AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 1995
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)
<TABLE>
<S> <C> <C>
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:
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<S> <C>
ALAN D. YARBRO, ESQ. JAMES J. WINN, JR., ESQ.
Venable, Baetjer and Howard, LLP Piper & Marbury L.L.P.
1800 Mercantile Bank & Trust Building 36 South Charles Street
Two Hopkins Plaza, Suite 1800 Baltimore, Maryland 21201
Baltimore, Maryland 21201 (410) 539-2530
(410) 244-7400
</TABLE>
------------------------
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
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
------------------------
<TABLE><CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================
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)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Common Stock, $2.00 par value (1)..... 1,799,562 N/A $20,862,069 $3,240.49
===============================================================================================================
</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 Common Stock of The Sparks
State Bank 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 $7,193.87, less
$3,953.38 previously paid in connection with the filing of preliminary proxy
materials of The Sparks State Bank on May 4, 1995.
================================================================================
<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
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR HEADING IN
ITEM NUMBER AND CAPTION PROSPECTUS AND PROXY STATEMENT
------------------------------------------- --------------------------------------
<C> <S> <C>
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
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 Sparks Special Meeting--
Vote Required; The Affiliation--
Appraisal Rights of Dissenting
Stockholders,--Certain Federal
Income Tax Consequences
4. Terms of the Transaction................... The Affiliation--Reasons for the
Affiliation; Recommendation of the
Sparks Board of Directors,--Opinion
of Sparks 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 Incorporated by
Reference; Comparison of Stockholder
Rights of Mercshares and Sparks
Common Stock
5. Pro Forma Financial Information............ Unaudited Pro Forma Condensed Combined
Financial Statements
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 Support
Agreement,--Affiliate Undertakings
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>
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR HEADING IN
ITEM NUMBER AND CAPTION PROSPECTUS AND PROXY STATEMENT
------------------------------------------- --------------------------------------
<C> <S> <C>
B. Information About the Registrant
10. Information with Respect to S-3
Registrants.............................. Documents Incorporated by Reference;
Description of Mercshares Capital
Stock
11. Incorporation of Certain Information by
Reference................................ Documents 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................................ Not Applicable
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................ Summary; Description of Sparks;
Properties; Legal Proceedings;
Sparks Selected Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; The Sparks State Bank
Financial Statements
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Documents Incorporated by Reference;
The Sparks Special Meeting--Date,
Place and Time,--Record Date,--Vote
Required; The Affiliation--Appraisal
Rights of Dissenting Stockholders,--
Interests of Certain Persons in the
Affiliation
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer..................... Not Applicable
</TABLE>
<PAGE>
THE SPARKS STATE BANK
14804 York Road Sparks, Maryland 21152 (410) 771-4900
, 1995
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
The Sparks State Bank ("Sparks") to be held at Hereford Fire Hall, 510 Monkton
Road, Hereford, Maryland on Tuesday, July 11, 1995 at 3:00 p.m. local time.
At the Special Meeting, you will be asked to consider and vote on the
Agreement and Plan of Affiliation and Share Exchange (the "Affiliation
Agreement"), dated December 15, 1994, by and between Sparks and Mercantile
Bankshares Corporation, a bank holding company organized under the laws of
Maryland ("Mercshares") and the share exchange and affiliation contemplated
thereby (the "Affiliation"). Based in Baltimore, Maryland, Mercshares is a bank
holding company with $5.9 billion in total assets at year-end 1994 and with its
principal operations currently being conducted through 20 affiliated banks in
Maryland, Virginia and Delaware.
Under the terms of the Affiliation Agreement, each holder of Sparks Common
Stock on the date of consummation (other than a Sparks Stockholder who follows
the procedures with respect to dissenting stockholders set forth in Title 3,
Subtitle 2 of the Maryland General Corporation Law) will be deemed, without
further act, to have automatically exchanged his shares of Sparks Common Stock
for Mercshares Common Stock on the basis of two and one-third shares of
Mercshares Common Stock for each share of Sparks Common Stock. Cash will be paid
in lieu of fractional shares of Mercshares Common Stock. Based on this exchange
ratio, and the current dividend rate of Mercshares Common Stock, your annual
dividend payments would increase from $.83 per share to approximately $1.73 per
share of Sparks Common Stock now held by you, although no assurance can be given
that current dividend levels will be maintained by Mercshares. 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 Sparks Common Stock. The shares of Mercshares Common Stock you receive
pursuant to the Affiliation should be more readily marketable than the shares of
Sparks Common Stock you presently hold. Following the consummation of the
transaction with Mercshares, Sparks will continue to operate as a separate bank
within the Mercshares system. The transaction with Mercshares does not change
the Sparks name, office locations, directors or staff.
Your Board of Directors has retained the investment banking firm of Berwind
Financial Group, L.P. ("Berwind") to act as its financial advisor in connection
with the transaction with Mercshares. As discussed in the accompanying
Prospectus and Proxy Statement, Berwind has delivered to the Board of Directors
its written opinion that, as of this date, the consideration to be received in
the Affiliation is fair to our stockholders from a financial point of view.
The exchange of Sparks 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 Affiliation requires the affirmative vote of at least
two-thirds of the outstanding shares of Sparks Common Stock.
Your Board of Directors unanimously approved the Affiliation Agreement and
the Affiliation and believes that they are in the best interest of Sparks and
our stockholders. Accordingly, the Board of Directors unanimously recommends
that you vote TO APPROVE the Affiliation Agreement and the Affiliation
contemplated thereby.
We hope you can attend the Special Meeting. Whether or not you plan to
attend 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 Special Meeting.
Sincerely,
CHARLES E. ENSOR, SR. BRADLEY G. MOORE
Chairman of the Board President and Chief Executive Officer
<PAGE>
THE SPARKS STATE BANK
SPARKS, MARYLAND
-------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
, 1995
-------------------
The Special Meeting of Stockholders of The Sparks State Bank ("Sparks") will
be held at the Hereford Fire Hall, 510 Monkton Road, Hereford, Maryland on
Tuesday, July 11, 1995 at 3:00 p.m. local time for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Affiliation and Share Exchange, dated December 15, 1994 (the
"Agreement") by and between Sparks 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, and the share exchange and
affiliation contemplated thereby (the "Affiliation"), pursuant to which (i)
Sparks shall become a wholly-owned subsidiary of Mercshares and (ii) each
holder (a "Sparks Stockholder") of common stock of Sparks, par value $10.00
per share ("Sparks Common Stock") (other than a Sparks Stockholder who
follows the procedures with regard to dissenting stockholders set forth in
Title 3, Subtitle 2 of the Maryland General Corporation Law, as amended
("MGCL")), will be deemed, without further act, to have automatically
exchanged his shares of Sparks Common Stock for common stock of Mercshares,
par value $2.00 per share ("Mercshares Common Stock") on the basis of two
and one-third shares of Mercshares Common Stock for each share of Sparks
Common Stock. Cash will be paid in lieu of fractional shares of Mercshares
Common Stock.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Each Sparks Stockholder 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 Sparks
Stockholder to receive such payment is contingent upon strict compliance with
the requirements set forth in Title 3, Subtitle 2 of the MGCL, the full text of
which is enclosed as Annex C attached to the accompanying Prospectus and Proxy
Statement.
The Board of Directors has fixed June 6, 1995, as the record date for the
Special Meeting and only holders of record of Sparks Common Stock at the close
of business on that date are entitled to receive notice of and to vote at the
Special Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
DONNA S. ENSOR
Secretary
, 1995
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF SPARKS RECOMMENDS THAT SPARKS
STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE AFFILIATION.
<PAGE>
PROSPECTUS
RELATING TO 1,799,562 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
-------------------
PROXY STATEMENT
RELATING TO
THE SPECIAL MEETING OF STOCKHOLDERS OF
THE SPARKS STATE BANK
TO BE HELD ON JULY 11, 1995
This prospectus and proxy statement (the "Prospectus and Proxy Statement")
is being furnished to the holders (the "Sparks Stockholders") of common stock,
par value $10.00 per share (the "Sparks Common Stock"), of The Sparks State Bank
("Sparks"), in connection with the solicitation of proxies by the Board of
Directors of Sparks for use at the Special Meeting of the Sparks Stockholders to
be held at Hereford Fire Hall, 510 Monkton Road, Hereford, Maryland on Tuesday,
July 11, 1995 at 3:00 p.m. local time, and at any and all adjournments or
postponements thereof (the "Sparks Special 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 Bank
Holding Company Act of 1956, as amended (the "BHCA"), issuable in connection
with the proposed share exchange between Sparks and Mercshares and the
affiliation of Sparks with Mercshares (the share exchange and affiliation are
collectively referred to herein as the "Affiliation"), contemplated by an
Agreement and Plan of Affiliation and Share Exchange, dated December 15, 1994
(the "Affiliation Agreement"), by and between Mercshares and Sparks. Following
consummation of the Affiliation, Sparks will continue to operate as a separate
bank within the Mercshares system. The transaction with Mercshares does not
change Sparks' name, office locations, directors or staff. Upon consummation of
the Affiliation, each Sparks Stockholder (other than a Sparks Stockholder who
follows the procedures with respect to dissenting stockholders set forth in
Title 3, Subtitle 2 of the Maryland General Corporation Law (the "MGCL")) will
be deemed, without further act, to have automatically exchanged his shares of
Sparks Common Stock for Mercshares Common Stock on the basis of two and
one-third shares of Mercshares Common Stock for each share of Sparks Common
Stock. Cash will be paid in lieu of fractional shares of Mercshares Common
Stock.
This Prospectus and Proxy Statement constitutes (i) a proxy statement for
use at the Sparks Special Meeting, at which the Sparks Stockholders will be
asked to consider and vote upon a proposal to approve the Affiliation Agreement
and the Affiliation contemplated thereby and (ii) a prospectus covering the
issuance in connection with the Affiliation of up to 1,799,562 shares of
Mercshares Common Stock.
The information presented in this Prospectus and Proxy Statement concerning
Sparks has been supplied by Sparks 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 and the accompanying form of proxy are
being furnished to Sparks Stockholders on or about , 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................ 4
DOCUMENTS INCORPORATED BY REFERENCE.................................................. 5
SUMMARY.............................................................................. 6
The Parties........................................................................ 6
The Affiliation.................................................................... 6
Certain Federal Income Tax Consequences............................................ 8
Comparison of Stockholder Rights................................................... 9
Market Price Data.................................................................. 9
SUMMARY HISTORICAL FINANCIAL DATA.................................................... 10
COMPARATIVE UNAUDITED PER SHARE DATA................................................. 11
THE SPARKS SPECIAL MEETING........................................................... 13
Date, Place and Time............................................................... 13
Purpose of the Sparks Special Meeting.............................................. 13
Record Date........................................................................ 13
Vote Required...................................................................... 13
Solicitation of Proxies............................................................ 14
THE AFFILIATION...................................................................... 15
General............................................................................ 15
Background to the Affiliation...................................................... 15
Reasons for the Affiliation; Recommendation of the Sparks Board of Directors....... 16
Opinion of Sparks Financial Advisor................................................ 18
Effective Date..................................................................... 22
Procedures for Exchange of Certificates............................................ 22
Certain Federal Income Tax Consequences............................................ 23
Accounting Treatment............................................................... 23
Resale of Mercshares Common Stock After the Affiliation by Controlling Persons..... 24
Conditions to Affiliation.......................................................... 24
Treatment of Employee Benefit Plans................................................ 25
Exclusive Dealing.................................................................. 25
Interests of Certain Persons in the Affiliation.................................... 26
Termination........................................................................ 27
Appraisal Rights of Dissenting Stockholders........................................ 27
CERTAIN OTHER AGREEMENTS............................................................. 29
The Support Agreement.............................................................. 29
Affiliate Undertakings............................................................. 29
DESCRIPTION OF THE SPARKS STATE BANK................................................. 30
General............................................................................ 30
Business........................................................................... 30
Properties......................................................................... 34
Legal Proceedings.................................................................. 35
Dividends.......................................................................... 35
</TABLE>
2
<PAGE>
<TABLE>
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PAGE
----
<S> <C>
Price Range of Common Stock.......................................................... 36
Stock Ownership of Directors and Executive Officers.................................. 37
SPARKS SELECTED FINANCIAL INFORMATION................................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 39
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.......................... 51
COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES AND SPARKS COMMON STOCK............... 62
DESCRIPTION OF MERCSHARES CAPITAL STOCK.............................................. 63
LEGAL MATTERS........................................................................ 64
EXPERTS.............................................................................. 64
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
ANNEX A--AGREEMENT AND PLAN OF AFFILIATION AND SHARE EXCHANGE........................ A-1
ANNEX B--OPINION OF BERWIND FINANCIAL GROUP, L.P..................................... B-1
ANNEX C--TITLE 3, SUBTITLE 2 OF THE MARYLAND GENERAL CORPORATION LAW................. C-1
</TABLE>
3
<PAGE>
AVAILABLE INFORMATION
Mercshares is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (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 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 1,799,562 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.
Sparks is subject to the information requirements of the Federal Deposit
Insurance Corporation ("FDIC") promulgated pursuant to the Exchange Act, set
forth in 12 C.F.R. Part 335, and in accordance therewith files reports and other
information with the FDIC. Reports, proxy statements and other information filed
by Sparks with the FDIC can be inspected and copied at the following addresses:
Federal Deposit Insurance Corporation, Registration and Disclosure Section, 550
Seventeenth Street, N.W., Room F-640, Washington, D.C. 20429 and Federal Reserve
Bank of New York, Public Information Office, 13th Floor, 33 Liberty Street, New
York, New York, 10045. Copies of this material can be obtained from the FDIC, at
the same address, at prescribed rates.
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.
4
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
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, 1994;
2. Mercshares' Quarterly Report on Form 10-Q for the period ended March
31, 1995; and
3. 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.
