agreement will be,
prior to its issuance, duly authorized for issue and will, when issued and
delivered in accordance with this Agreement, be duly and validly issued,
fully paid and nonassessable.
(j) The execution, delivery, and performance of this Agreement by the
Corporation has been duly and effectively authorized by its Board of
Directors and requires no action on the part of the stockholders of the
Corporation.
A-7
<PAGE>
(k) Nothing in this Agreement shall limit the right of the Corporation
to issue or repurchase any of its stock or other securities in any manner
and for any consideration permitted by law either in connection with
acquisitions of new affiliates or otherwise, prior to or after the
Effective Date, as hereinafter defined; provided, however, that if the
Corporation takes any action which establishes, prior to the Effective
Date, as hereinafter defined, a record date or effective date for a stock
dividend on the Common Stock, a split or reverse split of the Common Stock
or any distribution on all shares of the Common Stock other than cash
dividends, the Corporation will take such action as shall be necessary in
order that each share of common stock of Fredericksburg will be converted
in the Affiliation into the same number of shares of Common Stock (whether
such number is greater or lesser than the number otherwise provided for
herein) together with any such other property so distributed that the owner
of such shares would have owned immediately after the record date or
effective date of such event had the Effective Date occurred immediately
before such record date or effective date and the conversion ratio set
forth in Section 1.2 hereof shall be adjusted accordingly.
(l) Subject to applicable law, it is the Corporation's intent to treat
the Employee Stock Ownership Plan (the "ESOP") currently sponsored by
Fredericksburg as any other shareholder of Fredericksburg stock and it
would receive Corporation stock in exchange for Fredericksburg stock in the
Affiliation. It is not the Corporation's intent to strip the ESOP of its
assets or to permit employees of other Corporation units to participate in
the ESOP. It is the Corporation's current intent to continue the ESOP or to
liquidate it for the benefit of its participants and beneficiaries, but in
either case, it is not the Corporation's intent to make any contributions
to the ESOP or to cause Fredericksburg or the Bank to make future
contributions to the ESOP beyond those to which Fredericksburg or the Bank
is currently contractually obligated. For purposes hereof, future
contributions for which Fredericksburg or the Bank is currently
contractually obligated shall include only contributions sufficient to pay
the remaining principal and interest on any indebtedness of the ESOP as of
the Effective Date.
1.7 Representations and Warranties of Fredericksburg. Fredericksburg
represents and warrants to, and agrees with, the Corporation as follows:
(a)(i) Fredericksburg is a Virginia stock corporation, legally formed,
validly existing and in good standing under the laws of Virginia. It is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended. Fredericksburg has one office, which is located at 2403 Fall
Hill Avenue, Fredericksburg, Virginia. It has no subsidiaries other than
the Bank and FNB Properties, Inc., and the latter has not been capitalized
or activated.
(ii) The Bank is a national bank, having and exercising trust
powers, legally formed, validly existing and in good standing under the
laws of the United States, is insured by the Federal Deposit Insurance
Corporation (the "FDIC") and is a member of the Federal Reserve System. The
Bank has seven banking offices, the locations of which are set forth on the
Schedule of Offices (Schedule 1). In addition, the Bank received regulatory
approval for the establishment of a branch at the intersection of Route 17
and Plantation Drive but has no present intention of erecting and opening
such branch. No application for any additional banking office is pending.
The Bank has no subsidiaries but intends to invest in a corporation that
will engage in title agency activities pursuant to a program established by
the Virginia Bankers Association; before the investment is made and
activities commenced, the Bank will have provided and obtained all required
regulatory notices or approvals for such investment and activities.
(b) The authorized capital stock of Fredericksburg consists of
1,000,000 shares of common stock, $1.00 par value, of which 788,112 shares
are issued and outstanding. All of the outstanding shares of
Fredericksburg's common stock are in certificate form, were validly issued
and are fully paid and nonassessable. The authorized capital stock of the
Bank consists of 220,000 shares of capital stock, $4.00 par value, of which
220,000 shares are issued and outstanding. All of such issued and
outstanding shares of the Bank's capital stock are in certificate form,
were validly
A-8
<PAGE>
issued, are fully paid and nonassessable, and are owned beneficially and of
record by Fredericksburg. Except for the Stock Option Agreement when it is
executed and delivered, neither Fredericksburg nor the Bank has any
options, calls, warrants, commitments or agreements of any character to
which it is a party or by which it is bound, calling for the issuance, sale
or transfer of shares of Fredericksburg's or the Bank's stock of any class
or of any security representing the right to purchase or receive any such
stock. The shareholders of Fredericksburg do not have pre-emptive rights.
(c) The list of stockholders to be furnished by Fredericksburg
pursuant to Section 1.3 hereof shall be true, correct and complete.
(d) Fredericksburg has more than 500 stockholders of record and its
common stock is registered under Section 12 of the Exchange Act.
Fredericksburg has filed with the SEC in a timely manner all registration
statements and reports required by the Exchange Act and applicable rules
and regulations of the SEC thereunder and none of such filings contained as
of its date any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
(e) At the date of this Agreement, (1) each of the directors of
Fredericksburg, respectively, owns with sole or joint power to vote, or
directly or indirectly controls the power to vote, the number of shares of
common stock of Fredericksburg set forth on Schedule 2 to this Agreement,
(2) such number of shares constitutes all of the shares of stock of
Fredericksburg owned with sole or joint power to vote, or direct or
indirect control of the power to vote, as the case may be, by each
director, and (3) each of the directors, respectively, has good and
merchantable title to all of the shares of stock indicated on said list as
being owned by him, free of all restrictions and encumbrances of every kind
and character, except as indicated on Schedule 2 to this Agreement.
(f) Except as provided in Section 1.13(h), at the date of this
Agreement, there are no declared and unpaid dividends or distributions on,
or with respect to, the shares of stock of Fredericksburg.
(g) To the best knowledge of Fredericksburg and the Bank, and except
as otherwise Previously Disclosed to the Corporation, each has complied
with all laws and regulations applicable to it and its respective
properties and operations, including, without limitation, those with
respect to all employee benefit plans maintained by Fredericksburg and the
Bank and with respect to the Bank's credit card and mutual fund businesses,
and all valid orders of regulatory authorities having jurisdiction over
Fredericksburg or the Bank, and neither of them has received any notice of
any asserted violations of the same.
(h) Fredericksburg has previously furnished to the Corporation copies
of its and the Bank's charter and bylaws, including all amendments thereto,
copies of all written agreements or understandings (except such as may be
deemed created or implied as a matter of law) and written memoranda of all
oral agreements or understandings (including copies of the minutes of the
Board of Directors relating to the retirement of Charles T. Lewis), between
Fredericksburg or the Bank and each of their respective directors, officers
and employees relating to his compensation or employment, copies of all
leases, agreements, options, mortgages, title reports and title policies
with respect to Fredericksburg and the Bank's offices, copies or
descriptions of all other material contracts (including, without
limitation, those relating to the Bank's credit card and mutual fund
businesses) and leases, a list of all securities held by Fredericksburg and
the Bank, respectively, on February 28, 1994, a copy of the Bank's
Community Reinvestment Act Statement, copies of the Bank's year-end reports
of condition and income filed with the Comptroller of the Currency for all
years subsequent to the year 1988, including copies of the reports of
condition and income filed by the Bank with the Comptroller of the Currency
for December 31, 1993 and for the year then ended (the "Bank's December 31,
1993 Financial Statements"), copies of all forms FRY-9, FRY-6 and FRY-6A
and other reports filed with the Federal Reserve after December 31, 1988
(other than
A-9
<PAGE>
forms FRY-9LP for March, June, and September, 1989), copies of all Annual
Reports to Shareholders, all forms 10-K, 10-Q and 8-K and all other
documents filed by, or with respect to, Fredericksburg with the SEC after
December 31, 1988, a copy of Fredericksburg's consolidated financial
statements for the year ended December 31, 1993 containing the following
consolidated financial statements of Fredericksburg: consolidated balance
sheets as of December 31, 1993 and 1992, and statements of consolidated
income, consolidated cash flows, and consolidated changes in stockholders'
equity for each of the three years in the period ended December 31, 1993,
together with the notes thereto, certified by either Yount, Hyde & Barbour
or Bowling, Franklin & Co., independent public accountants
("Fredericksburg's December 31, 1993 Financial Statements"); and a copy of
the most recent management letter rendered by Fredericksburg's independent
public accountants. Since December 31, 1993, there has been no material
adverse change in Fredericksburg's consolidated balance sheet, consolidated
income statement, financial position, results of operations, or business,
or in the Bank's balance sheet, income statement, financial position,
results of operations, or business; no material loss is presently
realizable or anticipated with respect to any asset included in the
Fredericksburg's December 31, 1993 Financial Statements or the Bank's
December 31, 1993 Financial Statements (except to the extent provided for
therein), and there is no material liability, actual or contingent, known
or anticipated of a character that should be disclosed in such financial
statements and that is not disclosed therein, other than liabilities
arising in the ordinary course of business since December 31, 1993, which
are not materially adverse.
(i) All of the financial statements previously provided to the
Corporation pursuant to subparagraph (h) of this Section 1.7 are true and
complete in all material respects, have been prepared in accordance with
generally accepted accounting principles consistently followed throughout
the periods covered by such financial statements, and present fairly the
financial position, cash flows (with respect to those financial statements
containing statements of cash flows), results of operations, and changes in
stockholders equity (with respect to those financial statements containing
statements of changes in stockholder equity) of Fredericksburg and the
Bank, as the case may be, at the close of business at the dates thereof and
for the periods covered thereby.
(j) Since December 31, 1993, except for the Stock Option Agreement
when it is executed and delivered, neither Fredericksburg nor the Bank has
authorized or issued any additional shares of stock or securities
convertible thereto or options, warrants or rights to subscribe thereto or
any notes, debentures or other evidences of indebtedness (other than
certificates of deposit issued by the Bank in the normal course of
business) or authorized or made payment or distribution of any of their
assets to their respective stockholders by way of dividends or otherwise,
except for the regular quarterly dividend described in Section 1.13(h).
(k) Except as Previously Disclosed, there is no litigation or other
proceeding pending against or threatened against Fredericksburg or the Bank
that might reasonably be expected to have a material adverse effect on
Fredericksburg's consolidated balance sheet, consolidated income statement,
financial position, results of operations or business or on the Bank's
balance sheet, income statement, financial position, results of operation
or business.
(l) Fredericksburg and the Bank have filed with the appropriate
governmental agencies all tax returns required to be filed and have paid
all taxes shown to be due on such returns. Neither Fredericksburg nor the
Bank has any material liability for taxes except as set forth and provided
for in Fredericksburg's December 31, 1993 Financial Statements, and there
is no reason to believe that any such liability will be asserted in
connection with such returns except as noted in Fredericksburg's December
31, 1993 Financial Statements. Frederickburg's federal tax returns have
been audited by the Internal Revenue Service through 1991. Fredericksburg
is not aware of any currently pending or threatened investigations or
proceedings concerning its or the Bank's tax returns by any governmental
agency other than the current routine audit by the Internal Revenue Service
of Fredericksburg's tax return for the year 1992.
A-10
<PAGE>
(m) There is no finder or broker acting, or who has acted, for
Fredericksburg or the Bank, nor, to the best knowledge of the directors of
Fredericksburg, for any stockholder of Fredericksburg, in connection with
the transactions contemplated by this Agreement, except that Fredericksburg
has retained Scott & Stringfellow, Inc. as its financial advisor pursuant
to a retainer agreement, a copy of which has been provided to the
Corporation.
(n) Except as set forth in Schedule 3, neither Fredericksburg nor the
Bank sponsors, maintains or is required to contribute to and has not during
the preceding five (5) years sponsored, maintained or contributed to an
"employee benefit plan" (as such term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA")) or any other
employee benefit program or arrangement, whether formal or informal,
including, without limitation, any pension, profit sharing, deferred
compensation, retirement, bonus, stock option, stock purchase or restricted
stock plan, severance or "golden parachute" arrangement, or any other
compensation, welfare or fringe benefit plan, program or arrangement
providing for benefits for, or for the welfare of, any or all of the
current or former employees, directors, consultants or independent
contractors of Fredericksburg or the Bank or the beneficiaries of such
persons (such plans, programs and arrangements set forth in Schedule 3,
collectively, the "Employee Plans").