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 Sparks Special 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 BY REFERENCE DOCUMENTS
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 FROM MERCANTILE BANKSHARES
CORPORATION, TWO HOPKINS PLAZA, P.O. BOX 1477, BALTIMORE, MARYLAND 21203,
ATTENTION: SECRETARY (TELEPHONE (410) 237-5900). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JULY 3, 1995.
5
<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. Sparks
Stockholders 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, three 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, 1995, Mercshares and the Affiliates had total
assets of approximately $5.9 billion, deposits of approximately $4.8 billion,
and loans (net) of approximately $4 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 April 30, 1995, there were 47,539,864 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.
The Sparks State Bank. Sparks is a Maryland commercial bank which operates
five banking offices. At March 31, 1995, Sparks had total assets of
approximately $192 million, deposits of approximately $164 million and total
loans of approximately $131 million. Its principal executive office is located
at 14804 York Road, Sparks, Maryland 21152, telephone number (410) 771-4900.
As of May 31, 1995, there were 771,241 shares of Sparks Common Stock
outstanding. There is no established trading market for Sparks Common Stock.
THE AFFILIATION
General. At the Sparks Special Meeting described in the notice (the
"Notice") accompanying this Prospectus and Proxy Statement, Sparks Stockholders
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, and the Affiliation contemplated thereby. Upon consummation of the
Affiliation, each Sparks Stockholder (other than a Sparks Stockholder who
follows the procedures with respect to dissenting stockholders set forth in
Title 3, Subtitle 2 of the MGCL) will be deemed, without further act, to have
automatically exchanged his shares of Sparks Common Stock for Mercshares Common
Stock on the basis of two and one-third shares of Mercshares Common Stock for
each share of Sparks Common Stock (the "Exchange Ratio"). Cash will be paid in
lieu of fractional shares of Mercshares Common Stock. See "THE AFFILIATION--
General," "--Background to the Affiliation," "--Reasons for the Affiliation;
Recommendation of the Sparks Board of Directors" and "--Appraisal Rights of
Dissenting Stockholders."
Vote Required. The affirmative vote of the holders of two-thirds of the
outstanding shares of Sparks Common Stock entitled to vote thereon will be
required to approve the Affiliation Agreement and the Affiliation contemplated
thereby. As of May 31, 1995, the directors and certain officers of
6
<PAGE>
Sparks and certain persons related to them beneficially owned an aggregate of
188,187.56 shares (24.40%) of Sparks Common Stock. Such persons have executed
agreements with Mercshares pursuant to which each such person has agreed to
support and to vote his shares to approve the Affiliation Agreement and the
Affiliation contemplated thereby. BECAUSE THE REQUIRED VOTE OF SPARKS
STOCKHOLDERS ON THE AFFILIATION AGREEMENT AND THE AFFILIATION IS BASED UPON THE
TOTAL NUMBER OF OUTSTANDING SHARES OF SPARKS COMMON STOCK, THE FAILURE TO SUBMIT
A PROXY CARD (OR THE FAILURE TO VOTE IN PERSON AT THE SPARKS SPECIAL MEETING IF
A PROXY CARD IS NOT SUBMITTED), THE ABSTENTION FROM VOTING AND ANY BROKER
NON-VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AFFILIATION AGREEMENT
AND THE AFFILIATION. See "THE SPARKS SPECIAL MEETING" and "CERTAIN OTHER
AGREEMENTS--The Support Agreement."
Recommendation of the Sparks Board; Reasons for the Affiliation. The Sparks
Board of Directors believes that the terms of the Affiliation and the
Affiliation Agreement are advisable and are fair to, and in the best interests
of, Sparks and the Sparks Stockholders and has unanimously adopted the
Affiliation Agreement. In considering the terms and conditions of the
Affiliation, the Sparks Board of Directors considered, among other things: the
financial terms of the Affiliation; the fact that the Affiliation would qualify
as a tax-free reorganization under the Internal Revenue Code of 1986, as amended
(the "Code"); the fact that because Mercshares Common Stock is publicly traded
and quoted on The Nasdaq National Market, Mercshares Common Stock should be more
readily marketable than Sparks Common Stock; the financial condition and history
of performance of Mercshares; the diversification of risk associated with
ownership in an institution with a broader geographic area; the opinion of its
financial advisor, Berwind Financial Group, L.P., formerly Berwind Financial
Group, Inc. ("Berwind"), that the consideration to be received in the
Affiliation is fair to the Sparks Stockholders from a financial point of view;
the operational and competitive benefits of the Affiliation; and the ability of
Sparks to remain a separate bank within the Mercshares system with a local board
of directors managing its affairs.
The Sparks 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 Sparks Stockholders, 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 Sparks 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. Based
upon the $23.625 per share closing market price of Mercshares Common Stock on
May 25, 1995, the price to be paid in the Affiliation as a percentage of Sparks'
March 31, 1995 book value was 203.7%. THE SPARKS BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT SPARKS STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT
AND THE AFFILIATION CONTEMPLATED THEREBY. See "THE AFFILIATION--Background to
the Affiliation," "--Reasons for the Affiliation; Recommendation of the Sparks
Board of Directors," and "--Opinion of Sparks Financial Advisor." For a
description of certain litigation by certain Sparks Stockholders which
challenges the Affiliation, see "DESCRIPTION OF SPARKS--Legal Proceedings."
Opinion of Sparks Financial Advisor. The Sparks Board of Directors has
received an opinion from Berwind to the effect that the consideration to be
received in the Affiliation is fair to the Sparks Stockholders from a financial
point of view. A copy of the opinion of Berwind, 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. Sparks Stockholders are urged to read the opinion in its
entirety. See "THE AFFILIATION--Opinion of Sparks Financial Advisor."
Conditions to Affiliation. The mutual obligation of Mercshares and Sparks to
consummate the Affiliation is subject to the requisite approval of the
Affiliation Agreement by the Sparks Stockholders. Additionally, the obligation
of Mercshares to consummate the Affiliation is subject to various conditions,
including the receipt of all appropriate regulatory approvals and that holders
of not more than 10% of the outstanding shares of Sparks Common Stock (or, in
certain circumstances, a smaller
7
<PAGE>
percentage) shall have filed with Sparks, at or before the Sparks Special
Meeting, a written objection to the Affiliation and not have voted in favor of
the Affiliation. 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 System, the
Virginia State Corporation Commission and the Maryland Bank Commissioner.
Mercshares expects to submit filings and notifications for these purposes as
soon as practicable. See "THE AFFILIATION--Conditions to Affiliation."
Accounting Treatment. The Affiliation Agreement contemplates that the
Affiliation will be accounted for as a pooling-of-interests. Notwithstanding the
provisions of the Affiliation Agreement, the Affiliation may be accounted for as
a purchase. See "THE AFFILIATION--Conditions to Affiliation," and "--Accounting
Treatment," and "COMPARATIVE UNAUDITED PER SHARE DATA" in this Summary.
Appraisal Rights. Under Maryland law, a Sparks Stockholder 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, a
Sparks Stockholder must (a) deliver to Sparks at or prior to the Sparks Special
Meeting a written objection to the Affiliation, (b) ensure that his shares are
not voted (or deemed to have been voted) to approve the Affiliation Agreement
and the Affiliation, (c) after the Affiliation is consummated, follow the
procedures set forth in a notice sent to such Sparks Stockholder, and (d) make a
written demand for payment for his Sparks Common Stock. If a judicial
determination of the "fair value" of Sparks Common Stock held by such Sparks
Stockholder 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 Stockholders" for a more complete discussion of Sparks
Stockholders' appraisal rights.
A SPARKS STOCKHOLDER 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 THE AFFILIATION
AND THEREFORE TO HAVE WAIVED HIS DISSENTERS' RIGHTS. NEITHER A VOTE AGAINST, NOR
AN ABSTENTION, NOR A FAILURE TO VOTE, WITH REGARD TO THE AFFILIATION AGREEMENT
AND THE AFFILIATION WILL CONSTITUTE A TIMELY WRITTEN OBJECTION TO THE
AFFILIATION. See "THE AFFILIATION--Appraisal Rights of Dissenting Stockholders."
Interests of Certain Persons in the Affiliation. The Affiliation Agreement
provides that no person now serving as a director of Sparks who was 60 years of
age or over as of December 15, 1994 shall become ineligible to serve as a
director of Sparks solely by virtue of attaining any age less than 75. In
connection with the negotiation of the Affiliation Agreement, certain employment
agreements between Sparks and certain of its officers were amended. See--"THE
AFFILIATION--Interests of Certain Persons in the Affiliation."
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 the Sparks Stockholders upon the receipt by them of
Mercshares Common Stock in exchange for Sparks Common Stock by reason of the
Affiliation, and (ii) no gain or loss will be recognized by Mercshares or Sparks
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 Sparks'
obligation to consummate the Affiliation. SPARKS STOCKHOLDERS ARE URGED TO
8
<PAGE>
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, Sparks Stockholders will become
stockholders of Mercshares, and their rights as stockholders of Mercshares will
be governed by the MGCL, Mercshares' Articles of Incorporation and Mercshares'
By-laws. The rights of Sparks Stockholders differ from those of the holders of
Mercshares Common Stock in a number of areas, including the availability of
dissenters' rights, the ability of Mercshares to issue preferred stock and the
purchase rights attached to each share of Mercshares Common Stock. See
"COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES AND SPARKS 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 Sparks
Common Stock and a description of Mercshares capital stock.
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
December 14, 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 $19.25 per share. The market value
of Mercshares Common Stock on May 25, 1995, 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 $23.625 per share. Sparks Common
Stock is not traded on any exchange and no established public trading market
exists for Sparks Common Stock.
BECAUSE THE MARKET PRICE OF MERCSHARES COMMON STOCK IS SUBJECT TO
FLUCTUATION, THE MARKET VALUE OF THE MERCSHARES COMMON STOCK THAT SPARKS
STOCKHOLDERS WILL RECEIVE PURSUANT TO THE AFFILIATION MAY INCREASE OR DECREASE
PRIOR TO THE EFFECTIVE DATE. SPARKS STOCKHOLDERS 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 Sparks. 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. Sparks' historical
financial data for each of the annual periods presented have been derived from
its audited consolidated financial statements previously filed with the FDIC.
The selected historical financial data for Mercshares for the three-month
periods ended March 31, 1994 and 1995 have been derived from Mercshares'
unaudited Quarterly Report on Form 10-Q previously filed with the Commission.
The selected historical financial data for Sparks for such periods have been
derived from Sparks' unaudited Quarterly Report on Form F-4 previously filed
with the FDIC. In the opinions of the respective managements of Mercshares and
Sparks, such data 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, 1995 for each company are not necessarily
indicative of the results that may be obtained for the entire year ended
December 31, 1995. 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,
---------------------- ----------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
MERCANTILE BANKSHARES
CORPORATION
Net Interest Income............ $ 69,333 $ 61,138 $ 262,956 $ 246,482 $ 228,540 $ 208,609 $ 200,086
Other Operating Income......... 20,621 25,119 92,186 86,313 106,988 76,265 64,011
Income Before Income Taxes..... 38,705 35,729 146,886 135,971 122,776 111,596 107,135
Net Income..................... 24,208 21,818 90,441 83,468 76,298 70,562 68,856
Net Income Per Share of Common
Stock(1)..................... .50 .45 1.88 1.73 1.67 1.56 1.55
Total Assets................... 5,936,738 5,781,819 5,938,225 5,789,620 5,459,577 5,216,802 4,885,599
Provision for Loan Losses...... 1,440 1,822 7,056 12,969 45,346 20,850 15,001
Long-Term Debt................. 31,242 32,135 31,470 32,350 15,108 16,609 17,298
Per Share Cash Dividends
Declared and Paid on Common
Stock (1).................... .20 .17 .74 .64 .58 .57 1/3 .54 1/3
Cash Dividends Declared and
Paid on Common Stock......... 9,533 8,022 34,982 30,173 26,454 25,936 23,624
Loans, Net..................... 3,970,690 3,617,210 3,846,838 3,628,780 3,401,213 3,309,005 3,258,339
THE SPARKS STATE BANK
Net Interest Income............ 2,209 1,718 7,805 7,312 7,166 6,443 5,921
Other Operating Income......... 183 156 723 1,142 740 632 584
Income Before Income Taxes..... 1,218 740 3,790 3,888 3,489 3,021 2,714
Net Income..................... 787 486 2,397 2,485 2,215 1,907 1,696
Net Income Per Share of Common
Stock(2)..................... 1.02 .63 3.11 3.27 2.96 2.58 2.31
Total Assets................... 191,513 184,031 191,028 181,738 177,401 168,533 151,168
Provision for Loan and Lease
Losses....................... 33 33 351 279 236 401
Per Share Cash Dividends
Declared on Common Stock..... .21 0 0.83 0.69 0.63 0.40 0.33
Cash Dividends Declared on
Common Stock................. 163 0 643 528 472 297 246
Loans, Net..................... 128,815 115,475 126,782 114,662 109,324 110,493 97,577
</TABLE>
- ------------
(1) In September 1993, Mercshares effected a three-for-two stock split which was
effected in the form of a stock dividend. All per share amounts above have
been adjusted to give effect to the split.
(2) Per share data for 1990 to 1993 have been adjusted to reflect the
six-for-five stock splits which were effected in the form of 20% stock
dividends in December 1994 and December 1993, and 10% stock dividends which
were declared in December 1992 and December 1991.
10
<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 Sparks, including the respective notes thereto,
which are included elsewhere in this Prospectus and Proxy Statement or in
documents 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.
POOLING-OF-INTERESTS ACCOUNTING TREATMENT
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 Sparks on a
historical basis and on a pro forma equivalent basis. See "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------- --------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE:
NET INCOME:
Sparks-historical(1)................................. $ 1.02 $ .63 $ 3.11 $ 3.27 $ 2.96
Sparks pro forma equivalent(2)....................... 1.17 1.05 4.34 4.01 3.87
Mercshares-historical(3)............................. .50 .45 1.88 1.73 1.67
Mercshares pro forma combined(4)..................... .50 .45 1.86 1.72 1.66
CASH DIVIDENDS DECLARED:
Sparks-historical(1)................................. .21 0 0.83 0.69 0.63
Sparks pro forma equivalent(2)....................... .47 .40 1.73 1.49 1.35
Mercshares-historical(3)............................. .20 .17 .74 .64 .58
Mercshares pro forma combined(5)..................... .20 .17 .74 .64 .58
BOOK VALUE:
Sparks-historical(1)(6).............................. 27.06 25.26 25.63 24.77 22.12
Sparks pro forma equivalent(2)....................... 35.51 32.92 34.77 32.36 30.15
Mercshares-historical(3)(6).......................... 15.36 14.23 15.05 13.99 13.07
Mercshares pro forma combined........................ 15.22 14.11 14.90 13.87 12.92
</TABLE>
- ------------
(1) Per share data for 1992 and 1993 have been adjusted to reflect the
six-for-five stock splits which were effected in the form of 20% stock
dividends in December 1994 and December 1993.
(2) Sparks pro forma equivalent amounts represent Mercshares' pro forma combined
information multiplied by the Exchange Ratio of two and one-third shares of
Mercshares Common Stock for each share of Sparks Common Stock.
(3) In September 1993 Mercshares effected a three-for-two stock split which was
effected in the form of a stock dividend. All per share amounts above have
been adjusted to give effect to the split.
(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
Sparks.
(5) Pro forma combined dividends per share represent historical dividends per
share paid by Mercshares.
(6) Generally accepted accounting principles require adjustment to equity for
net unrealized gains and losses on securities available for sale for fiscal
years beginning after December 31, 1993.
11
<PAGE>
The comparative per share information set forth above is based on the
provisions of the Affiliation Agreement which contemplate 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 and which
condition Mercshares has waived provided that the other conditions to
Mercshares' obligations contained in the Affiliation Agreement have been
satisfied or waived) with respect to the application of pooling-of-interests
accounting treatment to the Affiliation. Sparks Stockholders will receive the
same number of shares of Mercshares Common Stock in exchange for their holdings
of Sparks Common Stock regardless of the accounting treatment which is
ultimately applied to the Affiliation. For a description of the application of
pooling-of-interests and purchase accounting and the circumstances under which
Mercshares has agreed to waive the condition with respect to the application of
pooling-of-interests accounting treatment, see "THE AFFILIATION--Accounting
Treatment."
PURCHASE ACCOUNTING TREATMENT
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 period
presented and accounted for as a purchase and (ii) for Sparks on a historical
basis and on a pro forma equivalent basis. See "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------ ------------
1995 1994
------------------ ------------
<S> <C> <C>
PER COMMON SHARE:
NET INCOME:
Sparks-historical............................................. 1.02 3.11
Sparks pro forma equivalent(1)................................ 1.17 4.29
Mercshares-historical......................................... .50 1.88
Mercshares pro forma combined(2).............................. .50 1.84
CASH DIVIDENDS DECLARED:
Sparks-historical............................................. .21 0.83
Sparks pro forma equivalent................................... .47 1.73
Mercshares-historical......................................... .20 .74
Mercshares pro forma combined(3).............................. .20 .74
BOOK VALUE:
Sparks-historical(4).......................................... 27.06 25.63
Sparks pro forma equivalent(1)................................ 36.14 35.43
Mercshares-historical(4)...................................... 15.36 15.05
Mercshares pro forma combined................................. 15.49 15.18
</TABLE>
- ------------
(1) Sparks pro forma equivalent amounts represent Mercshares' pro forma combined
information multiplied by the Exchange Ratio of two and one-third shares of
Mercshares Common Stock for each share of Sparks Common Stock.
(2) Pro forma combined net income per share represents historical net income per
share of Mercshares adjusted for the impact of a purchase of Sparks.
(3) Pro forma combined dividends per share represent historical dividends per
share paid by Mercshares.
(4) Generally accepted accounting principles require adjustment to equity for
net unrealized gains and losses on securities available for sale for fiscal
years beginning after December 31, 1993.
12
<PAGE>
THE SPARKS SPECIAL MEETING
DATE, PLACE AND TIME
The Sparks Special Meeting will be held at Hereford Fire Hall, 510 Monkton
Road, Hereford, Maryland on Tuesday, July 11, 1995 at 3:00 p.m. local time.
PURPOSE OF THE SPARKS SPECIAL MEETING
At the Sparks Special Meeting, Sparks Stockholders will consider and vote
upon (i) a proposal to approve the Affiliation Agreement and the Affiliation
contemplated thereby pursuant to which each Sparks Stockholder (other than a
dissenting stockholder who follows the procedures with respect to dissenting
stockholders set forth in Title 3, Subtitle 2 of the MGCL) shall receive, in
exchange for each share of Sparks Common Stock owned by him, two and one-third
shares of Mercshares Common Stock and cash in lieu of fractional shares of
Mercshares Common Stock, and (ii) such other matters as may properly be brought
before the Sparks Special Meeting.
THE SPARKS BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE AFFILIATION
AGREEMENT AND THE AFFILIATION CONTEMPLATED THEREBY.
RECORD DATE
The Sparks Board of Directors has fixed the close of business on June 6,
1995 (the "Sparks Record Date") as the record date for determining holders
entitled to notice of and to vote at the Sparks Special Meeting. Accordingly,
only holders of record of Sparks Common Stock at the close of business on the
Sparks Record Date will be entitled to notice of, and to cast their vote at, the
Sparks Special Meeting. At the close of business on May 31, 1995, there were
771,241 shares of Sparks Common Stock issued and outstanding held by 569 holders
of record.
VOTE REQUIRED
Each holder of record of shares of Sparks Common Stock on the Sparks 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 Sparks Special Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the shares of Sparks Common Stock outstanding on the Sparks Record
Date is necessary to constitute a quorum at the Sparks Special Meeting.
The approval of the Affiliation Agreement and the Affiliation requires the
affirmative vote of the holders of two-thirds of the outstanding shares of
Sparks Common Stock entitled to vote thereon.
As of May 31, 1995 the directors and certain officers of Sparks and certain
persons related thereto owned an aggregate of 188,187.56 shares (24.40%) of
Sparks Common Stock. Such persons have executed agreements with Mercshares
pursuant to which such persons have agreed to vote their shares of Sparks Common
Stock to approve the Affiliation Agreement and the Affiliation. See "CERTAIN
OTHER AGREEMENTS--The Support Agreement."
All shares of Sparks 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 SPARKS COMMON STOCK WILL BE VOTED TO APPROVE THE
AFFILIATION AGREEMENT AND THE AFFILIATION.
Sparks does not know of any matters other than as described in the Notice
that are to come before the Sparks Special Meeting. If any other matter or
matters are properly presented for action at the Sparks Special Meeting, the
persons named in the enclosed form of proxy and acting thereunder will
13
<PAGE>
have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. A Sparks Stockholder 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 Sparks Special Meeting to Donna S.
Ensor, Secretary of Sparks, by signing and returning a later dated proxy, or by
voting in person at the Sparks Special Meeting; however, mere attendance at the
Sparks Special Meeting will not in and of itself have the effect of revoking the
proxy.
Votes cast by proxy or in person at the Sparks Special 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 Sparks Stockholders for a vote, proxies are marked as abstentions (or
Sparks Stockholders 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. BECAUSE THE REQUIRED VOTE OF SPARKS
STOCKHOLDERS ON THE AFFILIATION AGREEMENT AND THE AFFILIATION IS BASED UPON THE
TOTAL NUMBER OF OUTSTANDING SHARES OF SPARKS COMMON STOCK, THE FAILURE TO SUBMIT
A PROXY CARD (OR THE FAILURE TO VOTE IN PERSON AT THE SPARKS SPECIAL MEETING IF
A PROXY CARD IS NOT SUBMITTED), THE ABSTENTION FROM VOTING AND ANY BROKER
NON-VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AFFILIATION AGREEMENT
AND THE AFFILIATION.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Sparks Board of
Directors and Sparks will bear the costs of its solicitation of proxies.
Solicitations may be made by mail, telephone, or personally by directors,
officers and employees of Sparks, none of whom will receive additional
compensation for performing such services. Sparks may engage the services of a
proxy solicitation firm to assist in the solicitation of proxies. The terms of
any such engagement have not yet been determined. Mercshares will pay all the
expenses of printing and mailing the Prospectus and Proxy Statement.
14
<PAGE>
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. Sparks Stockholders 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, each Sparks Stockholder (other than
a Sparks Stockholder who follows the procedures with respect to dissenting
stockholders set forth in Title 3, Subtitle 2 of the MGCL) will be deemed,
without further act, to have automatically exchanged his shares of Sparks Common
Stock for Mercshares Common Stock on the basis of two and one-third shares of
Mercshares Common Stock for each share of Sparks Common Stock. Following
consummation of the Affiliation, Sparks will continue to operate as a separate
bank within the Mercshares system. The transaction with Mercshares does not
change the Sparks name, office locations, directors or staff. Certificates for
Sparks Common Stock shall be exchanged for certificates of Mercshares Common
Stock as described below.
Based upon the capitalization of Mercshares and Sparks as of April 30, 1995,
the Sparks Stockholders would own approximately 3.6% of the outstanding
Mercshares Common Stock following consummation of the Affiliation. Based upon
the financial statements of Mercshares and Sparks at March 31, 1995, upon
consummation of the Affiliation, the percentage of total assets and the
percentage of total liabilities represented by Sparks in the combined entity
would each be less than 5.0%.
As discussed below in "Reasons for the Affiliation; Recommendation of the
Sparks Board of Directors," the Sparks Board of Directors has concluded that the
terms of the Affiliation and the Affiliation Agreement are advisable and are
fair to, and in the best interests of, Sparks and the Sparks Stockholders. Upon
consummation of the Affiliation, the former Sparks Stockholders who become
holders of Mercshares Common Stock will be stockholders in a larger entity with
equity traded on The Nasdaq National Market. Each Sparks Stockholder who becomes
a holder of Mercshares Common Stock shall possess the same rights as other such
holders, and former Sparks Stockholders as a group will no longer be taking
action at the Sparks corporate level. See "COMPARISON OF STOCKHOLDER RIGHTS OF
MERCSHARES AND SPARKS COMMON STOCK" and "DESCRIPTION OF MERCSHARES CAPITAL
STOCK."
BACKGROUND TO THE AFFILIATION
As Chairmen of their respective banking institutions, H. Furlong Baldwin of
Mercshares and Charles E. Ensor, Sr. of Sparks have had personal interaction
within the industry for many years. In January, 1994, Mr. Ensor contacted Mr.
Baldwin to discuss a possible affiliation. The Sparks Board of Directors had
become increasingly concerned over the changes in the financial industry and the
ability of Sparks to maintain its market share in the face of such changes, and
the ability of Sparks to provide highly technical services which some customers
demand.
Commencing with a meeting in late January 1994, discussions between
Mercshares and Sparks were general and exploratory in nature and did not result
in any specific offers or proposals being made. In the following weeks, Sparks
began to provide financial information to Mercshares and certain executive
officers of Sparks visited with the management of two Mercshares' affiliated
banks headquartered in Maryland. Sparks visited such banks to observe the
day-to-day operations of an institution after its affiliation with Mercshares.
The degree of Mercshares' involvement in the affiliate's operations, goals and
policies was considered.
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Further discussions between Sparks and Mercshares continued and in late
April, 1994, Mercshares advised Sparks that it might be prepared to submit an
affiliation proposal to include an exchange ratio of 2.7 shares (2.25 after
giving effect to the stock dividend paid on December 31, 1994) of Mercshares
Common Stock for each share of Sparks Common Stock. Sparks then engaged Berwind
to serve as its financial advisor and to assist in the negotiations with
Mercshares. Berwind met with the Sparks Board of Directors concerning the
Mercshares offer on June 28, 1994. At the conclusion of Berwind's presentation,
the Sparks Board unanimously agreed that negotiations with Mercantile should
continue to try to obtain a higher value.
On October 18, 1994, Mr. Baldwin and other representatives of Mercshares met
with the Sparks Board of Directors and explained Mercshares' philosophy,
policies and procedures relating to its affiliates. Mercshares then presented a
proposal to include an exchange ratio of 2.75 shares (2.29 after giving effect
to the stock dividend paid on December 31, 1994) of Mercshares Common Stock for
each share of Sparks Common Stock for the consideration of the Sparks Board. In
the following weeks, members of the Board of Directors and senior management of
Sparks held discussions with Berwind and representatives of Mercshares
concerning the structure and terms of a possible affiliation. On November 9,
1994, the Sparks Board directed that a counter offer be made of 2.9 shares (2.42
after giving effect to the stock dividend paid on December 31, 1994) of
Mercshares Common Stock for each share of Sparks Common Stock. The counter offer
also required that the market value of Mercshares Common Stock should not fall
below $20.00 per share. After further discussions among Sparks, Berwind and
Mercshares, the Sparks Board indicated on November 17, 1994 that it would accept
an exchange ratio of 2.8 shares (two and one-third after giving effect to the
stock dividend paid on December 31, 1994) of Mercshares Common Stock for each
share of Sparks Common Stock.
The Sparks Board of Directors met on December 8, 1994 to discuss the
proposed transaction. During the next week the terms of a definitive agreement
were negotiated. On December 13, 1994, the Mercshares Board of Directors
authorized its management to proceed with a transaction with Sparks at an
exchange ratio of two and one-third shares of Mercshares Common Stock for each
share of Sparks Common Stock outstanding after giving effect to the stock
dividend paid on December 31, 1994. On December 15, 1994, the Sparks Board met
and received a presentation from Berwind indicating that the proposed
affiliation with Mercshares was fair to the Sparks Stockholders from a financial
point of view. The Sparks Board unanimously approved the Affiliation and the
execution of the Affiliation Agreement. See "--Reasons for the Affiliation;
Recommendation of the Sparks Board of Directors" and "CERTAIN OTHER AGREEMENTS."