(1) Each Employee Plan and any related funding arrangement is in
compliance with all applicable requirements of ERISA, the Internal
Revenue Code of 1986 (the "Code") and other applicable law and each
Employee Plan has been properly administered in accordance with its
written terms to the extent consistent with such requirements of law
except as Previously Disclosed; all benefits due and payable under any
Employee Plan have been paid in accordance with the terms of such
Employee Plan except as Previously Disclosed; Fredericksburg and the
Bank have timely made (and at the Effective Date will have timely made)
all contributions required to be made to any Employee Plan; there is no
litigation or other proceeding pending or threatened against or with
respect to any Employee Plan or its fiduciaries except as Previously
Disclosed; all reports, returns, forms, notifications or other
disclosure materials required to be filed with any governmental entity
or distributed to employees with respect to any Employee Plan have been
timely filed or distributed and are accurate and complete except as
Previously Disclosed; no nonexempt "prohibited transaction" (as defined
in Section 4975 of the Code and Section 406 of ERISA) has occurred or
will occur prior to the Effective Date with respect to any Employee Plan
subject to such rules except as Previously Disclosed; except to the
extent limited by applicable law and except in the case of special
contractual arrangements (all of which are noted on Schedule 3 as "not
unilaterally amendable"), neither Fredericksburg nor the Bank is subject
to any legal obligation to continue any Employee Plan either before or
after the Effective Date and any such Employee Plan, in any manner and
without the consent of any employee or beneficiary, may be amended or
terminated.
(2) Fredericksburg or the Bank has previously delivered or made
available (or will deliver or make available within a reasonable time
following the execution of this Agreement) to the Corporation complete
copies of: each Employee Plan; all related trust agreements or other
funding arrangements, including, but not limited to, insurance policies;
for the five (5) most recent plan years, all annual reports (5500
series) for each Employee Plan that have been filed with any
governmental agency; all other material documents relating to any
Employee Plan as may reasonably be requested by the Corporation.
(3) The only Employee Plans currently maintained by Fredericksburg
or the Bank which are intended to be qualified under Section 401(a) of
the Code are a defined benefit plan (the "Pension Plan") and the ESOP
(collectively, the "Qualified Plans"); each Qualified Plan meets the
requirements for tax qualification under Section 401(a) of the Code and
its related trust is tax-exempt under Section 501(a) of the Code; each
Qualified Plan has received a
A-11
<PAGE>
favorable determination letter from the Internal Revenue Service with
respect to its tax-qualified status and Fredericksburg or the Bank has
delivered or made available (or will deliver or make available within a
reasonable time following the execution of this Agreement) to the
Corporation complete copies of all such determination letters and all
material correspondence relating to the applications therefor; nothing
has occurred since the date of the most recent applicable determination
letter nor will occur prior to the Effective Date that would adversely
affect the tax-qualified status of any Qualified Plan except as
Previously Disclosed.
(4) With respect to the Pension Plan, no "accumulated funding
deficiency" (as defined in Section 412 of the Code and Section 302 of
ERISA), whether or not waived, and no "unfunded current liability" (as
defined in Section 412 of the Code and Section 302 of ERISA) exists; no
"reportable event" (as defined in Section 4043 of ERISA) has occurred or
will occur prior to the Effective Date; Fredericksburg or the Bank has
made all required premium payments to the Pension Benefit Guaranty
Corporation when due; no amendment has occurred or will occur prior to
the Effective Date which could require Fredericksburg or the Bank to
provide security to the Pension Plan under Section 401(a)(29) of the
Code; all benefit statements provided to Pension Plan participants
correctly state in all material respects the participants' accrued
benefits under the Pension Plan and the amount of such accrued benefits
has been calculated in the same manner as the accrued benefits of such
participants as reflected on the Pension Plan's actuarial reports; as of
January 1, 1993, the assets of the Pension Plan were at least equal to
the present value of the accrued benefits of the participants, former
participants and beneficiaries in such plan, based first on those
actuarial methods, tables and assumptions (as then in effect) used for
minimum funding purposes, and second on those actuarial methods, tables
and assumptions (as then in effect) used for calculating termination
liability; Fredericksburg or the Bank has delivered to the Corporation
complete copies of the actuarial valuation and trustee reports for the
Pension Plan for the last five (5) plan years.
(5) With respect to the ESOP, the ESOP constitutes an employee
stock ownership plan under Section 4975(e)(7) of the Code and Section
406(d)(6) of ERISA; each loan to the ESOP is and has been an "exempt
loan" (as defined in Section 4975(d)(3) of the Code and Section
408(b)(3) of ERISA; the employer stock held and to be held by the ESOP,
both before and after the Effective Date, constitutes "employer
securities" (as defined in Section 409(1) of the Code); the purchase of
the employer stock by the ESOP did not constitute a nonexempt
"prohibited transaction" (as defined in Section 4975 of the Code and
Section 406 of ERISA); the performance of the transactions contemplated
by this Agreement will not cause any nonexempt "prohibited transaction"
(as defined in Section 4975 of the Code and Section 406 of ERISA) to
occur with respect to the ESOP.
(6) Fredericksburg's December 31, 1993 Financial Statements and the
Bank's December 31, 1993 Financial Statements reflect the present value
of any arrangement providing or promising post-retirement medical, life
or other post-retirement benefits to any employee, former employee (or
any beneficiary of any employee or former employee) of Fredericksburg or
the Bank in a manner satisfying the requirements of FAS 106.
(o) Except as disclosed or reserved against in its financial
statements, Fredericksburg and the Bank each has good and marketable title
to all of its material property and assets, including those reflected on
the December 31, 1993 Financial Statements, except as sold or otherwise
disposed of only in the ordinary course of business, free and clear of all
material liens and encumbrances (except as permitted in Section 1.7(s)
below with respect to certain real estate). Without limiting the foregoing,
Fredericksburg has good and marketable title to all of the issued and
outstanding shares of common stock of the Bank, free and clear of all
liens, encumbrances, restrictions, options, warrants and agreements of any
kind or nature other than the Stock Option Agreement.
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(p) The execution and delivery of this Agreement and the Stock Option
Agreement by Fredericksburg have been duly and validly authorized by its
Board of Directors by a vote of at least two-thirds of the entire Board of
Directors. Neither the execution and delivery of this Agreement or the
Stock Option Agreement nor the carrying out of the transactions
contemplated hereunder or thereunder will result in any material violation,
termination, modification of, or conflict with, the Articles of
Incorporation or Bylaws of Fredericksburg, or any terms of any material
contract or other instrument to which Fredericksburg or the Bank is a
party, or of any judgment, decree, or order applicable to Fredericksburg or
the Bank, or result in the creation of any material lien, charge, or
encumbrance upon any of the properties or assets of Fredericksburg or the
Bank. No consent to the Affiliation or Stock Option Agreement by any
private party (excluding, with respect to the Affiliation, Fredericksburg's
stockholders) is required, including without limitation, in connection with
any contract, lease, mortgage or other instrument to which Fredericksburg
or the Bank is a party.
(q) The tangible personal property of Fredericksburg and the Bank is
in good operating condition and repair, subject to ordinary wear and tear.
(r) There is no material violation of any zoning, building, fire or
other regulatory laws, statutes, ordinances or regulations relating to
Fredericksburg's or the Bank's offices or other real property reflected on
the Schedule of Offices; no condemnation proceeding exists or, to the
knowledge of Fredericksburg or the Bank, is threatened that would preclude
or impair the use of the Bank's or Fredericksburg's offices as presently
being used in the conduct of their business.
(s) The Bank has good and marketable fee simple title to the real
estate for all of its offices and other real property listed in the
Schedule of Offices (Schedule 1) as being owned by the Bank, free and clear
of material liens and encumbrances of every kind and nature except use,
occupancy and similar restrictions of public record, easements,
encumbrances and encroachments that may be observed by an inspection of the
property, and such utility and other easements and encumbrances as do not
materially adversely affect the fair market value of the real property. All
leases for Bank facilities listed on the Schedule of Offices (Schedule 1)
as being leased are valid and in full force and effect; the Bank has not
breached any material provision of, and is not in default in any material
respect under the terms of any such lease.
(t) All electrical, plumbing, heating, air conditioning and other
mechanical systems and related equipment in the facilities listed on the
Schedule of Offices (Schedule 1) are in good working order, subject to
ordinary wear and tear. To Frederickburg's and Bank's best knowledge, the
roofs of the buildings are waterproof and their basements, if any, are not
subject to water seepage.
(u)(1) to Fredericksburg's and Bank's best knowledge (i) all real
estate (including, without limitation, offices and foreclosed properties)
owned by the Bank or Fredericksburg (the "Real Estate") is in compliance
with all environmental laws and regulations, and (ii) there are no
underground tanks on the Real Estate.
(2) Except as Previously Disclosed, to Fredericksburg's and the
Bank's best knowledge, without special investigation or inquiry, all
property in which the Bank holds a security interest or which it holds in a
fiduciary or agency capacity is in compliance with applicable environmental
laws and regulations.
(v) With respect to the Bank's credit card business:
(1) The Bank is the sole and absolute owner of, and has good and
marketable title to its credit card accounts, related books and records,
cardholder agreements, and related intellectual property (the "Credit
Card Assets"), and such Credit Card Assets are not subject to any
material charge, claim or encumbrance of any kind, including without
limitation tax liens.
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(2) The agreements between the Bank and the cardholders of its
credit card accounts ("Cardholder Agreements") are legally binding
agreements, enforceable in accordance with their respective terms,
except as the same may be limited by bankruptcy, insolvency, moratorium
or other similar laws or regulations that affect the enforcement of
creditors' rights generally.
(3) The Bank is in compliance with all Cardholder Agreements where
the failure to comply would have a material adverse effect on the Credit
Card Assets.
(4) The procedures employed by the Bank to create and maintain the
Credit Card Assets are adequate for the purposes for which they are
intended.
(5) Neither the Bank nor any of its affiliates has provided a list
of cardholders of the credit card accounts to any unaffiliated party
other than to a party that is under an obligation to maintain the
confidentiality of such list and who is restricted from using such list
for any purpose other than as directed by the Bank.
(w) The Board of Directors of Fredericksburg, by resolution adopted by
a majority of the "disinterested directors" as defined in Article 14
("Affiliated Transactions") of the Virginia Corporation Law, hereinafter
defined, has approved this Agreement and the Stock Option Agreement and has
given prior approval of the Corporation's becoming an "interested
shareholder" (pursuant to Section 13.1-727.B.1(iv) of said Article 14),
with the effect that, notwithstanding the Stock Option Agreement or any
exercise of the option provided for therein, the provisions of said Article
14 shall have no application to this Agreement or to the Affiliation
provided for herein or in the Stock Option Agreement. Article 14.1
("Control Share Acquisitions") of the Virginia Corporation Law, hereinafter
defined, has no application to the Stock Option Agreement or any exercise
of the option provided for therein, or to this Agreement or the Affiliation
provided for therein.
1.8 (a) Access to Records and Information; Operation of Business. From the
date of this Agreement until the Effective Date, Fredericksburg will itself and
will cause the Bank to afford the Corporation, its officers and other authorized
representatives, reasonable access to all books, accounts, records, bank
examination reports (subject to such permission from regulatory agencies as may
be required), tax returns, leases, contracts and documents of Fredericksburg and
the Bank and furnish to the Corporation such information with respect to
Fredericksburg's and the Bank's assets, liabilities and business as the
Corporation may from time to time request in order to perform the audits and
examinations described in Section 1.9 hereof, to obtain all required approvals
of the Affiliation by the Federal Reserve, the Bureau of Financial Institutions
of the Commission, the Maryland Bank Commissioner (with respect to the
affiliation of the Maryland banking affiliates of the Corporation with the Bank
and its affiliates), the Delaware Bank Commissioner (if required)), and any
other regulatory authorities, to prepare any registration statement, proxy
statement or other documents required to be filed with the SEC, or other
authorities, and to meet any of the other conditions set forth in Sections 1.7,
1.8, 1.9, 1.10, 1.13 and 1.14 hereof or elsewhere in this Agreement.