The terms of the Affiliation and the execution of the Affiliation Agreement were
announced in a joint press release on December 15, 1994.
REASONS FOR THE AFFILIATION; RECOMMENDATION OF THE SPARKS BOARD OF DIRECTORS
The Sparks Board of Directors believes that the terms of the Affiliation and
the Affiliation Agreement are advisable and are fair to, and in the best
interests of, Sparks and the Sparks Stockholders. As explained below, this
conclusion is supported by the opinion of its independent financial advisor that
the consideration to be received in the Affiliation is fair to the Sparks
Stockholders from a financial point of view. In considering the terms and
conditions of the Affiliation Agreement, the Sparks Board of Directors
considered a number of factors. The Sparks 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 Sparks
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 Sparks Stockholders resulting from the Exchange Ratio
represented a fair multiple of Sparks' per share book value and earnings.
The Sparks Board of Directors also considered that, under the proposed
Exchange Ratio and based on the Sparks 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
Sparks Stockholders,
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although there can be no assurance that current dividends are indicative of
future dividends. See "COMPARATIVE UNAUDITED PER SHARE DATA."
(ii) The Terms, Other Than the Financial Terms, and Structure of the
Affiliation. In this respect, the Sparks Board of Directors considered the
benefits to the customers and employees of Sparks and the communities it
serves by allowing Sparks to remain a separate bank within the Mercshares
system. The Sparks Board of Directors also considered that the Affiliation
would qualify as a tax-free reorganization under the Code. See "--Certain
Federal Income Tax Consequences."
(iii) Certain Financial and Other Information Concerning Mercshares. In
this respect, the Sparks Board of Directors considered, among other things,
the favorable position of Mercshares among its peer group of national and
regional financial institutions in terms of profitability, capital adequacy
and asset quality. The Sparks 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 Sparks Stockholders,
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 Sparks 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 Sparks Board of
Directors also considered the marketability of Mercshares Common Stock,
which is publicly traded and quoted on The Nasdaq National Market. The
Sparks Board of Directors further considered the diversification of risk
associated with ownership of an institution that operates 20 banks serving a
broad geographic area that encompasses most of Maryland and parts of
Virginia and Delaware.
(iv) Other Possible Alternatives. The Sparks Board of Directors
considered, based in part on the advice of Berwind, possible alternatives to
the transaction with Mercshares, including affiliation partners for Sparks
other than Mercshares. After weighing the financial and non-financial
aspects of a transaction with Mercshares or with other possible affiliation
partners, the Sparks Board of Directors decided to pursue an affiliation
with Mercshares.
(v) Opinion of Sparks Financial Advisor. The Sparks Board of Directors
also considered the opinion of Berwind as to the fairness of the
consideration to be received in the Affiliation to the Sparks Stockholders
from a financial point of view. See "--Opinion of Sparks Financial Advisor."
(vi) Certain Other Considerations. The Sparks Board of Directors further
determined that the addition of resources resulting from the Affiliation
will enable Sparks 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 Sparks Board of Directors concluded that the Affiliation will
help provide Sparks with the financial resources needed to meet the
competitive challenges arising from recent and anticipated changes in the
banking and financial services industry.
THE SPARKS BOARD OF DIRECTORS BELIEVES THAT THE AFFILIATION AND THE
AFFILIATION AGREEMENT ARE ADVISABLE AND ARE FAIR TO, AND IN THE BEST INTERESTS
OF, SPARKS AND THE SPARKS STOCKHOLDERS. THE SPARKS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT SPARKS STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION
AGREEMENT AND THE AFFILIATION CONTEMPLATED THEREBY.
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OPINION OF SPARKS FINANCIAL ADVISOR
Sparks has retained Berwind to act as its financial advisor and to render a
fairness opinion in connection with the Affiliation. Berwind has rendered its
opinion to the Board of Directors of Sparks that, based upon and subject to the
various considerations set forth therein, as of December 14, 1994, and as of the
date of the Prospectus and Proxy Statement, the consideration to be received in
the Affiliation is fair to the Sparks Stockholders from a financial point of
view.
The full text of Berwind's opinion as of the date hereof, which sets forth
the assumptions made, matters considered and limitations of the review
undertaken, is attached as Annex B to this Prospectus and Proxy Statement, and
should be read in its entirety in connection with this Prospectus and Proxy
Statement. The summary of the opinion of Berwind set forth herein is qualified
in its entirety by reference to the full text of such opinion attached as Annex
B to this Prospectus and Proxy Statement.
Sparks retained Berwind to act as Sparks' financial advisor in connection
with the Affiliation. Berwind was selected to act as Sparks' financial advisor
based upon its qualifications, expertise and experience. Berwind has knowledge
of, and experience with, Maryland banking markets and banking organizations
operating in those markets and was selected by Sparks because of its knowledge
of, experience with, and reputation in the financial services industry.
In such capacity, Berwind participated in the negotiations with respect to
the pricing and other terms of the Affiliation, but the decision with respect to
the Affiliation price was determined by Sparks in the process of its
negotiations with Mercshares. On December 15, 1994, Sparks' Board of Directors
approved the Affiliation Agreement. Berwind delivered an opinion (the "December
Opinion") to Sparks' Board stating that, as of such date, the proposed
affiliation with Mercshares was fair to Sparks Stockholders from a financial
point of view. As of the date of this Prospectus and Proxy Statement, Berwind
has concluded that the consideration to be received in the Affiliation is fair
to the Sparks Stockholders from a financial point of view. The full text of the
opinion of Berwind dated as of the date of this Prospectus and Proxy Statement
(the "Proxy Opinion"), which sets forth assumptions made, matters considered and
limits on the review undertaken, is attached as Annex B to this Prospectus and
Proxy Statement. No limitations were imposed by Sparks' Board of Directors upon
Berwind with respect to the investigations made or procedures followed by
Berwind in rendering the December Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of
Sparks and Mercshares, (ii) reviewed the Affiliation Agreement, (iii) reviewed
and analyzed stock market performance of Mercshares, (iv) studied and analyzed
the consolidated financial and operating data of Sparks and Mercshares, (v)
considered the terms and conditions of the proposed affiliation between Sparks
and Mercshares as compared with the terms and conditions of comparable bank
mergers and acquisitions, (vi) met and/or communicated with certain members of
Sparks' and Mercshares' senior management to discuss their respective
operations, historical financial statements, and future prospects, (vii)
reviewed this Proxy Statement and Prospectus, and (viii) conducted such other
financial analyses, studies and investigations as it deemed appropriate.
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to Sparks' financial
forecasts reviewed by Berwind in rendering its opinion, Berwind assumed that
such financial forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Sparks as to
the future financial performance of Sparks. Berwind did not make an independent
evaluation or appraisal of the assets (including loans) or liabilities of Sparks
or Mercshares nor was it furnished with any such appraisal. Berwind also did not
independently verify and has relied on and assumed that all allowances for loan
and lease losses set forth in the balance sheets of Sparks and Mercshares were
adequate and complied fully with applicable law, regulatory policy and sound
banking practice as of the date of such financial statements.
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The following is a summary of selected analyses prepared by Berwind for the
December Opinion and updated by Berwind in connection with the Proxy Opinion.
Comparable Companies and Comparable Acquisition Transaction
Analyses. Berwind compared selected financial and operating data for Sparks with
those of a peer group of selected banks and bank holding companies with assets
between $100 million and $300 million, as of the most recent financial period
publicly available, located in Maryland and the Pennsylvania counties of Adams
and York (the "Sparks Peer Group"). Berwind compared the following financial
ratios for Sparks and the median for the Sparks Peer Group: equity as a
percentage of assets (10.35% for Sparks compared to 9.33% for the Sparks Peer
Group), nonperforming assets as a percentage of equity plus the loan loss
reserve (1.62% for Sparks compared to 10.23% for the Sparks Peer Group),
nonperforming assets as a percentage of loans plus other real estate owned (.27%
for Sparks compared to 1.82% for the Sparks Peer Group), loan loss reserve as a
percentage of nonperforming assets (567.4% for Sparks compared to 85.4% for the
Sparks Peer Group) and compound annual loan growth (4.9% for Sparks compared to
3.7% for the Sparks Peer Group). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Analysis of Loans."
Berwind compared the following operating ratios for the latest twelve
months: return on average assets (1.27% for Sparks compared to 1.22% for the
Sparks Peer Group), return on average equity (12.20% for Sparks compared to
11.98% for the Sparks Peer Group), net interest margin (4.30% for Sparks
compared to 4.56% for the Sparks Peer Group), efficiency ratio (defined as
noninterest expense as a percentage of net interest income and noninterest
income) (55.29% for Sparks compared to 62.71% for the Sparks Peer Group) and net
charge offs as a percentage of average loans (.06% for Sparks compared to .13%
for the Sparks Peer Group).
Berwind also compared the operating ratios as an average of the last three
years for Sparks and the median for the Sparks Peer Group: return on average
assets (1.26% for Sparks compared to 1.05% for the Sparks Peer Group), return on
average equity (12.85% for Sparks compared to 11.86% for the Sparks Peer Group),
net interest margin (4.30% for Sparks compared to 4.57% for the Sparks Peer
Group), efficiency ratio (defined as noninterest expense as a percentage of net
interest income and noninterest income) (53.61% for Sparks compared to 64.46%
for the Sparks Peer Group) and net charge offs as a percentage of average loans
(-.06% for Sparks compared to .17% for the Sparks Peer Group).
Berwind also compared selected financial, operating and stock market data
for Mercshares with those of a peer group of selected commercial banks with
assets between $2 billion and $9 billion, as of the most recent period publicly
available, located in Washington, D.C., Delaware, Maryland, Pennsylvania,
Virginia and West Virginia (the "Mercshares Peer Group"). Berwind compared the
following financial ratios for Mercshares and the median for the Mercshares Peer
Group: equity as a percentage of assets (12.33% for Mercshares compared to 9.22%
for the Mercshares Peer Group), nonperforming assets as a percentage of equity
plus the loan loss reserve (5.14% for Mercshares compared to 7.30% for the
Mercshares Peer Group), nonperforming assets as a percentage of loans plus other
real estate owned (1.04% for Mercshares compared to .85% for the Mercshares Peer
Group), loan loss reserve as a percentage of nonperforming assets (218.81% for
Mercshares compared to 136.02% for the Mercshares Peer Group) and compound
annual loan growth (5.28% for Mercshares compared to 8.08% for the Mercshares
Peer Group).
Berwind compared the following operating ratios for the latest twelve
months: return on average assets (1.60% for Mercshares compared to 1.34% for the
Mercshares Peer Group), return on average equity (12.96% for Mercshares compared
to 13.83% for the Mercshares Peer Group) net interest margin (5.00% for
Mercshares compared to 4.65% for the Mercshares Peer Group), efficiency ratio
(defined as noninterest expense as a percentage of net interest income and
noninterest income) (55.01% for Mercshares compared to 59.89% for the Mercshares
Peer Group) and net charge offs as a percentage of average loans (.21% for
Mercshares compared to .17% for the Mercshares Peer Group).
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Berwind also compared the operating ratios as an average of the last three
years for Mercshares and the median for Mercshares Peer Group: return on average
assets (1.50% for Mercshares compared to 1.24% for the Mercshares Peer Group),
return on average equity (12.99% for Mercshares compared to 13.51% for the
Mercshares Peer Group), net interest margin (4.76% for Mercshares compared to
4.61% for the Mercshares Peer Group), efficiency ratio (defined as noninterest
expense as a percentage of net interest income and noninterest income) (53.67%
for Mercshares compared to 61.91% or the Mercshares Peer Group) and net charge
offs as a percentage of average loans (.40% for Mercshares compared to .29% for
the Mercshares Peer Group).
Berwind compared the following market ratios for Mercshares compared to the
median for the Mercshares Peer Group: price as a percentage of book value
(156.3% for Mercshares compared to 153.3% for the Mercshares Peer Group), price
as a percentage of tangible book value (160.9% for Mercshares compared to
162.75% for the Mercshares Peer Group), price as a percentage of latest twelve
months earnings per share (12.3 times for Mercshares compared to 11.9 times for
the Mercshares Peer Group) and dividend yield (3.33% for Mercshares compared to
3.77% for the Mercshares Peer Group).
Berwind also compared the multiples of book value, tangible book value and
latest twelve months' earnings associated with the Affiliation with the
multiples paid in recent acquisitions of banks and bank holding companies that
Berwind deemed comparable (the "Comparable Transactions"). The Comparable
Transactions included both interstate and intrastate acquisitions announced
since January 1, 1994, in which the selling institution's assets were between
$100 million and $300 million. No company or transaction, however, used in this
analysis is identical to Sparks, Mercshares or the Affiliation. Accordingly, an
analysis of the result of the foregoing is not mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that would affect
the public trading values of the companies or company to which they are being
compared. However, the range of price as a percentage of book value ratios for
Comparable Transactions was 83.83% to 372.6% compared to 206.9% for Sparks, the
range of price as a percentage of tangible book value ratios for Comparable
Transactions was 91.2% to 372.6% compared to 206.9% for Sparks, the range of
price as a percentage of latest twelve months earnings multiples for Comparable
Transactions was 7.9 times to multiples which were not meaningful as a result of
negative earnings compared to 15.3 times for Sparks and the range of price as a
percentage of assets ratios for Comparable Transactions was 7.1% to 30.7%
compared to 22.6% for Sparks. For purposes of computing the information with
regard to the Affiliation, Mercshares' closing price of $24.00 per share on May
23, 1995, was used.
Discounted Dividend Analyses. Using discounted dividend analyses, Berwind
estimated the present value of the future dividend streams that Sparks could
produce over a five year period under different assumptions as to dividend
pay-out levels, if Sparks performed in accordance with various earnings growth
forecasts. Berwind also estimated the terminal value for Sparks Common Stock
after the five year period by applying a range of earnings multiples to Sparks'
terminal year earnings. The range of multiples used reflected a variety of
scenarios regarding the growth and profitability prospects of Sparks ranging in
growth from 5% to 10% per year. The dividend streams and terminal values were
then discounted to present value using discount rates, reflecting different
assumptions regarding the rates of return required by holders or prospective
buyers of Sparks Common Stock which ranged from 10% to 15%.