(b) Except as otherwise contemplated by this Agreement and unless the
Corporation shall otherwise consent in writing, from the date of this
Agreement until the Effective Date, Fredericksburg will do and cause the
Bank to do, and otherwise cause to be done all things necessary to:
(1) preserve and keep in full force and effect the corporate
existence of Fredericksburg and the Bank;
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(2) operate their respective businesses only in the usual, regular
and ordinary manner and consistent with past operations; follow the
Bank's current lending practices with regard to the setting of rates,
credit standards and collection procedures; preserve the present
business organizations intact; make no material increase in levels of
staffing; make no material changes in duties or responsibilities of
senior management (which shall include those officers at the executive
vice president level and above); make no changes in or appointments of
senior management; and preserve their present relationships with persons
having business dealings with them;
(3) maintain their books, accounts and records in the usual regular
and ordinary manner, on a basis consistent with prior years; comply in
all material respects with all material laws and contractual
obligations, and perform all of the material obligations relating to
their business without material default;
(4) not enter into any material agreement or incur any material
obligation;
(5) not pledge, sell, lease, transfer, dispose or otherwise
encumber any of their property or assets other than in the ordinary
course of business (it being agreed that the pending sale of the excess
parcel consisting of approximately 0.75 acres that adjoins the Bank's
Courtland Office is in the ordinary course of business) and, in any
event, not pledge, sell, lease, transfer, dispose of or otherwise
encumber the capital stock of the Bank;
(6) not issue any shares of Fredericksburg or Bank capital stock,
any securities convertible into or exchangeable for Fredericksburg or
Bank capital stock, or any other class of securities, whether debt
(other than certificates of deposit issued by the Bank in the ordinary
course of business and consistent with past practice) or equity; and not
issue any option or rights to acquire any of the foregoing;
(7) not amend their Charters or Bylaws;
(8) not provide for the consolidation with or merger of
Fredericksburg or the Bank or a share exchange or any other
reorganization involving Fredericksburg or Bank capital stock with or
into another corporation or the liquidation or dissolution of
Fredericksburg or the Bank;
(9) not create any subsidiary, except for the formation of the Bank
subsidiary to engage in certain title insurance agency activities; and
(10) not take any other action or enter into any agreement which
would have the effect of defeating the purposes of this Agreement or the
Affiliation, or cause the Affiliation not to qualify for
pooling-of-interests accounting treatment or as a tax-free
reorganization under Section 368(a)(1)(A) of the Code.
1.9 Audits, Income and Capital Account Requirements, etc. Immediately upon
the execution of this Agreement, Fredericksburg shall take such action as may be
necessary to authorize the Corporation, and such accountants as may be
designated by the Corporation, at the Corporation's expense (a) to conduct an
examination and audit of the books, accounts and records of Fredericksburg and
the Bank for the calendar years ended December 31, 1991, 1992, 1993, and for any
subsequent period and (b) to update any such examination and audit from time to
time, at any time at, or prior to, the Effective Date. If any such examination
or audit, or update thereof, shall disclose, in the reasonable opinion of the
Corporation, (1) that consolidated net income of Fredericksburg and the Bank,
determined in accordance with generally accepted accounting principles,
consistently applied, for the calendar year ended December 31, 1993 was less
than $1,000,000, or for the six months ended June 30, 1994 is less than
$1,050,000, or if the Effective Date is after September 30, 1994, for the nine
month period ending September 30, 1994 is less than $1,700,000, or if the
Effective Date is after December 31, 1994, for the
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year ending December 31, 1994 is less than $2,400,000, or (2) that the
consolidated shareholders' equity of Fredericksburg and the Bank, determined in
accordance with generally accepted accounting principles, consistently applied,
at December 31, 1993 aggregated less than $20,000,000, or at June 30, 1994
aggregates less than $20,650,000, or if the Effective Date is after September
30, 1994, at September 30, 1994 aggregates less than $21,100,000, or if the
Effective Date is after December 31, 1994, at December 31, 1994 aggregates less
than $21,600,000; provided, however, that the foregoing consolidated
shareholders' equity figures shall not take into account, as either additions or
subtractions, the impact of FAS 115, or (3) that any inability of independent
public accountants to certify financial statements of Fredericksburg or the Bank
for any period (or any qualification to such a certification) would materially
interfere with or prevent the Corporation, before or after the Effective Date,
from complying with requirements of the SEC (or other requirements) for the
preparation and publication of certified or other required financial statements,
whether for Fredericksburg or the Bank or for the Corporation and its
consolidated subsidiaries, or (4) that the representations contained in Section
1.7 hereof or elsewhere in this Agreement are inaccurate in any material
respect, or (5) that the nature or composition of the Bank's loan portfolio are
materially different from the nature or composition of the Bank's loan portfolio
as reflected in the Bank's December 31, 1993 Financial Statements, or (6) that
any material item or group of items in the Bank's loan portfolio is unacceptable
to the Corporation for stated defects, including, without limitation, matters
relating to credit, collateral or documentation, that are not cured within
thirty days after Fredericksburg receives notice of such defects from the
Corporation, or (7) that the nature or composition of the Bank's deposit
liabilities are materially different from the nature or composition of the
Bank's deposit liabilities as reflected in the Bank's December 31, 1993
Financial Statements or (8) that the Bank's accrued expenses or other
liabilities are materially different in nature from those associated with the
normal operation of a national bank with trust powers, or (9) that the list of
Fredericksburg and Bank securities supplied by Fredericksburg to the Corporation
pursuant to Section 1.7(h) hereof is inaccurate, as of its date, in any material
respect, then the Corporation shall have the right upon written notice to
Fredericksburg at any time prior to the Effective Date, to terminate this
Agreement, in which event neither party shall have any obligations under, or
liabilities arising out of, this Agreement, except as set forth in Section 3.4
with respect to expenses.
1.10 Regulatory Approvals. When requested by the Corporation, and through
counsel for the Corporation, Fredericksburg will cooperate and will cause the
Bank to cooperate with the Corporation and will use, and will cause the Bank to
use, its best efforts to obtain the approval of the Affiliation and of the steps
necessary to accomplish the Affiliation by all appropriate state and federal
regulatory agencies.
1.11 Best Efforts Regarding Pooling and Tax Free
Reorganization. Fredericksburg agrees to use its and to cause the Bank to use
its best efforts to (i) cause the Affiliation to qualify as a tax-free
reorganization under Section 368(a)(1)(A) of the Code, (ii) cause the
Affiliation to qualify for pooling-of-interests accounting treatment and (iii)
cooperate with the Corporation in preparing and furnishing the proxy statement
to be delivered to Fredericksburg's stockholders in connection with the
Affiliation.
1.12 Exclusive Dealing. The Board of Directors of Fredericksburg has
carefully considered and deliberated upon the terms and conditions of the
Affiliation and has concluded that the Affiliation is fair to, and in the best
interests of the stockholders of Fredericksburg, with the intent that this
Agreement be conclusive and binding, subject to the terms and conditions hereof.
In the process of so concluding, the Board of Directors of Fredericksburg has,
at Fredericksburg's expense, been advised by Scott & Stringfellow, Inc., its
financial advisor, that the consideration to be received in the Affiliation is
fair to the stockholders of Fredericksburg from a financial point of view.
Accordingly, in view of the commitments of the parties and the time and expense
required to consummate the Agreement and while this Agreement is in effect,
neither Fredericksburg nor any of its or the Bank's officers, directors,
employees, agents or representatives (including, without limitation, investment
bankers) shall, directly
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or indirectly: (i) encourage, solicit or initiate the submission of any
Acquisition Proposal or take any other action to facilitate any inquiries or the
making of any proposal that constitutes or may reasonably be expected to lead to
any Acquisition Proposal; or (ii) recommend any Acquisition Proposal to
Fredericksburg stockholders or enter into any agreement with respect to any
Acquisition Proposal or participate in discussions or negotiations with, or
furnish any information to, any person in connection with any potential
Acquisition Proposal, unless an unsolicited Acquisition Proposal is made and the
Board of Directors of Fredericksburg shall conclude, based on written advice of
counsel, that its fiduciary obligations require consideration or acceptance or
the recommendation of such Acquisition Proposal because it is more favorable to
the Fredericksburg stockholders from a financial point of view than the
Affiliation provided for herein. "Acquisition Proposal" shall mean any proposed
(A) merger, consolidation, share exchange or similar transaction involving
Fredericksburg or the Bank, (B) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of assets of
Fredericksburg (including the stock of the Bank), or the Bank representing 10%
or more of the consolidated assets of Fredericksburg and the Bank, (C) issue,
sale or other disposition (including by way of merger, consolidation, share
exchange or any similar transaction) of securities (or options, rights or
warrants to purchase, or securities convertible into, such securities)
representing 10% or more of the voting power of Fredericksburg or the Bank, (D)
transaction in which any person shall acquire beneficial ownership (as such term
is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of 20% or more of the outstanding Fredericksburg or Bank
common stock. Fredericksburg shall immediately advise the Corporation of, and
communicate to the Corporation the terms of, any such inquiry or proposal
addressed to Fredericksburg or the Bank or of which Fredericksburg or the Bank,
or their respective officers, directors, employees, agents, or representatives
(including, without limitation, any investment banker) has knowledge.
Fredericksburg's Board of Directors shall use its best efforts to cause its
officers, directors, employees, agents and representatives and the Bank and its
officers, directors, employees, agents and representatives to comply with the
requirements of this Section 1.12.
1.13 Conditions to the Corporation's Obligations. The obligations of the
Corporation under this Agreement are subject to the satisfaction prior to, and
at, the Effective Date, of the conditions set forth in Article II of this
Agreement and of the following conditions:
(a) That pursuant to applicable statutes, the Federal Reserve shall
have given all required approvals to permit the Affiliation and the steps
necessary to accomplish the Affiliation and such approvals shall have
become effective and all required waiting periods with respect thereto
shall have expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Commission, the Maryland Bank Commissioner, and, if
required, the Delaware Bank Commissioner) and any appropriate Federal
regulatory agencies in addition to the Federal Reserve shall have approved
the Affiliation and the steps necessary to accomplish the Affiliation to
the extent, if any, required by applicable state or federal laws and all
required waiting periods with respect thereto shall have expired.
(c) That the Registration Statement shall have been declared effective
by the SEC and any applicable state securities regulatory authorities and
there shall not be in effect a stop order with respect thereto.
(d) That stockholders of the Corporation and Fredericksburg who are
affiliates of the Corporation for the purposes of Accounting Series Release
No. 135 shall have entered into agreements with the Corporation in form and
substance satisfactory to the Corporation, necessary or desirable to assure
the ability to use pooling-of-interests accounting for the Affiliation and
to conform with SEC Rule 145.
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(e) That the Corporation shall have received a letter from its
independent certified public accountants to the effect that the Affiliation
qualifies for pooling-of-interests accounting treatment if consummated in
accordance with this Agreement.
(f) That any consent to the transaction by any lessor of any office of
the Bank shall have been obtained, if in the opinion of the Corporation,
such consent is necessary or desirable.
(g) That all other consents or approvals, governmental or otherwise,
that in the opinion of counsel for the Corporation are necessary to permit,
enable or facilitate the Affiliation, shall have been granted or issued and
shall have become effective.
(h) That since December 31, 1993, Fredericksburg and the Bank shall
not have authorized or distributed any of their assets to their respective
stockholders by way of dividends or otherwise, except that (i)
Fredericksburg declared in December 1993 and paid in January 1994, a cash
dividend of $.25 per share; (ii) Fredericksburg may declare in March 1994
and pay in April 1994, a cash dividend of $.25 per share; (iii)
Fredericksburg may declare in June 1994 and pay in July 1994, a cash
dividend of $.25 per share; (iv) Fredericksburg may declare in September
1994 and pay in October 1994, a cash dividend of $.25 per share; (v)
Fredericksburg may declare in December 1994 and pay in January 1995, a cash
dividend of $.25 per share; (vi) Fredericksburg may declare in March 1995
and pay in April 1995, a cash dividend of $.25 per share; and (vii) the
Bank may declare and pay cash dividends to Fredericksburg in accordance
with past practice.
(i) That since December 31, 1993, Fredericksburg and the Bank shall
not have issued or authorized the issuance of additional shares of their
respective capital stock of any class or options to buy shares of said
stock or warrants or rights to subscribe thereto or any notes, debentures
or other evidences of indebtedness (other than certificates of deposit
issued by the Bank in the normal course of business) or issued or
authorized the issuance of other securities in respect of, in lieu of, or
in substitution for the now outstanding shares of capital stock, or
repurchased or redeemed any of their capital stock or changed their
respective capitalization or made any distribution of their earnings or
assets other than as provided in Section 1.13(h) above or as otherwise
agreed in writing by the Corporation, and Fredericksburg shall not have
sold, transferred or granted any option or other rights with respect to the
capital stock of the Bank held by Fredericksburg.
(j) That, except with the prior written approval of the Corporation,
there shall have been no increase in the compensation, or rate of
compensation, payable or to become payable by Fredericksburg or the Bank to
any director, officer or employee thereof, other than in the normal and
ordinary course of business, or the establishment of, or an agreement to
establish by Fredericksburg or the Bank, any early retirement program or
arrangement for certain employees, or, except in the ordinary course of
business, any payment of any bonus, profit sharing, severance or other
extraordinary compensation or change in any presently existing stock
option, employee stock ownership, profit sharing, pension, retirement,
bonus, severance, group life or health insurance or other plan, agreement
or arrangement, and that Fredericksburg and the Bank shall not have adopted
or entered into any new employment, stock option, employee stock ownership,
profit sharing, pension, retirement, bonus, group life or health insurance
or other benefit plan, agreement or arrangement.
(k) That, subject to the obligations of their respective Boards' of
Directors, Fredericksburg or the Bank, as the case may be, if requested by
the Corporation, shall have sold any securities that were added to their
respective securities portfolios between the date of the list of their
securities referred to in Section 1.7(h) and the date of this Agreement and
shall have replaced them with securities acceptable to the Corporation, and
that between the date of this Agreement and the Effective Date, no other
change by way of acquisition or sale shall have been made in Fredericksburg
or the Bank's securities portfolios without the approval of the
Corporation.
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(l) That there are granted or issued any such consents or approvals,
governmental or otherwise, which are necessary to permit or enable the Bank
after the Effective Date to conduct all and every part of the business and
activities conducted by the Bank prior to the Effective Date in the manner
in which such activities and business were then conducted and at the
offices at which they are conducted as of the date of this Agreement.
(m) That the holders of no more than 10% of Fredericksburg's
outstanding capital stock (or of such smaller percentage which, if
exceeded, together with other factors, in the judgment of the Corporation,
would preclude accounting for the Affiliation as a pooling-of-interests)
shall have filed written notice with Fredericksburg, before the vote is
taken at the shareholders meeting at which the Affiliation is to be voted
upon, that they intend to demand payment of the fair value of their shares
if the Affiliation is effectuated, and not voted in favor of the
Affiliation.
(n) That Fredericksburg shall not have opened any new, or closed any
existing, offices without the consent of the Corporation, unless required
to do so in connection with any governmental or regulatory enforcement
action.
(o) That, except to the extent accrued for in Fredericksburg's
December 31, 1993 Financial Statements and the Bank's December 31, 1993
Financial Statements, no condition shall exist and no event shall have
occurred, or shall be threatened, and no claim or litigation shall be
pending or threatened and no settlement of any claim or litigation shall
have occurred, that in the reasonable opinion of the Corporation does or
may materially and adversely affect the income, operations, financial
position, business, or assets of Fredericksburg or the Bank.
(p) That there shall be no actual or threatened legal proceeding or
impediment that in the reasonable opinion of the Corporation might prevent
the consummation of the Affiliation.
(q) That no condition shall exist and no event shall have occurred, or
shall be threatened, and no claim, assessment or litigation shall be
pending or threatened and no settlement of any claim, assessment or
litigation shall have occurred, which does or may adversely affect the
tax-qualified status of any Qualified Plan or which may result in costs for
unanticipated benefit liabilities with respect to any Qualified Plan and,
as a consequence, does or may, in the reasonable opinion of the
Corporation, materially and adversely affect the income, operations,
financial position, business, or assets of Fredericksburg, the Bank or such
Qualified Plan.
(r) That the representations of Fredericksburg contained in Section
1.7 of this Agreement (other than paragraph (c)) shall be true in all
material respects on and as of the Effective Date as if made again as of
such date, and that, on request of the Corporation, and as of the Effective
Date, the President of Fredericksburg shall deliver a written certificate
to the Corporation that, to his best knowledge, the representations of
Fredericksburg set forth in this Agreement (other than paragraph (c) of
Section 1.7) are true and correct in all material respects as if made on
and as of the date of such certificate and that the conditions set forth
herein required to have been met by Fredericksburg by such date have,
without exception, been met.
Conditions (d), (e), (f), (g), (h), (i), (j), (k), (1), (m), (n), (o), (p),
(q), and (r), may be waived by the Corporation.
1.14 Conditions to Fredericksburg's Obligations. (a) The obligation of
Fredericksburg to consummate the Affiliation under this Agreement is subject to
the condition that Fredericksburg shall have received an opinion of counsel
substantially to the effect that, upon completion of the Affiliation (except as
to the disposition of fractional shares):
(1) no gain or loss will be recognized to the stockholders of
Fredericksburg upon receipt by them of Common Stock in exchange for common
stock of Fredericksburg;
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(2) provided that Fredericksburg common stock is held as a capital
asset, the basis of the Common Stock received by such stockholders of
Fredericksburg will be the same as the basis of the common stock of
Fredericksburg surrendered by such stockholders in exchange for the Common
Stock;
(3) provided that Fredericksburg common stock is held as a capital
asset, such stockholders' holding period of the Common Stock received by
them will include the stockholders' holding period of the common stock of
Fredericksburg which is surrendered in exchange for such Common Stock.
(b) The obligation of Fredericksburg to consummate the Affiliation under
this Agreement is subject to the satisfaction prior to, and at the Effective
Date, of the following further conditions that the representations of the
Corporation contained in Section 1.6 of this Agreement (other than paragraph
(d)) shall be true in all material respects on and as of the Effective Date as
if made again as of such date, and that, on request of Fredericksburg, and as of
the Effective Date, the President of the Corporation shall deliver a written
certificate to Fredericksburg that, to his best knowledge, the representations
of the Corporation set forth in this Agreement (other than paragraph (d) of
Section 1.6) are true and correct in all material respects as if made on and as
of the date of such certificate and that the conditions set forth herein
required to have been met by the Corporation by such date have, without
exception, been met.
1.15 Lease Renewal. The Bank occupies its Courtland Office pursuant to a
Deed of Lease with Fredericksburg National Corp. dated as of October 31, 1986
("Courtland Office Lease"). The Bank also occupies its Main Office pursuant to a
Deed of Lease with Fredericksburg National Corp. dated January 7, 1976, and
restated as of March 29, 1977 (the "Main Office Lease"). The Corporation will
not object to the Bank's affirmative exercise of the renewal option contained in
Section 19.1 of the Courtland Office Lease, whether before or after consummation
of the Affiliation, if in its judgment, the Board of Directors of the Bank
decides that course of action to be desirable for the Bank, provided that
changes, mutually acceptable to the parties hereto, are made with respect to
assignability of the Courtland Office and Main Office Leases, uses permitted in
both leases and the period for exercising the purchase option in the Courtland
Office Lease as a condition to such lease renewal of the Courtland Office Lease.
1.16 Fairness Opinion. The obligation of Fredericksburg to consummate the
Affiliation under this Agreement is subject to the further condition that the
Fredericksburg proxy statement referred to in Section 1.6(e) hereof shall
contain the written opinion of Scott & Stringfellow, Inc. (or such other
recognized investment firm as Fredericksburg may select), dated
contemporaneously with the date of the proxy statement, to the effect that the
consideration to be received in the Affiliation is fair to the stockholders of
Fredericksburg from a financial point of view.
1.17 Confidentiality. Between the date of this Agreement and the Effective
Date, the Corporation and Fredericksburg each will maintain in confidence, and
cause its directors, officers, employees, agents and advisors to maintain in
confidence, and not use to the detriment of the other party, any written, oral
or other information obtained in confidence from the other party or a third
party in connection with this Agreement or the transactions contemplated hereby
unless such information is already known to such party or to others not bound by
a duty of confidentiality or unless such information becomes publicly available
through no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Affiliation is not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested except to the extent that it is necessary or appropriate
for the party to retain the information in connection with any legal proceedings
relating to the Agreement.
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<PAGE>
ARTICLE II
THE AFFILIATION
2.1 Effective Date. Subject to the terms and conditions contained in this
Agreement, as soon as practicable after the performance of all agreements and
obligations of the parties hereunder and upon fulfillment or waiver of all
conditions precedent contained herein, the Corporation and Fredericksburg will
execute and deliver Articles of Merger in such form(s) as in the opinion of
counsel to the Corporation may be required by Virginia and Maryland law (the
"Articles") and any other documents required by law to effectuate the
Affiliation, and will file the Articles with the Commission and with the State
Department of Assessments and Taxation of the State of Maryland. The effective
date and time of the Affiliation (the "Effective Date") shall be the effective
date and time set forth in Articles as filed with the Maryland State Department
of Assessments and Taxation and the Commission, but, in no event, shall such
effective date and time be prior to the acceptance for filing of Articles with
the Commission or more than fifteen days after the issuance of a Certificate of
Merger by the Commission. After all of the conditions set forth in this
Agreement have been met or waived, the Effective Date will be the earliest
practical date that is the last business day of a month, or such other date as
may be acceptable to the Corporation and Fredericksburg.
2.2 Corporation's Obligations in Accomplishing the Affiliation. In order to
effect the Affiliation as aforesaid, the Corporation will (i) prepare and file
with the Federal Reserve and the Commission, applications requesting approval of
the Affiliation, (ii) cause its Maryland banking affiliates to file with the
Bank Commissioner of Maryland, an application for approval, as required by the
Financial Institutions Article of the Annotated Code of Maryland, of the
affiliation of such Maryland banking affiliates with the Bank and its affiliates
that will result from the Affiliation, and; (iii) prepare and file any other
necessary regulatory applications and use its best efforts to obtain approval of
all such applications.
2.3 Fredericksburg's Obligations in Accomplishing the Affiliation. At such
times as shall be requested by the Corporation, Fredericksburg and its
management and directors shall, and will also cause the Bank and its management
and directors to, (i) cooperate with and assist the Corporation in the
preparation and filing with the Commission of an application requesting approval
of the Corporation's acquisition of Fredericksburg and the Bank pursuant to
Section 6.1-399 of the Code of Virginia, or any successor statute thereto, (ii)
cause the publication of any newspaper notices required by law or by the
Commission with respect to the Affiliation or such acquisition, (iii) duly call
and convene a meeting of Fredericksburg's stockholders to vote on the
Affiliation and, in connection therewith and subject to the fiduciary duties of
the Board of Directors of Fredericksburg (as advised in writing by its counsel),
but only as such fiduciary duty is encompassed in, contemplated by, and within
the scope of Section 1.12, approve and recommend this Agreement, the Plan of
Merger and the Affiliation to Fredericksburg's stockholders and use their best
efforts to obtain a favorable vote thereon; and (iv) take such action as shall
be required by law, including, if so required, the appointment of a co-fiduciary
for such purpose, to permit shares of common stock of Fredericksburg held by the
Bank as fiduciary to be voted on the Affiliation. In connection with the
submission of the Plan of Merger to the stockholders of Fredericksburg under
Section 13.1-718 of the Virginia Corporation Law, Fredericksburg agrees that its
Board of Directors will not take any action that would have the effect of
requiring that the Plan of Merger be approved by more than a majority of the
votes entitled to be cast on the matter nor, pursuant to provisions of Section
13.1-718C of the Virginia Corporation Law hereinafter defined, impose any
condition to approval of the Plan of Merger by the stockholders of
Fredericksburg.
2.4 Stockholder Approval. The Affiliation is subject to the additional
nonwaivable condition that this Agreement, the Plan of Merger, and the
Affiliation, having been heretofore approved by more than two-thirds of the
entire Board of Directors of Fredericksburg, shall have been approved by
stockholders of Fredericksburg holding not less than a majority of the votes
entitled to be cast on the matter at a
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meeting of Fredericksburg's stockholders duly called for that purpose and duly
constituted, at which a quorum is present and acting throughout, subject,
however, to the rights of the Corporation under Section 1.13(m) hereof.