Pro Forma Contribution Analysis. For the December Opinion, Berwind analyzed
the changes in the amount of earnings, book value, and dividends represented by
one share of Sparks Common Stock prior to the Affiliation and two and one-third
shares of Mercshares Common Stock after the Affiliation based upon
pooling-of-interests accounting. The analysis considered, among other things,
the changes that the Affiliation would cause to Sparks' earnings per share, book
value per share, and indicated dividends. In reviewing the pro forma combined
earnings, equity and assets of Mercshares based on the Affiliation with Sparks,
Berwind analyzed the contribution that Sparks would have made to the
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combined company's earnings, equity and assets as of and for the 12 month period
ended March 31, 1995. Berwind also reviewed the percentage ownership that
Sparks' Stockholders would hold in Mercshares following consummation of the
Affiliation. For the Proxy Opinion, Berwind performed the same analysis
described in this paragraph except that it considered the change in the amount
of earnings, book value and dividends represented by one share of Sparks Common
Stock prior to the Affiliation and two and one-third shares of Mercshares Common
Stock after the Affiliation based upon either purchase accounting or
pooling-of-interests accounting.
In connection with rendering its December Opinion and Proxy Opinion, Berwind
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the consideration to be paid in the
Affiliation was to some extent a subjective one based on the experience and
judgment of Berwind and not merely the result of mathematical analysis of
financial data, Berwind principally relied on the previously discussed financial
valuation methodologies in its determinations. Berwind believes its analyses
must be considered as a whole and that selecting portions of such analyses and
factors considered by Berwind without considering all such analyses and factors
could create an incomplete view of the process underlying Berwind's opinion. In
its analysis, Berwind made numerous assumptions with respect to business,
market, monetary and economic conditions, industry performance and other
matters, many of which are beyond Sparks' and Mercshares's control. Any
estimates contained in Berwind's analyses are not necessarily indicative of
future results or values, which may be significantly more or less favorable than
such estimates.
In reaching its opinion as to fairness, none of the analyses performed by
Berwind was assigned a greater weighting by Berwind than any other analysis. As
a result of its consideration of the aggregate of all factors present and
analyses performed, Berwind reached the conclusion, and opined, that
consideration to be received in the Affiliation as set forth in the Affiliation
Agreement, was fair to the Sparks Stockholders from a financial point of view.
In connection with delivering the Proxy Opinion, Berwind updated certain
analyses described above to reflect current market conditions and events
occurring since the date of the Affiliation Agreement. Such reviews and updates
led Berwind to conclude that it was not necessary to change the conclusions it
had reached in connection with rendering the December Opinion.
The Proxy Opinion was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of the date the
Proxy Opinion was delivered; events occurring after the date of the Proxy
Opinion could materially affect the assumptions used in preparing the Proxy
Opinion. Berwind has not undertaken to reaffirm and revise the Proxy Opinion or
otherwise comment upon any events occurring after the date thereof.
In delivering the December Opinion and Proxy Opinion, Berwind assumed that
in the course of obtaining the necessary regulatory and governmental approvals
for the Affiliation, no restriction will be imposed on Mercshares that would
have a material adverse effect on the contemplated benefits of the Affiliation.
Berwind also assumed that there would not occur any change in applicable law or
regulation that would cause a material adverse change in the prospects or
operations of Mercshares after the Affiliation.
Berwind, as part of its investment banking business, is engaged regularly in
the valuation of assets, securities and companies in connection with various
types of asset and security transactions, including mergers, acquisitions,
private placements, and valuation for various other purposes and in the
determination of adequate consideration in such transactions.
Pursuant to the terms of an engagement letter dated May 10, 1994 Sparks has
paid Berwind $50,000 for acting as financial advisor in connection with the
Affiliation including delivering the December and Proxy Opinions. In addition,
Sparks has also agreed to pay Berwind $86,865 upon the consummation of the
Affiliation and to reimburse Berwind for its reasonable out-of-pocket expenses.
Whether or not the Affiliation is consummated, Sparks has also agreed to
indemnify Berwind and certain related persons against certain liabilities
relating to or arising out of its engagement.
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The full text of the Proxy Opinion of Berwind dated as of the date of this
Prospectus and Proxy Statement, which sets forth assumptions made and matters
considered, is attached hereto as Annex B to this Prospectus and Proxy
Statement. Sparks' Stockholders are urged to read the Proxy Opinion in its
entirety. The Proxy Opinion is directed only to the consideration to be received
by Sparks Stockholders in the Affiliation and does not constitute a
recommendation to any holder of Sparks Common Stock as to how such holder should
vote at the Sparks Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF BERWIND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH
IS SET FORTH AS ANNEX B TO THIS PROSPECTUS AND PROXY STATEMENT.
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 Sparks
will execute and deliver Articles of Share Exchange (the "Articles"), and will
file the Articles 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 are set forth in the Articles as
filed with the Maryland SDAT. Mercshares and Sparks contemplate that the
Affiliation will be made effective on the last business day of a month, or such
other date as may be acceptable to Mercshares and Sparks.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
Certificates representing shares of Sparks Common Stock may be exchanged
after the Effective Date by surrendering such certificates to Mercantile-Safe
Deposit and Trust Company, a Maryland banking affiliate of Mercshares acting as
exchange agent, or its agent (the "Exchange Agent"), in exchange 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 for Sparks 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, Sparks Stockholders will receive
transmittal forms and instructions as to the time and method of surrendering
their certificates. Until so surrendered, certificates formerly representing
shares of Sparks Common Stock (other than shares of dissenting stockholders as
described herein under the heading "Appraisal Rights of Dissenting
Stockholders") 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 Sparks 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.
SPARKS STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. SPARKS STOCKHOLDERS 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. The matters set forth in paragraphs (i) through (iv) are
based upon the opinion of Piper & Marbury L.L.P., counsel to Sparks.
(i) the Affiliation will qualify as a tax-free reorganization under
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the
"Code");
(ii) no gain or loss will be recognized by the Sparks Stockholders upon
receipt by them of Mercshares Common Stock in exchange for Sparks Common
Stock pursuant to the Affiliation;
(iii) provided that the Sparks Common Stock is held as a capital asset,
the tax basis of the Mercshares Common Stock received by the Sparks
Stockholders will be the same as the tax basis of the Sparks Common Stock
surrendered therefor;
(iv) provided that the Sparks Common Stock is held as a capital asset,
the holding period of the Mercshares Common Stock received by the Sparks
Stockholders will include the holding period of the Sparks Common Stock
surrendered therefor; and
(v) no gain or loss will be recognized by Mercshares or Sparks in the
Affiliation.
The obligation of Sparks to consummate the Affiliation is subject to the
receipt of an opinion of Piper & Marbury L.L.P., counsel to Sparks, 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. Sparks has
agreed in the Affiliation Agreement to use all commercially reasonable efforts
to cause the Affiliation to qualify as a tax-free reorganization under Section
368(a)(1)(B) of the Code.
Any cash received by Sparks Stockholders, 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 Sparks Stockholders. 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 SPARKS STOCKHOLDER 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
The Affiliation Agreement contemplates 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 (the
"Pooling Condition"). Following the execution of the Affiliation Agreement,
circumstances arose indicating that the use of purchase accounting for the
Affiliation might be required, depending upon certain actions taken or not to be
taken by Mercshares. Mercshares has waived the
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Pooling Condition and has agreed to proceed to consummate the Affiliation on the
basis of purchase accounting if: (1) Sparks shall have used all commercially
reasonable efforts to cause the Affiliation to qualify for pooling-of-interests
accounting treatment; (2) Sparks shall not take any action or enter into any
agreement which would cause the Affiliation not to qualify for
pooling-of-interests accounting treatment; (3) affiliates of Sparks shall have
entered into agreements with Mercshares to assure the ability to use
pooling-of-interests accounting; (4) Sparks Stockholders holding no more than
10% of the shares of Sparks Common Stock outstanding (or in certain cases, a
lesser percentage) shall have filed a written objection to the Affiliation prior
to or at the Sparks Special Meeting; and (5) the other conditions to Mercshares'
obligations under the Affiliation Agreement are satisfied or waived. See
"CERTAIN OTHER AGREEMENTS--The Support Agreement."
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of Mercshares and Sparks would be combined at the
Effective Date and carried forward at their previously recorded amounts and the
stockholders' equity accounts of Sparks would be combined on Mercshares'
consolidated balance sheet. Income and other financial statements of Mercshares
issued after consummation of the Affiliation would be restated retroactively to
reflect the consolidated operations of Mercshares and Sparks as if the
Affiliation had taken place prior to the periods covered by such financial
statements. If the Affiliation were not to qualify for pooling-of-interests
accounting treatment and if the Affiliation were consummated using purchase
accounting, the aggregate purchase price of Sparks (consisting of the fair value
of Sparks 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. Any potential differences between the consequences of
pooling-of-interests and purchase accounting for the Affiliation are not
expected to be material. See "COMPARATIVE UNAUDITED PER SHARE DATA" and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS." Sparks
Stockholders will receive the same number of shares of Merchares Common Stock in
exchange for their holdings of Sparks Common Stock regardless of the accounting
treatment which is ultimately applied to the Affiliation.
In connection with the Pooling Condition, individuals who are affiliated
with Mercshares and Sparks 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 Sparks,
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
Sparks 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 Sparks Stockholders who may be controlling persons of Sparks. Mercshares
and Sparks believe that the only Sparks Stockholders who may be deemed
controlling persons subject to these limitations are the directors and certain
officers of Sparks and certain persons related to them 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 two-thirds of
the outstanding shares of Sparks 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
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the balance sheet, income statement, financial position, results of operations
or business of Sparks, except as provided in the Affiliation Agreement; (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 Sparks with certain conditions, including limits on
unapproved increases in compensation of directors, officers or employees of
Sparks or unapproved alterations in benefits received by such individuals; (4)
maintenance to Mercshares' satisfaction of the composition of Sparks' securities
portfolio; (5) absence of notices of objection by holders of an aggregate of 10%
or more of the outstanding shares of Sparks 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) and such holders shall not have voted in favor of the
Affiliation pursuant to the provisions of Title 3, Subtitle 2 of the MGCL; (6)
the absence of any actual or threatened legal proceeding or impediment that in
the reasonable opinion of counsel to Mercshares might prevent the consummation
of the Affiliation; (7) the accuracy and satisfaction of various other financial
and legal representations and conditions with respect to Sparks; (8) the receipt
of certain regulatory approvals; and (9) the effectiveness of the Registration
Statement. Mercshares may in its discretion waive conditions (1) through (7),
and as more fully described in "--Accounting Treatment," Mercshares has waived
condition (2) provided that certain conditions to Mercshares' obligations under
the Affiliation Agreement are satisfied or waived.
The obligation of Sparks 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 Sparks Stockholders 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. Sparks may in its discretion waive condition (2).
TREATMENT OF EMPLOYEE BENEFIT PLANS
Pursuant to the Affiliation Agreement and at the option of Mercshares, after
the Effective Date, except with respect to the Sparks' 401(k) plan and pension
plan, both of which will be merged with and into such plans of Mercshares,
employees of Sparks will be entitled to participate either (a) in Mercshares'
employee benefit plans and programs on substantially the same basis as similarly
situated employees of Mercshares or (b) 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 Sparks plans and
programs currently in effect.
EXCLUSIVE DEALING
Sparks has agreed that while the Affiliation Agreement is in effect, neither
Sparks nor any of its officers, directors, employees, agents or representatives
(including its investment bankers) shall, directly or indirectly: (i) encourage,
solicit or initiate the submission of 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 Sparks Stockholders or enter into
any agreement or participate in any 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 Sparks Board of
Directors shall conclude, based on a written opinion of counsel, that its
fiduciary obligations require consideration of such Acquisition Proposal because
it may be in the best interests of the Sparks Stockholders and is more favorable
to the Sparks Stockholders 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 Sparks, (B) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of assets of
Sparks representing 10% or more of the assets of Sparks, (C) issue, sale or
other disposition of securities
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representing 10% or more of the voting power of Sparks, or (D) any transaction
in which any person or group shall acquire beneficial ownership of 20% or more
of the outstanding Sparks Common Stock.
Sparks has agreed that it will promptly advise Mercshares of, and
communicate to Mercshares the terms of, any such inquiry or proposal addressed
to Sparks or of which Sparks or its 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 no person now serving as a director
of Sparks who was 60 years of age or over as of December 15, 1994 shall become
ineligible to serve as a director of Sparks solely by virtue of attaining any
age less than 75 (the current mandatory retirement age provided by Sparks'
By-laws). Messrs. Ensor, Price, Tarbert, Lawson, McDonald, Schapiro, Rigger and
Palmer were 60 years of age or older as of December 15, 1994.
In connection with the negotiation of the Affiliation Agreement, the
employment agreements between Sparks and certain of its officers (Bradley G.
Moore, Janet M. Miller, Gail S. Kimble, Felicia A. Meeks, Daniel R. Wernecke and
John W. Wright) were amended. The amendments will be effective only upon the
consummation of the Affiliation. As part of such amendments, provisions which
restricted Sparks, without each officer's consent, from terminating or amending
any benefit arrangements covering such officer were removed from each officer's
employment agreement. In the case of Mr. Moore, the amendments also provide that
if he is designated by Mercshares as a participant in Mercshares Annual
Incentive Compensation Plan, he shall be precluded from participating in any
other incentive plan of Sparks. The amendments also delete the provisions from
each officer's employment agreement which would obligate Sparks, in the event of
the disability or death of the officer, to pay to such officer (or to such
officer's estate) salary and benefits in addition to what the officer would
receive under Spark's regular benefit programs.