2.5 Effect of the Affiliation. Upon the Effective Date, Fredericksburg
shall be merged with and into the Corporation in accordance with this Agreement
and the Plan of Merger and pursuant to the applicable provisions of Title 13.1
of the Code of Virginia, 1950, as amended (the "Virginia Corporation Law") and
the Maryland General Corporation Law and with the effect provided in said
provisions. The Corporation shall be the successor in the Affiliation (or, under
Virginia law, the "surviving" corporation); no amendments to its charter will be
effected by the Affiliation.
2.6 Terms of the Affiliation. On the Effective Date and immediately upon
the Affiliation provided for in this Agreement becoming effective with the
effects set forth in Section 3-114 of the Maryland General Corporation Law, or
any successor statutory provisions thereto, and in consideration thereof, the
terms of the Affiliation shall be as set forth in the Plan of Merger.
2.7 Confirmatory Deeds. When and as reasonably requested by the
Corporation, Fredericksburg shall execute and deliver or cause to be executed
and delivered, all such deeds and other instruments, and take or cause to be
taken all such further or other actions, as the Corporation may deem necessary
or desirable in order to vest or perfect in or confirm of record or otherwise to
the Corporation as Successor in the merger, title to and possession of all real
estate and other property of Fredericksburg, and otherwise to carry out the
intent and purposes of this Agreement and the Affiliation.
2.8 Procedural Matters. The Corporation, at its option, may revise the
sequence of events or similar matters relating to the Affiliation in such manner
as the President of the Corporation, acting on the advice of its legal counsel,
may reasonably determine will best facilitate accomplishment of the Affiliation.
2.9 Benefit Plans. (a) At the option of the Corporation (which may be
applied on a plan or program by plan or program basis), after the Effective Date
and through December 31, 1995, employees of Fredericksburg and the Bank shall be
entitled to participate either (x) in the Corporation's employee benefit plans
and programs on substantially the same basis as similarly situated employees of
the Corporation (taking into account all applicable factors, including but not
limited to position, employment classification, age, length of service, pay,
part time or full time status, and the like, as well as changes made in such
plans and programs in the future) or (y) in plans and programs which, subject to
changes required by applicable laws or by limitations imposed by insurance
companies providing plan benefits and to the cessation of contributions to the
ESOP as provided herein, are comparable to and provide for participation on
substantially the same basis as Fredericksburg's and the Bank's plans and
programs currently in effect. If and to the extent option (x) is effectuated:
(1) The Corporation agrees that (i) the coverage under its plans and
programs shall be available to each employee of Fredericksburg and the Bank
and his or her dependents without regard to any waiting period, evidence or
requirement of insurability, actively at work requirement or preexisting
condition exclusion or limitation (except to the extent and in the manner
any such waiting period, evidence or requirement of insurability, actively
at work requirement or exclusion or limitation applies immediately prior to
the effectuation of option (x)) and (ii) amounts paid or payable by
employees for health care expenses for the portion of the annual benefit
period prior to the date as of which option (x) becomes effective shall be
credited in satisfaction of any deductible requirement and any
out-of-pocket limit for the balance of the annual benefit period which
includes such date.
(2) The Corporation agrees to treat service with Fredericksburg and
the Bank before the Effective Date as service with the Corporation for
purposes of eligibility to begin participation and vesting (but not benefit
accruals unless otherwise determined by the Corporation) for purposes of
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all employee benefit and seniority based plans and programs, including but
not limited to annual, sick and personal leave accruing following the
Effective Date.
(b) The Corporation understands that Fredericksburg and the Bank are
currently designing an early retirement incentive program (the "Proposed Early
Retirement Program") anticipated to become effective in 1994. Fredericksburg
agrees and has caused the Bank to agree that the Proposed Early Retirement
Program shall not be established or implemented in any manner without the prior
written approval of the Corporation.
2.10 Indemnification. The Corporation agrees that following the Effective
Date, it shall indemnify and hold harmless any person who has rights to
indemnification from Fredericksburg, to the same extent and on the same
conditions as such person is entitled to indemnification pursuant to Virginia
Corporation Law, hereinafter defined, and Fredericksburg's Articles of
Incorporation, as in effect on the date of this Agreement, to the extent legally
permitted to do so with respect to matters occurring on or prior to the
Effective Date, including, without limitation, the transactions contemplated in
this Agreement and the Stock Option Agreement, but, in no event, shall the
Corporation's obligations hereunder be greater than those of Fredericksburg as
of the date of this Agreement. Without limiting the foregoing, in any case in
which corporate approval may be required to effectuate any indemnification with
respect to a director of Fredericksburg, the Corporation shall, to the extent
required by Fredericksburg's Articles of Incorporation as of the date of this
Agreement, direct, at the election of the party to be indemnified, that the
determination of permissibility of indemnification shall be made by independent
counsel mutually agreed upon between the Corporation and the indemnified party.
The Corporation shall use its reasonable best efforts to maintain
Fredericksburg's existing directors' and officers' liability policy, or some
other policy, including the Corporation's existing policy, providing at least
comparable coverage, covering persons who are currently covered by such
insurance of Fredericksburg for a period of three years after the Effective Date
on terms no less favorable than those in effect on the date hereof.
2.11 Public Announcements. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Affiliation and shall not issue any such press release or make any such
public statement prior to such consultation, except as may be required by law.
2.12 Non-Survival of Representations, Warranties and Covenants. Except for
Sections 1.2, 1.14 (with respect to the tax opinion), 1.15, 1.17, 2.6, 2.7 and
2.10 of this Agreement, none of the respective representations and warranties,
obligations, covenants and agreements of the parties shall survive the Effective
Date.
ARTICLE III
MISCELLANEOUS
3.1 Termination. Notwithstanding any other provision of this Agreement, and
notwithstanding the approval of this Agreement and the Plan of Merger by the
stockholders of Fredericksburg, this Agreement may be terminated and the
Affiliation abandoned at any time prior to the Effective Date:
(a) By the mutual consent of Fredericksburg and the Corporation.
Action by the Executive Committee of the Board of Directors of the
Corporation or by any officer of the Corporation to whom such authority has
been delegated shall satisfy the requirements of this Section 3.1(a).
(b) By the Corporation if the conditions set forth in Sections 1.8,
1.9, 1.10, 1.11, 1.13, 2.3 or 2.4 have not been met or waived by the
Corporation.
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<PAGE>
(c) By the Corporation if at any time the Corporation receives
information from any regulatory authority, which by law is required to
approve the Affiliation or any other aspect of the transactions
contemplated herein, or which has authority to challenge the validity of
the Affiliation or such transactions in judicial proceedings or otherwise,
that provides a substantial basis for reasonably concluding that the
required regulatory approval will not be granted or the Affiliation or such
transactions will be so challenged.
(d) By the Corporation if Fredericksburg recommends to its
stockholders or accepts an Acquisition Proposal or if a Purchase Event (as
defined in the Stock Option Agreement) occurs.
(e) By Fredericksburg if the conditions set forth in Sections 1.14,
1.16, and 2.4 have not been met or waived by Fredericksburg.
(f) By Fredericksburg if, in compliance with Section 1.12 hereof, it
recommends to its stockholders or accepts an Acquisition Proposal.
(g) By the Corporation or Fredericksburg if the Affiliation is not
consummated by March 31, 1995.
(h) By the Corporation by written notice to Fredericksburg before the
close of business on the day immediately following the date hereof, if the
Stock Option Agreement shall not yet have been entered into by the close of
business on such date.
3.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement and the Affiliation pursuant to Section 3.1, this Agreement
shall become void and have no effect, except that (a) the last sentence of
Section 1.17 and all of Sections 2.11 and 3.4 shall survive any such termination
and abandonment and (b) no party shall be relieved of or released from any
liability arising out of an intentional breach of any provision of this
Agreement.
3.3 Amendment. This Agreement may be amended, but only in writing executed
by Fredericksburg and the Corporation, at any time prior to the Effective Date
and with respect to any of the terms and provisions hereof; provided, however,
that after the stockholders of Fredericksburg have approved the Affiliation, no
amendment to this Agreement shall be made that alters the conversion rate or
kind of shares to be received as set forth in Section 1.2 (except pursuant to
Section 1.6(k)) or otherwise adversely affects the rights of Fredericksburg's
stockholders or changes the articles of incorporation of either corporation.
Action by the Executive Committee of the Board of Directors of the Corporation
or by any officer of the Corporation to whom such authority has been delegated
by the Corporation's Board of Directors shall satisfy the requirements of this
Section 3.3.
3.4 Expenses. If this Agreement is terminated pursuant to Section 3.1 and
the transactions hereunder are not consummated, each party to this Agreement
shall pay its own expenses relating hereto, including fees and disbursements of
its respective counsel and of any investment or financial advisor retained by
it; provided, however, that in such event, the Corporation will pay for the
preparation of the regulatory filings referred to herein, and for the filing
fees relating thereto, the printing and mailing of the Registration and Proxy
Statement, and all fees and disbursements of accountants (not including routine
auditing fees) for either of the parties hereto.
3.5 Notices. All notices or other communications required or permitted
under the terms of this Agreement shall be sufficient if sent by registered or
certified mail, postage prepaid, or with respect to any notice of termination
under Section 3.1(h), if sent by telecopy, addressed as follows:
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<PAGE>
If to the Corporation:
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 1-410-237-5309
Attention: John A. O'Connor, Jr.,
Senior Vice President and Secretary
If to Fredericksburg:
Fredericksburg National Bancorp, Inc.
2403 Fall Hill Avenue
P.O. Box 7207
Fredericksburg, Virginia 22404-7207
Fax No. 1-703-371-7480
Attention: Gregory R. Bosiack, President
or to such other address as shall hereafter be provided in writing by the
Corporation or Fredericksburg, respectively. Any notice or communication given
pursuant to this Agreement shall be deemed to have been given on the day it is
mailed.
3.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
together be deemed one and the same Agreement.
3.7 Binding Effect; No Third-Party Rights. This Agreement shall bind the
Corporation and Fredericksburg and their respective successors and assigns.
Other than Section 2.10, nothing in this Agreement is intended to confer upon
any individual, corporation or other entity, other than the parties hereto or
their respective successors, any rights or remedies under or by reason of this
Agreement.
3.8 Applicable Law. This Agreement shall be governed by the laws of
Maryland.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
MERCANTILE BANKSHARES CORPORATION
By: /s/_EDWARD K. DUNN, JR.
___________________________ (SEAL)
Edward K. Dunn, Jr.
President
FREDERICKSBURG NATIONAL BANCORP, INC.
By: /s/_DUVAL Q. HICKS
___________________________ (SEAL)
DuVal Q. Hicks
Chairman
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<PAGE>
EXHIBITS A AND C AND SCHEDULES 1 THROUGH 3 TO
THE AGREEMENT AND PLAN
OF AFFILIATION AND MERGER
ARE OMITTED
A-26
<PAGE>
EXHIBIT B
PLAN OF MERGER
OF
FREDERICKSBURG NATIONAL BANCORP, INC.
WITH AND INTO
MERCANTILE BANKSHARES CORPORATION
1. The Parties. Fredericksburg National Bancorp, Inc., a Virginia
corporation and federally registered bank holding company ("Fredericksburg"),
shall merge (the "Merger") with and into Mercantile Bankshares Corporation, a
Maryland corporation and federally registered bank holding company
("Mercantile") (collectively, the "Constituent Corporations"). Mercantile shall
be (and is hereinafter called when reference is made to it after the
consummation of the Merger) the surviving corporation (the "Surviving
Corporation").
2. Effective Date. The Merger shall be effective on such date as may be
determined in accordance with the Agreement and Plan of Affiliation and Merger
described in Section 7 (the "Effective Date").
3. Conversion and Exchange of Shares.
(a) Each share of the common stock of Mercantile issued and
outstanding immediately prior to the Effective Date shall remain issued and
outstanding after the Merger as one share of common stock of the Surviving
Corporation, without any action on the part of the holder thereof.