The amendments also provide that in order for an officer to be terminated
for "cause" as defined in the employment agreements, a finding of cause must be
made by (A) a majority of those non-employee directors who are then on the
Sparks Board and who were also non-employee directors immediately before the
Affiliation, provided that there are at least three such non-employee directors,
or (B) if there are not at least three such non-employee directors, then by a
majority vote of all of the directors who are then on the Sparks Board, after at
least 10 days' written notice to the officer specifying the cause to be claimed
and after an opportunity for the officer to be heard at meetings of the Sparks
Board. In the case of each of the officers other than Mr. Moore and Ms. Miller,
the amendments also remove the obligation of Sparks to continue an officer's
benefits in the event of (A) the termination of such officer by Sparks for any
reason other than for cause, or (B) the resignation of the officer due to a
significant change in the nature or scope of his authorities or duties or a
reduction in total compensation from that contemplated in the employment
agreements or as a result of the breach by Sparks of any provision of such
officer's employment agreement.
In the case of Mr. Moore and Ms. Miller, in recognition of the fact that
such officers may not receive a benefit at age 60 under the Employees'
Retirement Plan of Sparks State Bank (the "Sparks Pension Plan") and the Sparks
State Bank Employees' Profit Sharing/401(k) Plan (the "Sparks 401(k) Plan," and
collectively with the Sparks Pension Plan, the "Sparks Plans") if the Sparks
Plans are not continued in their present forms, but are merged into plans of
Mercshares, the amendments provide that Sparks will pay to such officers upon
their retirement at age 60 (or, in the case of Mr. Moore, upon his retirement or
three years after notice of termination of his Employment Agreement is given),
an amount, if any, equal to (A) the annual life annuity which such officer would
have received had the Sparks Pension Plan continued in effect, plus the annual
life annuity which can be derived from that portion of the officer's 401(k) Plan
account attributable to contributions other than salary reduction contributions
which such officer would have received had the Sparks 401(k) Plan continued in
effect, minus (B) the annual life annuity which such officer is expected to
receive under the Mercshares Cash Balance Plan, plus the annual life annuity
which can be derived from that portion of such officer's Mercshares Thrift Plan
Account applicable to contributions other than salary reduction contributions.
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Such payment obligations would not be applicable (A) if such officer is
terminated for "cause," or (B) if he or she resigns, prior to age 60 (or, in the
case of Mr. Moore, prior to the termination of his Employment Agreement three
years after notice of the termination of his Employment Agreement is given,
whichever is applicable) other than a resignation due to a significant change in
the scope or nature of his or her duties or a reduction in total compensation
from that set forth in the Employment Agreement, or (C) or if he or she does not
retire at age 60 (or alternatively, in the case of Mr. Moore, upon the
termination of his Employment Agreement three years after notice of the
termination of his Employment Agreement is given.)
Mercshares has also indicated that, consistent with its philosophy of
operating its Affiliated Banks as separate community banks, it expects that
Sparks will continue to operate as a separate entity under its current name and
with its current board of directors. Accordingly, Mercshares has indicated that
it expects that Charles E. Ensor, Sr. will continue to serve as Chairman of the
Board of Sparks until he reaches the age of 75, that Richard F. Price will
continue to serve as Vice Chairman of the Sparks Board, and that Mr. Price will
succeed Mr. Ensor as Chairman until Mr. Price reaches the age of 75. Mercshares
has also indicated that, subject to the ongoing judgments of the Sparks Board
and officers, it expects that Sparks' current employees will continue to be
employed by Sparks following consummation of the Affiliation, with salaries no
less than they currently receive.
TERMINATION
The Affiliation Agreement provides that it may be terminated and the
Affiliation abandoned at any time prior to the Effective Date: (a)
notwithstanding the approval of the Affiliation by the Sparks Stockholders, by
the mutual consent of Sparks and Mercshares; (b) by Mercshares if any time
Mercshares receives information from any regulatory authority, which by law is
required to approve the Affiliation or any other aspect of the transactions
provided for in the Affiliation Agreement, 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; (c) by Mercshares if Sparks recommends to the Sparks
Stockholders or accepts an Acquisition Proposal, or by Sparks if in compliance
with the provisions of the Affiliation Agreement, Sparks recommends to the
Sparks Stockholders or accepts an Acquisition Proposal; and (d) by Mercshares or
Sparks if the Affiliation is not consummated by December 31, 1995. The
Affiliation Agreement provides that in the case of a termination under (c)
above, Sparks shall pay Mercshares a termination fee of $700,000. The
Affiliation Agreement also provides that if the Affiliation Agreement is
terminated by Mercshares by reason of a material breach of Sparks, or by Sparks
by reason of a material breach by Mercshares, and such breach involves an
intentional, willful or grossly negligent misrepresentation or breach of
covenant, the breaching party shall be liable to the nonbreaching party for all
costs and expenses reasonably incurred by such non-breaching party.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the MGCL, certain relevant sections of which are attached to this
Prospectus and Proxy Statement as Annex C, each Sparks Stockholder will be
entitled to demand and receive payment of the "fair value" of his shares in
cash, if he (i) prior to or at the Sparks Special Meeting, files with Sparks a
written objection to the Affiliation, (ii) does not vote in favor of the
Affiliation Agreement and the Affiliation by person or by proxy and (iii) within
20 days after Articles have been accepted for record by the Maryland SDAT, makes
written demand on Sparks for payment of his shares (a "Payment Demand"), stating
the number and class of shares for which payment is demanded. A Payment Demand
should be sent to Sparks at 14804 York Road, Sparks, Maryland 21152, Attention:
Janet M. Miller, Senior Vice President. Any Sparks Stockholder who fails to
comply with the requirements described above will be bound by the terms of the
Affiliation.
Sparks will promptly deliver or send by certified mail, return receipt
requested, to each Sparks Stockholder who has filed a written objection to the
proposed transaction with Sparks, written notice of the date of acceptance of
the Articles for record by the Maryland SDAT. Such notice may include a
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written offer by Sparks to pay the objecting Sparks Stockholder what Sparks
considers to be the fair value of the Sparks Common Stock. Within 50 days after
acceptance of the Articles for record by the Maryland SDAT, any Sparks
Stockholder who has made a Payment Demand but has not received payment for his
shares may petition a court of equity in Baltimore County, Maryland, for an
appraisal to determine the "fair value" of such shares. If the court finds that
a Sparks Stockholder is entitled to appraisal of his stock, the court will
appoint three disinterested appraisers to determine the "fair value" of such
shares on terms and conditions the court considers proper, and the appraisers
will, within 60 days after appointment (or such longer period as the court may
direct), file with the court and mail to each party to the proceeding their
report stating their conclusion as to the "fair value" of the shares. Within 15
days after the filing of the report, any party may object to the report and
request a hearing thereon. The court will, upon motion of any party, enter an
order either confirming, modifying or rejecting the report and, if confirmed or
modified, enter judgment directing the time within which payment must be made.
If the appraisers' report is rejected, the court may determine the 'fair value"
of the shares of the Sparks Stockholders requesting appraisal or may remit the
proceeding to the same or other appraisers. Any judgment entered pursuant to a
court proceeding will include interest from the date of the Sparks Special
Meeting unless the court finds that the Sparks Stockholder's refusal to accept a
written offer to purchase the stock which may previously have been made by
Sparks in accordance with Section 3-207 of the MGCL, was arbitrary and vexatious
or not in good faith. Sparks' costs of the proceeding (not including attorneys'
fees) will be determined by the court and will be assessed against Sparks or,
under certain circumstances, the Sparks Stockholder, or both.
At any time after the filing of a petition for appraisal, the court may
require a Sparks Stockholder who has filed such petition to submit his or her
certificates representing shares to the clerk of the court for notation of the
pendency of the appraisal proceedings. In order to receive payment, whether by
agreement with Mercshares or pursuant to a judgment, such Sparks Stockholder
must surrender the stock certificates endorsed in blank and in proper form for
transfer. A Sparks Stockholder who has made a Payment Demand will not have the
right to receive any dividends or distributions payable to holders of record
after the close of business on the date of the Sparks Special Meeting and shall
cease to have any rights as a Sparks Stockholder with respect to the shares
except the right to receive payment of the "fair value" thereof. The rights of a
Sparks Stockholder who has made a Payment Demand may be restored only upon the
withdrawal, with the consent of Sparks, of the Payment Demand, failure to file a
petition for appraisal within the time required, a determination of the court
that the Sparks Stockholder is not entitled to an appraisal, or the abandonment
or rescission of the Affiliation.
Payment of "fair value" to a Sparks Stockholder who has properly exercised
dissenters' rights will be made through an escrow agent (the "Dissenters' Escrow
Agent") to be appointed by Sparks by the Effective Date. Pursuant to the terms
of an escrow agreement to be entered into by Sparks and the Dissenters' Escrow
Agent prior to the Effective Date, Sparks will transfer in escrow to the
Dissenters' Escrow Agent prior to the Effective Date, and at such time as it may
be directed by Mercshares, an amount of money estimated by Sparks, with the
concurrence of Mercshares, to be sufficient to pay in full the aggregate "fair
value" of all shares of Sparks Common Stock owned by Sparks Stockholders who
have properly exercised dissenters' rights. Upon surrender to the Dissenters'
Escrow Agent of the certificates which represented such Sparks Stockholders'
shares of Sparks Common Stock prior to the Effective Date and upon compliance by
such Sparks Stockholders with the provisions of Title 3, Subtitle 2 of the MGCL,
the Dissenters' Escrow Agent will pay to such Sparks Stockholders in cash, from
the funds held in escrow, the "fair value" of those shares, after their "fair
value" has been determined by the procedure prescribed by Title 3, Subtitle 2 of
the MGCL. The certificates which represented such Sparks Stockholders' shares of
Sparks Common Stock prior to the Effective Date, when surrendered to the
Dissenters' Escrow Agent for payment of "fair value," will be canceled.
Any surplus remaining from the funds held in escrow after payment by the
Dissenters' Escrow Agent to Sparks Stockholders of the "fair value" of all such
Sparks Stockholders' shares of Sparks Common Stock will be immediately returned
by the Dissenters' Escrow Agent to Sparks, with accumulated interest, if any.
Sparks shall be responsible for all obligations with respect to Sparks
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Stockholders imposed by Title 3, Subtitle 2 of the MGCL upon a corporation the
stock of which was acquired in a share exchange and will indemnify and hold
harmless Mercshares from and against all liabilities, damages, losses, costs and
expenses (including attorneys' fees) incurred by Mercshares in connection
therewith.
The foregoing summary of the rights of Sparks Stockholders contains all
material information relating to the exercise of appraisal rights but does not
purport to be a complete statement of the procedures to be followed by Sparks
Stockholders desiring to exercise their rights of appraisal. The preservation
and exercise of appraisal rights are conditioned on strict adherence to the
applicable provisions of the MGCL. Each Sparks Stockholder desiring to exercise
appraisal rights should refer to Title 3, Subtitle 2, entitled "Rights of
Objecting Stockholders" of the Corporations and Associations Articles of the
Annotated Code of Maryland) for a complete statement of such stockholder's
rights and the steps which must be followed in connection with the exercise of
those rights.
For further information relating to the exercise of appraisal rights, see
Annex C to this Prospectus and Proxy Statement.
A SPARKS STOCKHOLDER 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 THE AFFILIATION
AND THEREFORE TO HAVE WAIVED HIS DISSENTERS' RIGHTS. NEITHER A VOTE AGAINST, NOR
AN ABSTENTION, NOR A FAILURE TO VOTE, WITH REGARD TO THE AFFILIATION AGREEMENT
WILL CONSTITUTE A TIMELY WRITTEN NOTICE OF OBJECTION TO THE AFFILIATION.
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
directors and certain officers of Sparks and certain persons related to them
owning an aggregate of 188,187.56 shares (24.40%) of the outstanding Sparks
Common Stock (the "Supporting Sparks Stockholders") each entered into a Support
Agreement (the "Support Agreement") with Mercshares. Pursuant to the Support
Agreement, each of the Supporting Sparks Stockholders 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 Sparks Common Stock
owned or acquired by such Supporting Sparks Stockholder 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 Sparks, and to use his best efforts to assure that Sparks takes no
such steps; (c) to promptly advise Mercshares of any such inquiry or proposal of
which such Supporting Sparks Stockholder has knowledge; (d) to vote his or her
shares of Sparks Common Stock in favor of the Affiliation Agreement and the
transactions contemplated thereby, and, in his capacity as a stockholder, 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 December 16, 1996 or the
termination of the Affiliation Agreement.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the Affiliation Agreement,
the Supporting Sparks Stockholders 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."
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DESCRIPTION OF THE SPARKS STATE BANK
GENERAL
Sparks was organized in 1916 as a Maryland commercial bank. At March 31,
1995, Sparks had 569 record holders of its capital stock.
As of March 31, 1995, Sparks had total assets of approximately $192 million,
total deposits of approximately $164 million and total stockholders' equity of
approximately $22 million.
Sparks 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.
Sparks competes principally with approximately fifteen other commercial
banks which operate in the vicinity of its offices, many of which have resources
substantially greater than its own. Sparks also encounters competition from
thrift institutions, consumer loan companies, brokerage firms, investment
companies, credit unions and other financial institutions.
Sparks is 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.
Sparks' main office is located in Sparks, Maryland. Sparks operates five
banking offices in its service area. Sparks leases two of its banking offices
and owns the remaining three offices.
As of March 31, 1995, Sparks employed 60 people on a full-time basis and 30
people on a part-time basis.
BUSINESS
Services of Sparks
Sparks provides service-intensive commercial and retail banking services to
small and medium sized businesses and to individuals. The following types of
services are offered by Sparks:
Commercial Services
. Loans, including working capital loans and lines of credit, a wide
range of demand, term and time loans, and loans for real estate land
acquisition, development and construction, equipment, inventory and
accounts receivable financing.
. Automatic overnight investment of funds.
. Investments, including certificates of deposit.
. Direct deposit of payroll.
. Letters of credit.
Retail Services
. Transaction accounts, including checking and NOW accounts.
. Savings accounts.
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. Money market deposit accounts.
. Certificates of deposit.
. Individual retirement accounts.
. Installment and home equity loans and lines of credit.
. Residential construction and first mortgage loans.
. 24-hour automated teller machines with access to the MOST(R) and
CIRRUS(R) systems.
. VISA(R) and MasterCard(R) credit cards.
. Travelers checks and safe deposit boxes.
Sparks does not now have general trust powers.
Lending Activities
General. At March 31, 1995, Sparks' loan portfolio totaled $131 million,
representing approximately 68.3% of its total assets of $192 million. The
principal categories of loans in Sparks' portfolio are commercial, real estate
development and construction, residential real estate mortgage, commercial real
estate mortgage and consumer.
Loan Portfolio Composition. The following table sets forth Sparks' loans by
major categories as of March 31, 1995:
MARCH 31, 1995
-------------------
AMOUNT PERCENT
-------- -------
(DOLLARS IN
THOUSANDS)
Commercial................................................ $ 10,334 7.9%
Real estate--development and construction................. 8,257 6.4
Real estate--mortgage:
Residential............................................. 65,360 50.0
Commercial.............................................. 37,916 29.0
Consumer:
Retail.................................................. 8,131 6.0
Credit card............................................. 814 .7
-------- -------
Total loans............................................... $130,812 100.0%
-------- -------
-------- -------
Commercial Loans. Sparks originates secured and unsecured loans for business
purposes. Additionally, commercial business loans are made to provide working
capital to businesses in the form of lines of credit which may be secured by
real estate, accounts receivable, inventory, equipment or other assets. At March
31, 1995, approximately $10.3 million or 7.90% of Sparks' total loan portfolio
consisted of commercial business loans. The financial condition and cash flow of
commercial borrowers are closely monitored by the submission of corporate
financial statements, personal financial statements and income tax returns. The
frequency of submissions of required information depends upon the size and
complexity of the credit and the collateral which secures the loan. Financial
statements are analyzed using a financial spreadsheet software program.
Real Estate Development and Construction Loans. Sparks provides interim
residential real estate development and construction loans to builders,
developers and persons who will ultimately occupy the single family dwellings.
The real estate development and construction loan portfolio primarily represents
loans for land development. At March 31, 1995, loans to borrowers for land
development
31
<PAGE>
accounted for $6.2 million of the real estate development and construction
portfolio of approximately $8.3 million. These loans are typically secured by
the property being developed, frequently include additional collateral (e.g., in
the case of loans to persons who will voluntarily occupy the dwelling being
financed, a second mortgage on the borrower's present home), and commonly have
maturities of one to two years. The remaining $2.1 million of construction loans
represented loans to individuals for the construction of single family
dwellings, loans to residential builders, and loans to companies and churches
for commercial construction.
Sparks makes residential real estate development and construction loans
generally to provide interim financing on property during the construction
period. These loans are generally made for 80% or less of the appraised value of
the property. Residential real estate development and construction loan funds
are disbursed periodically as pre-specified stages of completion are attained
based upon site inspections.
Sparks has limited losses in this area of lending through careful monitoring
of development and construction loans with on-site inspections and control of
disbursements on loans in process. Further, to assure that reliance is not
placed solely upon the value of the underlying collateral, Sparks considers the
financial condition and reputation of the borrower and any guarantors, the
amount of the borrower's equity in the project, independent appraisals, cost
estimates and pre-construction sale information.
Residential Real Estate Mortgage Loans. Sparks originates adjustable and
fixed-rate residential mortgage loans in order to provide a full range of
products to its customers. Fixed-rate residential mortgage loans are generally
originated under terms, conditions and documentation which permit their sale in
the secondary mortgage market. At March 31, 1995, approximately $65.4 million or
50.0% of Sparks' total loan portfolio consisted of residential mortgage loans.
For any loans retained by Sparks, title insurance insuring the priority of
its mortgage lien, as well as fire and extended coverage casualty insurance
protecting the properties securing its mortgage loans is required. Borrowers may
be required to advance funds, with each monthly payment of principal and
interest, to a loan escrow account from which Sparks makes disbursements for
items such as real estate taxes, hazard insurance premiums and mortgage
insurance premiums. The properties securing all of Sparks' residential mortgage
loans are appraised by appraisers approved by Sparks.
Home equity loans are originated by Sparks for typically up to 80% of the
appraised value, less the amount of any existing prior liens on the property.
Home equity loans generally have an open-ended term and the interest rate is
generally adjustable. Sparks secures these loans with mortgages on the homes
(generally a second mortgage).
Commercial Real Estate Mortgage Loans. Sparks also originates mortgage loans
secured by commercial real estate. At March 31, 1995, approximately $37.9
million or 29.0% of Sparks' total loan portfolio consisted of commercial
mortgage loans. Such loans are primarily secured by office condominiums, retail
buildings and warehouse and general purpose business space. Although terms vary,
Sparks' commercial mortgages generally have maturities of five years or less.
Sparks seeks to reduce the risks associated with commercial mortgage lending by
generally lending in its market area, using conservative loan-to-value ratios
and obtaining periodic financial statements and tax returns from borrowers to
perform annual term loan reviews.
Consumer Loans. Sparks offers a variety of consumer loans in order to
provide a full range of financial services to its customers and because such
loans generally have higher interest rates than other loans. The consumer loans
offered by Sparks include credit cards and similar lines of credit. At March 31,
1995, approximately $9.0 million or 6.7% of Sparks' total loan portfolio
consisted of consumer loans.
32
<PAGE>
COMPETITION
While promotional activities emphasize the many advantages of dealing with a
locally-run institution closely attuned to the needs of its community, Sparks
faces strong competition in all areas of its operations. This competition comes
from entities operating in the Baltimore metropolitan area which include offices
of most of the largest banks in Maryland. Sparks also competes with entities
operating in Southern York County in Pennsylvania. Its most direct competition
for deposits comes from other commercial banks, savings banks, savings and loan
associations, and credit unions operating in the Baltimore area and in Southern
York County, Pennsylvania and from mutual funds. Sparks competes with banking
entities, mortgage banking companies, and other institutional lenders for loans.
The competition for loans varies from time to time depending on certain factors.
These factors include, among others, the general availability of lendable funds
and credit, general and local economic conditions, current interest rate levels,
conditions in the mortgage market and other factors which are not readily
predictable.
INTERSTATE BANKING
Under current law, Sparks could participate in interstate affiliations with
banks and bank holding companies located in the District of Columbia, Virginia,
West Virginia, Pennsylvania, Delaware and ten other southeastern states.
Beginning September 29, 1995, adequately capitalized bank holding companies may
acquire control of banks in any state although states may limit the eligibility
of banks to be acquired to those in existence for a period of time but no longer
than five years. No bank holding company may acquire more than 10% of the
nationwide insured deposits or more than 30% of deposits in any state; however,
states may waive the 30% limit. Beginning June 1, 1997, banks may merge across
state lines. The date relating to mergers may be accelerated by any state, and
mergers may be prohibited by any state. States may also authorize the
acquisition of new offices across state lines. Legislation facilitating
interstate banking acquisitions, affiliations and branching has been enacted
which would allow out-of-state banks to establish branches in Maryland on a
reciprocal basis effective September 29, 1995. Sparks is unable to predict the
ultimate impact of interstate banking legislation on it or its competitors.
EMPLOYEES
At March 31, 1995, Sparks had 90 employees of whom 20 were officers, 40 were
full-time employees and 30 were part-time employees. Sparks believes its
employee relations are good.
SUPERVISION AND REGULATION
Sparks is a state-chartered bank subject to supervision, regulation and
examination by the Maryland Bank Commissioner and by the FDIC under the Federal
Deposit Insurance Act. Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment and
closing of branches, mergers and consolidations, changes in control, electronic
funds transfer, community reinvestment, management practices and other aspects
of operations are subject to regulation by the appropriate federal and state
regulatory agencies. Sparks is also subject to various regulatory requirements
of the Federal Reserve Board applicable to FDIC-insured banks, including
disclosure requirements in connection with personal and mortgage loans, interest
on deposits and reserve requirements. In addition, Sparks is subject to numerous
federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to the extension of
credit, credit practices, the disclosure of credit terms and discrimination in
credit transactions.
The FDIC has implemented a new risk-related assessment system for deposit
insurance premiums. All depository institutions have been assigned to one of
nine risk assessment classifications based upon
33
<PAGE>
certain capital and supervisory measures. A depository institution pays an
assessment of 23 to 31 per $100 of domestic deposits, depending upon its risk
classification. Based upon Sparks' current risk classification, Sparks was
required to pay an assessment which was $360 thousand in 1994.
Federal regulatory agencies have broad powers to take prompt corrective
action to resolve problems at banking institutions, including (in certain cases)
the appointment of a conservator or receiver. The extent of these powers is
generally influenced by the level of capital at the institution. Management does
not anticipate that Sparks will become subject to these prompt corrective action
provisions.
Only a well capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under FDIC regulations, an institution is
generally considered "well capitalized" if it has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a
Tier 1 capital (leverage) ratio of at least 5%. Federal law generally requires
full-scope on-site annual examinations of all insured depository institutions by
the appropriate federal bank regulatory agency although the examination may
occur at longer intervals for small well-capitalized or state chartered banks.
In the liquidation or other resolution by any receiver of a bank insured by the
FDIC, the claims of depositors have priority over the general claims of other
creditors.
As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of Sparks is particularly
susceptible to changes in federal and state legislation and regulations which
may increase the cost of doing business.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONTROLS
Sparks is affected by monetary policies of regulatory agencies, including
the Federal Reserve Board, which regulates the national money supply in order to
mitigate recessionary and inflationary pressures. Among the techniques available
to the Federal Reserve Board are engaging in open market transactions in United
States Government securities, changing the discount rate on bank borrowings, and
changing reserve requirements against bank deposits. These techniques are used
in varying combinations to influence the overall growth of bank loans,
investments and deposits. Their use may also affect interest rates charged on
loans or paid on deposits. The effect of governmental policies on the earnings
of Sparks cannot be predicted.
PROPERTIES
Sparks' main banking office is located at 14804 York Road, Sparks, Maryland
21152. The other offices are located at 12037 Belair Road, Kingsville, Maryland
21087; 201 Mt. Carmel Road, Parkton, Maryland 21120; 14231 Jarrettsville Pike,
Phoenix, Maryland 21131; and 21401 York Road, Maryland Line, Maryland 21105.
Sparks owns three of the banking offices it currently operates. Sparks
leases the offices located at Jacksonville and Kingsville. These leases run from
December 31, 1993 to December 31, 2003, and from January 1, 1993 to January 1,
2003, respectively. The annual rental for these offices was $67,536 in 1994.
Both leases have renewal options.
Sparks owns two parcels adjacent to the Sparks' main property in Sparks,
Maryland. One contains a building which it leases to the U.S. Post Office. The
other contains a residential property. Sparks also owns an office building in
Hunt Valley, Maryland, that will be used for consumer lending. A portion of this
building is rented to commercial tenants.
LEGAL PROCEEDINGS
Jean Hofmeister, Jr., Trustee Charitable Unitrust U/D/O/T 3/11/86, Donald H.
Shanklin IRA, and Elizabeth M. Ensor (collectively, the "Plaintiffs") have filed
suit in the Circuit Court for Baltimore
34
<PAGE>
County attempting to state various claims in connection with the Affiliation.
The Plaintiffs have named Sparks, each member of the Sparks Board of Directors,
and Mercshares as defendants in the suit. The Plaintiffs purport to bring the
suit on their own behalf and as a class action on behalf of all Sparks
Stockholders other than the defendants. The Plaintiffs allege that the directors
breached their fiduciary duties, engaged in self-dealing, and failed to obtain
the highest possible value for Sparks and that Mercshares aided and abetted the
alleged wrongdoing and conspired with the other defendants. Sparks and
Mercshares intend to defend against the suit vigorously and have each filed
motions to dismiss the suit.
DIVIDENDS
Sparks has declared and paid an annual cash dividend on Sparks Common Stock
of $.83 per share for 1994 and $.69 per share for 1993. Sparks has declared and
paid a cash dividend of $0.21 for the first quarter of 1995. Any future
determination as to payment of cash dividends will be at the discretion of
Sparks' Board of Directors and will depend on Sparks' results of operations,
financial condition, capital and regulatory requirements and other factors
deemed relevant by the Board of Directors. Since the execution of the
Affiliation Agreement, Sparks has also been subject to certain restrictions on
the declaration and payment of dividends.
The amount of allowable dividends which could be payable by Sparks are in
substance limited to net profits earned by Sparks, less any earnings retention
consistent with Sparks' capital needs, asset quality and overall financial
condition. No assurance can be given that Spark's earnings will continue to
enable it to pay cash dividends.
As a depository institution whose deposits are insured by the FDIC, Sparks
may not pay dividends or distribute any of its capital assets while it remains
in default on any assessment due the FDIC. Sparks currently is not in default
under any of its obligations to the FDIC. In addition, FDIC regulations also
impose certain minimum capital requirements which affect the amount of cash
available for the payment of dividends by a regulated banking institution such
as Sparks. As a commercial bank under the Maryland Financial Institutions Law,
Sparks may declare cash dividends from undivided profits or, with the prior
approval of the Maryland Bank Commissioner, out of surplus in excess of 100% of
its required capital stock, and (in either case) after providing for due or
accrued expenses, losses, interest and taxes.
Distributions paid by Sparks to Sparks Stockholders will be taxable to
Sparks Stockholders as dividends, to the extent of Sparks' accumulated or
current earnings and profits. There can be no assurance that Sparks will declare
or pay cash dividends on Sparks Common Stock at any particular time.
35
<PAGE>
PRICE RANGE OF COMMON STOCK
There is no established public trading market for Sparks Common Stock, which
is traded lightly in privately negotiated transactions. The following table sets
forth the range of high and low sales prices for the periods indicated as
reported by Ferris, Baker Watts Incorporated.