(b) Subject to Subparagraph 3(d) below, each share of the issued and
outstanding common stock of Fredericksburg (other than the shares of
dissenting shareholders of Fredericksburg redeemed pursuant to Subparagraph
3(c) hereof and shares owned by Mercantile, or any direct or indirect
subsidiary of Mercantile, other than in a fiduciary capacity), for all
corporate purposes and without any further action on the part of the
holders thereof, shall automatically become and be converted into 2.84
shares of the common stock of the Surviving Corporation. All shares of the
common stock of Fredericksburg owned by Mercantile or any direct or
indirect subsidiary of Mercantile, other than in a fiduciary capacity,
shall, by virtue of the Merger be cancelled, and shall not be converted
into common stock of the Surviving Corporation. Certificates representing
shares of common stock of Fredericksburg which have been converted to
shares of common stock of the Surviving Corporation shall thereafter
represent shares of the common stock (and the right to cash for fractional
shares) in the aforementioned proportions. Such certificates may at any
time after the Effective Date be surrendered to Mercantile-Safe Deposit and
Trust Company, a Maryland banking institution acting as exchange agent (the
"Exchange Agent"), and exchanged by the holders thereof for new
certificates representing the appropriate number of whole shares of common
stock of the Surviving Corporation determined by the above conversion
formula and for cash in lieu of any fractional shares as set forth in
Subparagraph 3(d) below. No dividends or other distributions shall be paid
on any person's converted shares until such person has been issued a new
certificate in the name of the Surviving Corporation. When the new
certificates have been issued, the holders thereof shall be entitled to and
shall be paid, without interest, the amount of all dividends or other
distributions that have theretofore, but after the Effective Date, become
payable to holders of record after the Effective Date with respect to the
number of whole shares of common stock represented by the certificate
issued upon such surrender or exchange.
(c) Any shares of common stock of Fredericksburg with respect to which
the holder, consistently with the requirements of Article 15 of Title 13.1
of the Code of Virginia, 1950, as amended (the "Virginia Corporation Law"),
(i) prior to the vote of stockholders on this Plan of Merger, files written
notice of his intention to demand payment for his shares if the Merger is
effected, (ii) effects no change in the beneficial ownership of his shares
from the date of such filing through the Effective Date, (iii) refrains
from voting his or her shares in favor of the Merger
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<PAGE>
contemplated by this Plan of Merger, and (iv) within thirty (30) days after
the delivery by the Corporation of a notice to demand payment pursuant to
Section 13.1-734 of the Virginia Corporation Law ("Dissenter's Notice")
demands payment and deposits his certificates for such shares in accordance
with said Dissenter's Notice, shall be entitled to receive from
Fredericksburg or the Surviving Corporation, as the case may be, in cash
the fair value of his shares of the common stock of Fredericksburg,
determined in accordance with the provisions of Article 15 of the Virginia
Corporation Law, or any successor statute thereto, plus interest from the
date his shares are deposited in accordance with the Dissenter's Notice
until payment therefor.
(d) No certificates will be issued for fractional shares of the
Surviving Corporation's common stock, but, in lieu thereof, and solely as a
mechanism for rounding shareholdings to whole shares, the Surviving
Corporation will pay cash for such fractional shares on the basis of the
closing price for Mercantile's common stock (as reported by NASDAQ/NMS) on
the Effective Date (or if no closing price is reported on that date, then
the closing price on the next preceding day on which there is a closing
price), without interest, upon surrender of certificates of common stock of
Fredericksburg representing such fractional shares No such holder shall be
entitled to dividends, voting rights or any other rights of shareholders in
respect of any fractional share.
4. Articles of Incorporation and Bylaws. On the Effective Date, the
Articles of Incorporation and Bylaws of Mercantile in effect immediately prior
to the Effective Date shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation until amended or restated in accordance with applicable
law.
5. Board of Directors; Officers. The directors and officers of Mercantile
who hold office immediately prior to the Effective Date shall thereafter be the
directors and officers of the Surviving Corporation until their successors be
elected and qualify.
6. Further Assurances. If at any time the Surviving Corporation shall
consider or be advised that any further assignments, conveyances or assurances
are necessary or desirable to vest, perfect or confirm the Surviving Corporation
with title to any property or rights of the Constituent Corporations, or
otherwise carry out the provisions hereof, the proper officers and Directors of
Fredericksburg or Mercantile, as the case may be, before the Effective Date and
thereafter the officers of the Surviving Corporation acting on behalf of
Fredericksburg or Mercantile, as the case may be, shall execute and deliver any
and all proper assignments, conveyances and assurances, and do all things
necessary or desirable to vest, perfect or confirm the Surviving Corporation
with title to such property or rights and otherwise carry out the provisions
hereof.
7. Modification and Amendment. Any of the terms and provisions of this Plan
of Merger may be amended at any time prior to the Effective Date, by a writing
executed by the Constituent Corporations; provided, however, that after the
stockholders of Fredericksburg have approved the Plan of Merger, no amendment in
this Plan of Merger shall be made that alters the conversion rate or kind of
shares to be received as set forth in Paragraph 3 (except pursuant to the
anti-dilution provisions contained in Section 1.5(k) of that certain Agreement
and Plan of Affiliation and Merger between the Constituent Corporations dated
March 29, 1994, a copy of which has been provided to each shareholder together
herewith, which provision is incorporated herein by reference) or otherwise
adversely affects the rights of Fredericksburg's stockholders. Action by the
Executive Committee of the Board of Directors of Mercantile or by any officer of
either Constituent Corporation to whom such authority has been delegated by
their respective Boards of Directors shall satisfy the requirements of this
paragraph.
8. Termination and Abandonment. This Plan of Merger may be terminated and
the Merger abandoned at any time prior to the Effective date by the mutual
consent in writing of the Constituent Corporations or otherwise in accordance
with the Agreement and Plan of Affiliation and Merger referred to above.
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<PAGE>
ANNEX B
OPINION OF SCOTT & STRINGFELLOW, INC.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[LETTERHEAD OF SCOTT & STRINGFELLOW, INC.]
, 1994
Board of Directors
Fredericksburg National Bancorp, Inc.
Fredericksburg, Virginia
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Fredericksburg National Bancorp,
Inc. ("FNB") of the terms of an Agreement and Plan of Affiliation and Merger
between Mercantile Bankshares Corporation ("Mercantile") and FNB dated March 29,
1994 and a related Plan of Merger (collectively the "Agreements"). The
Agreements provide for the merger of FNB with and into Mercantile (the
"Affiliation") and further provide that each share of Common Stock of FNB which
is issued and outstanding immediately prior to the Effective Date of the
Affiliation may be converted into and exchanged for 2.84 shares of Mercantile
Common Stock.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Agreements; (2) the Form S-4 Registration Statement filed with
the Securities and Exchange Commission in connection with the Affiliation; (3)
FNB's financial statements for the four years ended December 31, 1993; (4) FNB's
unaudited financial statements for the three months ended March 31, 1993 and
1994, and other internal information relating to FNB prepared by FNB's
management; (5) information regarding the trading market for the common stocks
of FNB and Mercantile and the price ranges within which the respective stocks
have traded; (6) the relationship of prices paid to relevant financial data such
as net worth, loans, deposits and earnings in certain bank and bank holding
company mergers and acquisitions in Virginia in recent years; (7) Mercantile's
annual reports to shareholders and its financial statements for the four years
ended December 31, 1993; and (8) Mercantile's unaudited financial statements for
the three months ended March 31, 1993 and 1994, and other internal information
relating to Mercantile prepared by Mercantile's management. We have discussed
with members of management of FNB and Mercantile the background to the
Affiliation, reasons and basis for the Affiliation and the business and future
prospects of FNB and Mercantile individually and as a combined entity. Finally,
we have conducted such other studies, analyses and investigations, particularly
of the banking industry, and considered such other information as we deemed
appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the information furnished to us by
or on behalf of FNB and Mercantile. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of FNB or Mercantile. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience in business valuation
in general.
B-1
<PAGE>
On the basis of our analyses and review and in reliance on the accuracy and
completeness of the information furnished to us and subject to the conditions
noted above, it is our opinion that, as of the date hereof the terms of the
Agreements are fair from a financial point of view to the holders of FNB Common
Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By:
..................................
Gary S. Penrose
Managing Director
Financial Institutions Group
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<PAGE>
ANNEX C
ARTICLE 15
OF
TITLE 13.1
OF THE
VIRGINIA STOCK
CORPORATION ACT
<PAGE>
ANNEX C
ARTICLE 15.
DISSENTERS' RIGHTS
Sec.13.1-729. DEFINITIONS.--In this article:
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under Sec.13.1-730 and who exercises that right when and in the manner
required by Sec.13.1-732 through Sec.13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
Sec.13.1-730. RIGHT TO DISSENT.--A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
Sec.13.1-718 or the articles of incorporation and the shareholder is
entitled to vote on the merger or (ii) if the corporation is a subsidiary
that is merged with its parent under Sec.13.1-719;
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
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<PAGE>
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or (ii) held by at least 2,000 record
shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such
shares provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date fixed
to determine the shareholders entitled to receive notice of and to vote
at the meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and
is not approved by a majority of "disinterested directors" as such terms
are defined in Sec.13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
Sec.13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
Sec.13.1-732. NOTICE OF DISSENTERS' RIGHTS.--A. If proposed corporate
action creating dissenters' rights under Sec.13.1-730 is submitted to a vote at
a shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
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B. If corporate action creating dissenters' rights under Sec.13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in Sec.13.1-734.
Sec.13.1-733. NOTICE OF INTENT TO DEMAND PAYMENT.--A. If proposed corporate
action creating dissenters' rights under Sec.13.1-730 is submitted to a vote at
a shareholders' meeting, a shareholder who wishes to assert dissenters' rights
(i) shall deliver to the corporation before the vote is taken written notice of
his intent to demand payment for his shares if the proposed action is
effectuated and (ii) shall not vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
Sec.13.1-734. DISSENTERS' NOTICE.--A. If proposed corporate action creating
dissenters' rights under Sec.13.1-730 is authorized at a shareholders' meeting,
the corporation, during the ten-day period after the effectuation of such
corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of Sec.13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before or after that date;
4. Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
Sec.13.1-735. DUTY TO DEMAND PAYMENT.--A. A shareholder sent a dissenters'
notice described in Sec.13.1-734 shall demand payment, certify that he acquired
beneficial ownership of the shares before or after the date required to be set
forth in the dissenters' notice pursuant to paragraph 3 of subsection B of
Sec.13.1-734, and, in the case of certificated shares, deposit his certificates
in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
Sec.13.1-736. SHARE RESTRICTIONS.--A. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
Sec.13.1-737. PAYMENT.--A. Except as provided in Sec.13.1-738, within
thirty days after receipt of a payment demand made pursuant to Sec.13.1-735, the
corporation shall pay the dissenter the amount the
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<PAGE>
corporation estimates to be the fair value of his shares, plus accrued interest.
The obligation of the corporation under this paragraph may be enforced (i) by
the circuit court in the city or county where the corporation's principal office
is located, or, if none in this Commonwealth, where its registered office is
located or (ii) at the election of any dissenter residing or having its
principal office in the Commonwealth, by the circuit court in the city or county
where the dissenter resides or has its principal office. The court shall dispose
of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the
corporate action creating dissenters' rights, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
Sec.13.1-739; and
4. A copy of this article.
Sec.13.1-738. AFTER-ACQUIRED SHARES.--A. A corporation may elect to
withhold payment required by Sec.13.1-737 from a dissenter unless he was the
beneficial owner of the shares on the date of the first publication by news
media or the first announcement to shareholders generally, whichever is earlier,
of the terms of the proposed corporate action, as set forth in the dissenters'
notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount of each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under Sec.13.1-739.
Sec.13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.--A. A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and the amount of interest due, and demand
payment of his estimate (less any payment under Sec.13.1-737), or reject the
corporation's offer under Sec.13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under Sec.13.1-737 or offered under Sec.13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
Sec.13.1-740. COURT ACTION.--A. If a demand for payment under Sec.13.1-739
remains unsettled, the corporation shall commence a proceeding within sixty days
after receiving the payment demand and petition the circuit court in the city or
county described in subsection B of this section to determine the fair value of
the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth were the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
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<PAGE>
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under Sec.13.1-738.
Sec.13.1-741. COURT COSTS AND COUNSEL FEES.--A. The court in an appraisal
proceeding commenced under Sec.13.1-740 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under
Sec.13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Sec.13.1-732 through Sec.13.1-739; or
2. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed did not act in good faith with respect to the rights
provided by this article.
C. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of Sec.13.1-737 the court
shall assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceedings,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The MGCL provides that a corporation may indemnify any director made a
party to a proceeding by reason of service in that capacity unless it is
established that: (1) the act or omission of the director was material to the
matter giving rise to the proceeding and (a) was committed in bad faith or (b)
was the result of active and deliberate dishonesty, or (2) the director actually
received an improper personal benefit in money, property or services, or (3) in
the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. To the extent that a director has
been successful in defense of any proceeding, the MGCL provides that he shall be
indemnified against reasonable expenses incurred in connection therewith. A
Maryland corporation may indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law.
The Registrant's Articles of Incorporation states, as to indemnification:
(a) The liability of directors and officers to Mercshares or its
stockholders for money damages shall be limited to the maximum extent that
the liability of directors and officers of Maryland corporations is
permitted to be limited by Maryland law. This limitation on liability shall
apply to events occurring at the time a person serves as a director or
officer of Mercshares whether or not such person is a director or officer
at the time of any proceeding in which liability is asserted.
(b) To the maximum extent permitted by Maryland law, Mercshares shall
indemnify its currently acting and its former directors against any and all
liabilities and expenses incurred in connection with their services in such
capacities, shall indemnify its currently acting and its former officers to
the full extent that indemnification shall be provided to directors, and
shall indemnify, to the same extent, its employees and agents and persons
who serve and have served, at its request as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint
venture or other enterprise. Mercshares shall advance expenses to its
directors, officers and other person referred to above to the extent
permitted by Maryland law. Mercshares' Board of Directors may by Bylaw,
resolution or other agreement make further provision for indemnification of
directors, officers, employees and agents to the extent permitted by
Maryland law.
(c) References to Maryland law shall include the MGCL as from time to
time amended. Neither the repeal or amendment of this paragraph, nor any
other amendment to the Articles of Incorporation, shall eliminate or reduce
the protection afforded to any person by the foregoing provisions of this
paragraph with respect to any act or omission which shall have occurred
prior to such repeal or amendment.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
(a) Exhibit Index
<TABLE>
<S> <C> <C>
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
A. Agreement and Plan of Affiliation and Merger dated March 29, 1994 between the Registrant and
Fredericksburg National Bancorp, Inc. ("FNB"), and related Plan of Merger (included as Annex A
to the Prospectus and Proxy Statement)
B. Stock Option Agreement, dated as of March 30, 1994 between the Registrant and FNB (Incorporated
by reference to Schedule 13D of the Registrant dated April 8, 1994, Exhibit 1)
(4) Instruments defining the rights of security holders, including indentures, charter and by-laws:
A. Rights Agreement dated as of September 12, 1989 between Registrant and the Rights Agent,
including Form of Rights Certificate and Articles Supplementary (Incorporated by reference to
Form 8-K of the Registrant filed September 27, 1989, Exhibit 4-A)
B. First Amendment, dated as of December 31, 1989, to Rights Agreement dated as of September 12,
1989 between Registrant and the Rights Agent, including amended Form of Rights Certificate and
amended Form of Articles Supplementary (Incorporated by reference to Form 8-K of the Registrant
filed January 9, 1990, Exhibit 4-A)
C. Second Amendment, dated as of September 30, 1993, to Rights Agreement dated as of September 12,
1989 between Registrant and the Rights Agent, including amended Form of Rights Certificate
(Incorporated by reference to Form 8-K of the Registrant filed September 30, 1993, Exhibit 4-A)
D. Amendment No. 1 to Registrant's Registration Statement on Form 8-B, amending description of
securities previously filed (Incorporated by reference to Form 8 filed December 20, 1991)
(5) Opinion regarding legality.
Opinion of Venable, Baetjer and Howard
(8) Opinion regarding tax matters.
Form of Tax Opinion of Mays & Valentine
(16) Letter re Change in Certifying Accountants
(included in the consent filed as Exhibit(23)C.)
(23) Consent of Experts and counsel.
A. Consent of Coopers & Lybrand as to Registrant
B. Consent of Yount, Hyde & Barbour, P.C. as to FNB
C. Consent of Bowling, Franklin & Co. as to FNB
D. Consent of Venable, Baetjer and Howard (included in the opinion filed as Exhibit 5)
E. Consent of Mays & Valentine
F. Consent of Scott & Stringfellow, Inc.
(24) Power of Attorney.
Power of Attorney dated August 1, 1994 of the Mercshares Board of Directors
(99) Additional Exhibits.
Form of Proxy Card for FNB Annual Meeting
</TABLE>
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.
(c) Reference is made to the opinion of Scott & Stringfellow, Inc. included
as Annex C to the Prospectus and Proxy Statement.
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<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"), with
respect to FNB, to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or in the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement as to FNB, and to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; (2) that,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes the information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Baltimore, State of
Maryland on August 1, 1994.
MERCANTILE BANKSHARES CORPORATION
By: /s/ H. FURLONG BALDWIN
..................................
Name: H. Furlong Baldwin
Title: Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE> <CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------- ---------------------------------------------- ------------------
<S> <C> <C>
/s/ H. FURLONG BALDWIN Chairman of the Board and August 1, 1994
.............................................. Chief Executive Officer
H. Furlong Baldwin (Principal Executive Officer)
/s/ KENNETH A. BOURNE, JR. Executive Vice President and Treasurer August 1, 1994
.............................................. (Principal Financial Officer)
Kenneth A. Bourne, Jr.
/s/ JERRY F. GRAHAM Vice President and Controller (Principal August 1, 1994
.............................................. Accounting Officer)
Jerry F. Graham
</TABLE>
A MAJORITY OF THE BOARD OF DIRECTORS:
Thomas M. Bancroft, Jr., Richard O. Berndt, James A. Block, George L.
Bunting, Jr., Douglas W. Dodge, B. Larry Jenkins, Robert D. Kunisch, William J.
McCarthy, Morris W. Offit, Christian H. Poindexter, William C. Richardson,
Bishop L. Robinson, Donald J. Shepard, Brian B. Topping, Jay M. Wilson, Calman
J. Zamoiski, Jr.
By: /s/ H. FURLONG BALDWIN Date: August 1, 1994
............................ ..............
H. Furlong Baldwin
For Himself and as
Attorney-in-Fact
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<PAGE>
EXHIBIT INDEX
<TABLE> <CAPTION>
EXHIBIT NO. PAGE
- --------------- ---------
<S> <C> <C>
(5) Opinion regarding legality.
Opinion of Venable, Baetjer and Howard
(8) Opinion regarding tax matters.
Form of Tax Opinion of Mays & Valentine
(16) Letter re Change in Certifying Accountants (included in the consent filed as Exhibit (23)C).
(23) Consents of experts and counsel.
A. Consent of Coopers & Lybrand as to the Registrant
B. Consent of Yount, Hyde & Barbour, P.C. as to FNB
C. Consent of Bowling, Franklin & Co. as to FNB
D. Consent of Venable, Baetjer and Howard (included in the opinion filed as Exhibit 5)
E. Consent of Mays & Valentine
F. Consent of Scott & Stringfellow, Inc.
(24) Power of Attorney.
Power of Attorney dated August 1, 1994 of the Mercshares Board of Directors
(99) Additional Exhibits.
Form of Proxy for FNB Annual Meeting
</TABLE>
EXHIBIT 5
VENABLE, BAETJER AND HOWARD
1800 MERCANTILE BANK & TRUST BUILDING
2 HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
August 1, 1994
Mercantile Bankshares Corporation
Two Hopkins Plaza
P.O. Box 1477
Baltimore, Maryland 21203
Ladies and Gentlemen:
We have acted as counsel to Mercantile Bankshares Corporation, a Maryland
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-4 of the Company (the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission"), relating
to the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of 2,238,238 shares (the "Shares") of the Company's common
stock, par value $2.00 per share, issuable pursuant to the Agreement and Plan of
Merger and Affiliation, dated March 29, 1994, by and between the Company and
Fredericksburg National Bancorp, Inc. ("FNB"), and the related Plan of Merger
(the "Affiliation Agreement"), whereby each share of FNB common stock, par value
$1.00 per share ("FNB Common Stock"), will be exchanged for 2.84 shares of
Company common stock.
In connection with this opinion, we have considered such questions of law
as we have deemed necessary as a basis for the opinions set forth below, and we
have examined and are familiar with originals or copies, certified or otherwise
identified to our satisfaction, of the following: (i) the Registration
Statement; (ii) the Articles of Incorporation and By-laws of the Company, as
amended and as currently in effect; (iii) certain resolutions of the Board of
Directors of the Company relating to the issuance of the Shares and the other
transactions contemplated by the Registration Statement; (iv) the Affiliation
Agreement; and (v) such other documents as we have deemed necessary or
appropriate as a basis for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies. As to any facts material to this
opinion that we did not independently establish or verify, we have relied upon
statements and representations of officers and other representatives of the
Company and others.
Based upon the foregoing, we are of the opinion that if and when issued in
exchange for shares of FNB Common Stock pursuant to the terms of the Affiliation
Agreement and under the circumstances contemplated by the Registration
Statement, the Shares will be validly issued, fully paid and non-assessable.
The law covered by the opinion set forth above is limited to the law of the
State of Maryland and the federal law of the United States of America.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5 to the Registration Statement and to the reference to our name under
the caption "Legal Matters" in the Prospectus and Proxy Statement constituting a
part of the Registration Statement. In giving this consent, we do not thereby
admit that we are within the category of persons whose consent is required under
Section 7 of the Securities Act, or the Rules and Regulations of the Commission
thereunder.
Very truly yours,
VENABLE, BAETJER AND HOWARD
EXHIBIT 8
MAYS & VALENTINE
NATIONSBANK CENTER
1111 EAST MAIN STREET
P.O. BOX 1122
RICHMOND, VIRGINIA 23208-1122
(804) 697-1200
TELEX 322063 (MAYSVAL UD)
TELECOPIER (804) 697-1339
, 199
Fredericksburg National Bancorp, Inc.
2403 Fall Hill Avenue
P.O. Box 7207
Fredericksburg, Virginia 22404-7207
TAX OPINION REGARDING MERGER OF FREDERICKSBURG NATIONAL BANCORP, INC.
WITH AND INTO MERCANTILE BANKSHARES CORPORATION
Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the proposed merger of Fredericksburg National Bancorp, Inc., a
Virginia corporation ("FNB"), with and into Mercantile Bankshares Corporation, a
Maryland corporation ("Mercshares") pursuant to an Agreement and Plan of
Affiliation and Merger, dated as of March 29, 1994 ("Agreement"), by and between
FNB and Mercshares.
THE TRANSACTION
Pursuant to the Agreement and subject to various regulatory approvals, FNB
will be merged with and into Mercshares in accordance with the provisions of,
and with the effect provided in, the Virginia Stock Corporation Act and the
Maryland General Corporation Law (the "Merger"). Mercshares will then serve as
the parent holding company for its current subsidiary banks and The National
Bank of Fredericksburg ("NBF"), all of which will continue to conduct their
businesses in substantially the same manner as prior to the Merger.
At the effective date of the Merger, each outstanding share of common stock
of FNB ("FNB Common Stock") will be exchanged for and converted into 2.84 shares
of common stock of Mercshares ("Mercshares Common Stock"), plus cash for
fractional shares.
EXAMINATION
In connection with the preparation of this opinion, we have examined such
documents concerning the Merger as we have deemed necessary. We have based our
conclusions on the Internal Revenue Code of 1986 (the "Code") and the
regulations promulgated pursuant thereto, each as amended from time to time and
existing on the date hereof, as well as existing judicial and administrative
interpretations thereof.
As to various questions of fact material to our opinion, we have assumed
that there is no plan or intention on the part of the shareholders of FNB to
sell or otherwise dispose of the Mercshares Common Stock received by them in the
Merger where such sale or other disposition would have the effect set
<PAGE>
forth in paragraph B below, and we have relied upon the representations made in
the Agreement as well as the additional representations set forth below.
ADDITIONAL REPRESENTATIONS
In connection with the proposed Merger, the following additional
representations have been made:
A. The fair market value of Mercshares Common Stock received by FNB
shareholders will be approximately equal to the fair market value of FNB
Common Stock to be surrendered in exchange therefor.
B. To the best knowledge of the management of FNB, there is no plan or
intention on the part of FNB's shareholders to sell or otherwise dispose of
Mercshares Common Stock received by them in the Merger that will reduce
their holdings thereof to a number of shares having in the aggregate a fair
market value of less than 50 percent of the fair market value of all FNB
Common Stock held by FNB shareholders on the effective date of the Merger.
For purposes of this representation, shares of FNB Common Stock surrendered
by dissenters or exchanged for cash in lieu of fractional shares of
Mercshares Common Stock will be treated as outstanding FNB Common Stock on
the effective date of the Merger. Moreover, shares of FNB Common Stock and
shares of Mercshares Common Stock held by FNB shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Merger will be
considered in making this representation.
C. There is no plan or intention to sell or otherwise dispose of any
of the assets of FNB to be transferred to Mercshares in the proposed
Merger, except for dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the Code.
D. Each party to the Merger will pay its own expenses, if any,
incurred in connection with the Merger.
E. Following the Merger, Mercshares will continue the historic
business of FNB.
F. Mercshares has no plan or intention to redeem or otherwise
reacquire any of its stock to be issued in the Merger.
G. The liabilities of FNB to be assumed by Mercshares in the proposed
transaction and the liabilities to which the assets of FNB are subject were
incurred in the ordinary course of business and are associated with the
assets transferred.
H. There is no intercorporate indebtedness existing between Mercshares
and FNB that was issued, acquired or will be settled at a discount.
I. The fair market value and adjusted basis of the assets of FNB to be
transferred to Mercshares each will equal or exceed the sum of the
liabilities assumed by Mercshares plus the amount of liabilities to which
the assets are subject.
J. No dividends or other distributions will be made with respect to
any FNB Common Stock immediately before the proposed Merger, except for
regular, normal distributions.
K. None of the shares of Mercshares Common Stock and no other property
received by a shareholder-employee in exchange for FNB Common Stock
pursuant to the Merger is compensation for services rendered. In addition,
any compensation paid to any shareholder-employee will be for services
actually rendered and bargained for at arm's length, or commensurate with a
third-party arm's length negotiation.
L. No two parties to the Merger are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
M. FNB is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
<PAGE>
OPINION
Based upon the foregoing, and with due regard to such legal considerations
as we deem necessary, we are of the opinion that for federal income tax
purposes:
1. The Merger will constitute and qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code;
2. No gain, loss or other income will be recognized by FNB as a result
of the Merger;
3. To the extent that shareholders of FNB receive Mercshares
Common Stock in exchange for their shares of FNB Common Stock, they will
recognize no gain or loss as a result of the Merger;
4. A FNB Shareholder who receives cash in lieu of a fractional share
interest in Mercshares Common Stock will be treated as receiving a
distribution in redemption of such fractional share interest subject to the
provisions and limitations of Section 302 of the Code. See Revenue Ruling
66-365, 1966-2 C.B. 116.
5. A dissenting FNB Shareholder who receives solely cash in exchange
for his or her FNB Common Stock will be treated as receiving a distribution
in redemption of his or her FNB Common Stock subject to the provisions and
limitations of Section 302 of the Code as applied in light of the decision
of the United States Supreme Court in Clark v. Commissioner, 489 U.S. 726
(1989).
6. The tax basis of Mercshares Common Stock received by the
shareholders of FNB who exchange their FNB Common Stock for Mercshares
Common Stock will be the same as the tax basis of the FNB Common
Stock surrendered in exchange therefor (less any portion of such basis
allocable to any fractional interest in Mercshares Common Stock for
which the FNB Shareholders receive cash); and
7. The holding period of Mercshares Common Stock received by the
shareholders of FNB will include the period during which the FNB Common
Stock surrendered in exchange therefor was held, provided such FNB Common
Stock was held as a capital asset on the effective date of the Merger.
This opinion is rendered pursuant to Section 1.14(a) of the Agreement and
is solely for the benefit of FNB and FNB shareholders. It may not be relied upon
in any other matter or by any other person.
Very truly yours,
EXHIBIT (23)A
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Mercantile Bankshares Corporation on Form S-4 (File No. 33- ) of our
report dated January 21, 1994, on our audit of the consolidated financial
statements of Mercantile Bankshares Corporation and Affiliates as of December
31, 1993 and 1992, and for each of the three years in the period ended December
31, 1993, which report is incorporated by reference in the Annual Report on Form
10-K for the year ended December 31, 1993, of Mercantile Bankshares Corporation.
We also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND
Baltimore, Maryland
August 1, 1994
EXHIBIT (23)B
AUGUST 1, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of our report on the
consolidated financial statements of Fredericksburg National Bancorp, Inc. and
Subsidiary included herein and to the reference made to us under the caption
"Experts" in the Prospectus.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
EXHIBIT 23(C)
BOWLING, FRANKLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
1207 CHARLES STREET
FREDERICKSBURG, VIRGINIA 22401
(703) 373-8973
FAX 703-371-5391
August 1, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Fredericksburg National Bancorp, Inc.
-------------------------------------
Gentlemen:
We were previously principal accountants for Fredericksburg National
Bancorp, Inc. and reported on the consolidated financial statements of the
corporation and its subsidiaries as of and for the years ended December 31, 1992
and 1991. On May 6, 1993, Bowling, Franklin & Co. was terminated as accountants
for the Corporation.
We have read the statements included under the section captioned "Experts"
in the Form S-4 Registration Statement in its current form as of the date
hereof, such statements relating to the above-referenced termination, and we
agree with such statements. We consent to the reference to us as experts therein
and to the use in this Registration Statement of our report dated January 28,
1993.
Very truly yours,
BOWLING, FRANKLIN & CO.
/s/ HARRY B. F. FRANKLIN, JR.
-----------------------------
HARRY B. F. FRANKLIN, JR., CPA
cc: William E. Milby
Fredericksburg National Bancorp, Inc.
MAYS & VALENTINE
NATIONSBANK CENTER
1111 EAST MAIN STREET
P.O. BOX 1122
RICHMOND, VIRGINIA 23208-1122
(804) 697-1200
TELEX 322063 (MAYSVAL UD)
TELECOPIER (804) 697-1339
August 1, 1994
The Board of Directors
Fredericksburg National Bancorp, Inc.
2403 Fall Hill Avenue
Fredericksburg, Virginia 22404
Consent to Reference as Experts
-------------------------------
We have represented you with regard to the proposed merger with Mercantile
Bankshares Corporation, and we consent to the reference to our Firm under the
heading "Experts" in the Registration Statement, as amended, filed with the
Securities and Exchange Commission this date and to the inclusion of our form
or tax opinion therein.
Sincerely,
MAYS & VALENTINE
EXHIBIT (23)F
SCOTT & STRINGFELLOW, INC.
August 1, 1994
Re: Fredericksburg National Bancorp, Inc./
Mercantile Bankshares Corporation Affiliation
---------------------------------------------
CONSENT OF INVESTMENT BANKERS
We consent to the use, quotation and summarization in the Registration
Statement on Form S-4 of our fairness opinion rendered to the Board of Directors
of Fredericksburg National Bancorp, Inc. in connection with the merger of FNB
with and into Mercantile Bankshares Corporation and to the use of our name, and
the statements with respect to us, appearing in the Registration Statement.
Sincerely,
SCOTT & STRINGFELLOW, INC.
/s/ GARY S. PENROSE
-------------------
GARY S. PENROSE
Managing Director
Financial Institutions Group
EXHIBIT 24
MERCANTILE BANKSHARES CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Directors of MERCANTILE
BANKSHARES CORPORATION, a Maryland Corporation, hereby constitute and appoint H.
FURLONG BALDWIN and EDWARD K. DUNN, JR., or either of them acting alone, the
true and lawful agents and attorneys in fact of the undersigned in each case
with full power and authority in either of said agents and attorneys in fact, to
sign for the undersigned and in their respective names as Directors of the
Corporation the Registration Statement of the Corporation to be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the offer and sale of shares to stockholders of Fredericksburg
National Bancorp. Inc., and any amendment or amendments to such Registration
Statement hereby ratifying and confirming all acts taken by such agents and
attorneys in fact, or either of them, as herein authorized. This Power of
Attorney may be executed in one or more counterparts.
Dated: August 1, 1994
<TABLE> <CAPTION>
SIGNATURE TITLE SIGNATURE TITLE
- ------------------------------------------ ----- ------------------------------------------ -----
<S> <C> <C> <C>
/s/ THOMAS M. BANCROFT, JR. Director /s/ MORRIS W. OFFIT Director
.......................................... ..........................................
Thomas M. Bancroft, Jr. Morris W. Offit
/s/ RICHARD O. BERNDT Director /s/ CHRISTIAN H. POINDEXTER Director
.......................................... ..........................................
Richard O. Berndt Christian H. Poindexter
/s/ JAMES A. BLOCK Director /s/ WILLIAM C. RICHARDSON Director
.......................................... ..........................................
James A. Block William C. Richardson
/s/ GEORGE L. BUNTING, JR. Director /s/ BISHOP L. ROBINSON Director
.......................................... ..........................................
George L. Bunting, Jr. Bishop L. Robinson
/s/ DOUGLAS W. DODGE Director /s/ DONALD J. SHEPARD Director
.......................................... ..........................................
Douglas W. Dodge Donald J. Shepard
/s/ B. LARRY JENKINS Director /s/ BRIAN B. TOPPING Director
.......................................... ..........................................
B. Larry Jenkins Brian B. Topping
/s/ ROBERT D. KUNISCH Director /s/ JAY M. WILSON Director
.......................................... ..........................................
Robert D. Kunisch Jay M. Wilson
/s/ WILLIAM J. MCCARTHY Director /s/ CALMAN J. ZAMOISKI, JR. Director
.......................................... ..........................................
William J. McCarthy Calman J. Zamoiski, Jr.
SIGNATURE TITLE
</TABLE>
EXHIBIT 99
FORM OF PROXY CARD
(The information below appears on the front of the Proxy Voting Card.)
FREDERICKSBURG THIS PROXY IS SOLICITED ON BEHALF OF THE
NATIONAL BOARD OF DIRECTORS
BANCORP, INC. The undersigned hereby appoints, G. Philip
PROXY Leveque, and Lemual Houston and each of
them, the proxies of the undersigned, with
several powers of substitution, to act and
vote at the ANNUAL MEETING OF SHAREHOLDERS
of Fredericksburg National Bancorp, Inc.,
2403 Fall Hill Avenue, Fredericksburg, VA
22407-7207 to be held on Tuesday, September
13, 1994 at 2:00 p.m., and at any and all
adjourn ments thereof.
1. Approval of the Agreement and Plan of Affiliation and Merger by and
between Mercantile Bankshares Corporation and Fredericksburg National
Bancorp, Inc., and the related Plan of Merger.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
2. Election of Directors / / FOR all nominees listed below
(except as shown to the contrary below)
/ / WITHHOLD AUTHORITY to vote for all nominees
listed below
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
Leland L. Baker, Jr., John H. Chichester, George C. Freeman, Jr., Thomas C.
Goodloe, DuVal Q. Hicks, Jr., John A. Jamison, Charles T. Lewis, Charles A.
McCormack, William E. Milby, J. William Poole, Frank C. Silvey, Jr.
(Instructions: To withhold authority to vote for any individual nominee print
that nominee's name on the space provided below)
3. Upon such other matters as may properly come before the meeting
(The information below appears on the back of the Proxy Voting Card.)
PLEASE MARK, SIGN, DATE AND MAIL IN THE ENCLOSED ENVELOPE. NO POSTAGE NEEDED IF
MAILED IN THE UNITED STATES.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED OR, IF
DIRECTIONS ARE NOT INDICATED, WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND
PLAN OF AFFILIATION AND MERGER AND THE RELATED PLAN OF MERGER AND FOR THE
ELECTION OF DIRECTORS. If a Director nominee is unable to serve, the within
Proxy may be voted for a substitute nominee.
Receipt of notice of the meeting and Proxy Statement is hereby
acknowledged, and the terms of the notice and statement are hereby incorporated
by reference into this Proxy. The undersigned hereby revokes all proxies
heretofore given for said meeting and any adjournment thereof.
WITNESS the hand and seal of the undersigned, the day of
, 1994.
Signature(s) should follow exactly the name(s) on the stock certificate. All
co-owners should sign. Executors and Administrators may sign as such.
Attorneys-in-fact should sign both names.
_______________________________________________(SEAL)
_______________________________________________(SEAL)