HIGH LOW
------ ------
1992:(1)
First quarter.............................................. $29.04 $26.52
Second quarter............................................. 29.67 26.52
Third quarter.............................................. 27.94 25.25
Fourth quarter............................................. 27.78 25.25
1993:(1)
First quarter.............................................. 30.56 26.39
Second quarter............................................. 31.25 27.78
Third quarter.............................................. 31.25 29.86
Fourth quarter............................................. 31.94 29.86
1994:(1)
First quarter.............................................. 32.50 30.00
Second quarter............................................. 33.33 30.00
Third quarter.............................................. 33.33 31.67
Fourth quarter............................................. 34.27 32.50
1995:
First Quarter.............................................. 43.00 39.50
Second Quarter (through May 25, 1995)...................... 43.00 41.00
- ------------
(1) Stock prices for 1992 and 1993 have been adjusted to reflect the
six-for-five stock splits which were effected in the form of 20% stock
dividends in December 1994 and December 1993, and the 10% stock dividend
which was declared in December 1992.
On April 5, 1995, the mean of the high and low sales prices reported for the
Sparks Common Stock was $42.00 per share, and as of that date, there were 569
holders of record of Sparks Common Stock.
36
<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the number of shares of Sparks Common Stock
beneficially owned by directors and executive officers of Sparks, directly or
indirectly, as of May 31, 1995. Unless otherwise indicated, the individuals
named below have sole voting and investment power over all shares beneficially
owned by them. There are no persons known by Sparks to own beneficially,
directly or indirectly, more than 5% of the Sparks Common Stock except as shown
below.
SHARES OF SPARKS COMMON STOCK
BENEFICIALLY OWNED(1)
----------------------------------
PERCENT OF
NAME AND ADDRESS(2) NUMBER CLASS
- ------------------------------------------- -------------------- ----------
Charles E. Ensor, Sr....................... 39,493.728(3) 5.12
Bradley G. Moore........................... 14,207.476(3)(4)(5) 1.84
Richard F. Price........................... 33,881.264(3)(6) 4.39
William L. Tarbert, Sr..................... 40,801.752(4)(7) 5.29
J. David Lawson............................ 6,008.688 .78
Lieb McDonald.............................. 5,109.444(3)(4) .66
Oscar M. Schapiro.......................... 14,762.988(3) 1.91
George V. Palmer........................... 9,899.028(4) 1.28
Linda I. Alexander......................... 553.65(3) *
Robert J. Rigger........................... 136.74(4) *
Daniel R. Wernecke......................... 144 *
Janet M. Miller............................ 10,628.496(4)(8)(9) 1.34
Felicia A. Meeks........................... 121.20(4)(10) *
Gail S. Kimble............................. 340.596(4) *
John W. Wright............................. 0 *
-------------------- -----
All directors and executive officers
as a group (15 persons).................. 176,095.05 22.8
========== ====
- ------------
* Indicates holdings of less than 1 percent.
(1) Shares which a person had the right to acquire within 60 days are deemed
outstanding in calculating the percentage ownership of the person but not
deemed outstanding as to any other person.
(2) Each stockholder's address is at Sparks' principal executive offices.
(3) Includes shares owned solely by spouse for which beneficial ownership is
assumed.
(4) Includes shares owned jointly with spouse.
(5) Includes shares owned jointly with adult child.
(6) Includes 3,114.48 shares beneficially owned through power to vote and power
to dispose under a revocable power of attorney from an unrelated third
party.
(7) Includes 6,843.49 shares beneficially owned through power to vote and power
to dispose under a revocable power of attorney from adult child.
(8) Includes shares owned jointly with parent.
(9) Includes 294.108 shares beneficially owned through power to vote and power
to dispose under revocable power of attorney from adult child.
(10) Includes shares owned by spouse and minor child for which beneficial
ownership is assumed.
Unless otherwise indicated in the foregoing notes, the individuals named
above have sole voting and disposition power over the shares beneficially owned
by them.
37
<PAGE>
SELECTED FINANCIAL INFORMATION
This selected financial information for Sparks does not purport to be
complete and is qualified in its entirety by more detailed financial information
and the financial statements contained elsewhere herein. The selected financial
information for Sparks for the periods ended March 31, 1994 and 1995 have been
derived from Sparks' unaudited Quarterly Report on Form F-4 previously filed
with the FDIC. In the opinion of Sparks' management, such data 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,
1995 are not necessarily indicative of the results that may be obtained for the
entire year ended December 31, 1995.
<TABLE><CAPTION>
QUARTER
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and dividend
revenue.................. $ 14,071 $ 14,680 $ 13,868 $ 12,827 $ 13,332 $ 3,042 $ 3,685
Interest expense........... 8,150 8,237 6,702 5,515 5,527 1,324 1,476
Net interest income........ 5,921 6,443 7,166 7,312 7,805 1,718 2,209
Provision for credit
losses................... 401 236 279 351 33 33 0
Other operating revenue.... 584 632 740 1,142 723 156 183
Other operating expense.... (3,390) (3,818) (4,138) (4,215) (4,705) 1,101 1,174
Income taxes............... (1,108) (1,114) (1,274) (1,403) (1,393) 254 431
Net income................. $ 1,696 $ 1,907 $ 2,215 $ 2,485 $ 2,397 $ 486 $ 787
BALANCE SHEET DATA, AT
PERIOD-END:
Total assets............... $151,168 $168,533 $177,401 $181,738 $191,028 $184,031 $191,513
Total loans, net of
deferred fees and
costs.................... 98,560 111,622 110,758 116,702 128,784 117,458 130,812
Total deposits............. 136,174 150,943 158,813 159,895 163,520 162,327 164,127
Total stockholders'
equity................... 12,831 14,601 16,550 18,825 19,769 19,480 20,866
PER COMMON SHARE DATA(A):
Net income................. $ 2.31 $ 2.58 $ 2.96 $ 3.27 $ 3.11 $ .76 $ 1.02
Cash dividends declared.... 0.33 0.40 0.63 0.69 0.83 0 .21
Tangible book value........ 17.48 19.73 22.12 24.77 25.63 25.26 27.05
Number of shares of Common
Stock outstanding, at
period-end............... 733,930 740,406 748,152 760,018 771,241 771,241 771,241
RATIOS:
Return on average assets... 1.19% 1.19% 1.29% 1.40% 1.26% 1.05% 1.63%
Return on average
stockholders' equity..... 13.96 13.81 14.08 13.81 11.84 10.19 15.49
Average stockholders'
equity to average total
assets................... 8.50 8.62 9.14 10.14 10.63 10.60 10.61
Cash dividends declared to
net income............... 14.49 15.60 21.33 21.24 26.82 0 20.58
Period-end capital to
period-end risk-weighted
assets(b):
Tier 1................... 16.35 16.25 17.94 18.62 17.43 17.41 17.43
Total.................... 17.60 17.50 19.19 19.87 18.69 18.67 18.68
Period-end Tier 1 leverage
ratio(b)................. 8.60 8.70 9.49 10.38 10.92 10.77 11.33
</TABLE>
- ------------
(a) Per share data for 1990 to 1993 have been adjusted to reflect the
six-for-five stock splits which were effected in the form of 20% stock
dividends in December 1994 and December 1993, and the 10% stock dividends
which were declared in December 1992 and December 1991.
(b) The FDIC capital guidelines for bank holding companies require minimum
risk-based ratios of Tier 1 and total capital to risk-weighted assets to be
4.00% and 8.00%, respectively, and a minimum leveraged-based ratio of Tier 1
capital to total average quarterly assets generally of 3.00% to 5.00%.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sparks' net income for 1994 was $2.40 million, $88 thousand (3.54%) lower
than in 1993; net income for 1993 was $2.48 million, $270 thousand (12.20%)
higher than in 1992. On a per share basis net income was $3.11 in 1994, $3.27 in
1993 and $2.96 in 1992. The decline in net income from 1993 to 1994 was due to a
number of factors, including (a) a decline in other operating revenue from
$1,141,691 to $722,750, a significant portion of which was due to a
non-recurring gain of $417,212 on the sale of equity securities in 1993, and (b)
an increase in operating expenses from $4.21 million in 1993 to $4.70 million in
1994, $212,864 of which was due to a non-recurring loss on the abandonment of
plans to expand Sparks' headquarters building, and $126,028 of which was on
account of legal and consulting fees. Net income increased from $486 thousand in
the first quarter of 1994 to $787 thousand in the first quarter of 1995. This
represents a 61.93% increase.
Sparks' loan portfolio increased $5.94 million or 5.37% during 1993 and an
additional $12.1 million or 10.35% through 1994. The growth in the loan
portfolio has been generated primarily by activity associated with Sparks'
commercial real estate loan business. Loans of this nature are typically secured
by commercial properties and personal guarantees are obtained as appropriate. In
addition, installment loans, consisting primarily of consumer credit, have
performed well in 1994 after a modest decline in 1993.
Sparks' assets increased by $489 thousand, or .26 percent, during the first
quarter of 1995. Growth in deposits for the quarter was $608 thousand and growth
in securities sold under agreements to repurchase was $1.26 million. The growth
in deposits and securities sold under repurchase agreements was used primarily
to fund an increase in loans of $2.02 million. Cash decreased $1.06 million and
securities decreased $3.5 million from December 31, 1994. These funds were used
to decrease federal funds purchased from $2.20 million to zero and increase
federal funds sold from $55 thousand to $3.19 million.
The following sections provide a detailed analysis regarding Sparks'
financial condition and results of operations.
39
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table shows balances of asset and liability categories,
interest income and expense and average yields and rates for periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------------------------------------- --------------------------
1993 1994 1995
-------------------------- --------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
-------- -------- ---- -------- -------- ----- -------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of deferred
fees and
costs(2)(3)........... $112,652 $ 9,478 8.41% $121,321 $ 10,204 8.41% $129,596 $3,005 9.27%
Investment
securities(3)......... 57,473 3,441 5.99 59,295 3,237 5.46 53,888 725 5.38
Federal funds sold...... 1,291 39 3.03 1,507 60 4.01 499 6 4.79
Interest-bearing
deposits in other
banks................. 525 23 4.43 368 15 4.00 -- -- --
-------- -------- -------- -------- -------- --------
Total
interest-earning
assets............ 171,941 12,981 7.63 182,491 13,516 7.41 183,983 3,736 8.12
-------- -------- --------
Noninterest-earning
assets:
Cash and due from
banks................. 3,411 3,567 3,713
Property and equipment;
net................... 1,930 2,278 2,466
Other assets............ 2,267 2,334 2,403
Less allowance for
credit losses and
equity securities
appreciation.......... (2,176) (2,199) (2,187)
-------- -------- --------
Total assets........ $177,373 $188,471 $190,378
-------- -------- --------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
Checking accounts....... $ 10,606 $ 300 2.83% $ 12,428 $ 317 2.55% $ 11,758 $ 72 2.47%
Savings deposits........ 68,660 2,102 3.06 71,207 2,090 2.94 66,311 511 3.08
Other time deposits..... 57,599 3,027 5.25 59,142 2,988 5.05 61,249 808 5.27
Short-term borrowings... 1,782 86 4.84 2,572 132 5.12 6,854 67 3.93
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities......... 138,647 5,515 3.98 145,349 5,527 3.80 146,172 1,458 3.99
-------- -------- --------
Noninterest-bearing
liabilities:
Demand deposits......... 19,324 21,765 21,682
Other liabilities....... 1,409 1,117 1,277
Stockholders' equity..... 17,993 20,240 21,247
-------- -------- --------
Total liabilities
and stockholders'
equity............ $177,373 $188,471 $190,378
-------- -------- --------
-------- -------- --------
Net interest income...... $ 7,466 $ 7,989 $2,278
-------- -------- --------
-------- -------- --------
Net interest spread...... 3.65% 3.61% 4.13%
Net yield on earning
assets................. 4.34% 4.38% 4.95%
</TABLE>
- ------------
(1) Average balances are calculated on daily balances.
(2) Loan fees are included in interest revenue.
(3) Interest on loans and investments is presented on a fully-taxable equivalent
basis. Equity investments are presented at average market values.
Investments in debt securities are presented at average amortized cost.
40
<PAGE>
INTEREST REVENUE
Interest revenue on a fully taxable equivalent basis increased $535 thousand
or 4.1% during 1994 as compared to 1993, primarily as a result of increased
volume of commercial loans, mitigated by a decline in the yield on earning
assets of approximately 22 basis points. The decline in the yield on earning
assets during 1994 reflects the effect of borrowers refinancing term debt during
the past two years at lower interest rates.
Interest revenue on a fully taxable equivalent basis decreased $1.01 million
or 7.2% in 1993 as compared to 1992. The yield on earning assets decreased
approximately 83 basis points during 1993 because of the declining interest rate
environment. The distribution of average earning assets among loans, investment
securities, federal funds sold, and deposits was relatively constant for 1993
and 1994.
Interest revenue on a fully taxable equivalent basis increased $651 thousand
or 21.1% during the first quarter of 1995 compared to the corresponding period
in 1994, primarily as a result of increased volume of commercial loans and
higher interest rates, mitigated by a decrease in interest revenue from
investments as a result of decreasing volume of investment securities and
federal funds sold.
INTEREST EXPENSE
Interest expense on deposits and borrowings increased $12 thousand or .22%
during 1994 as compared to 1993 as a result of an increase in average
interest-bearing liabilities of $6.70 million or 4.8% in 1994 over 1993,
mitigated by a decline in the cost of funds for interest-bearing liabilities of
approximately 18 basis points.
Interest expense on deposits and borrowings decreased $1.19 million or 21.5%
during 1993 as compared to 1992 principally as a result of declining interest
rates. Average interest-bearing liabilities increased by only $741 thousand or
.5% in 1993 over 1992 as customers sought higher returns through non-bank
investments. Sparks' cost of funds for interest-bearing liabilities declined
from 4.86% in 1992 to 3.98% in 1993 and 3.8% in 1994, and reflected continued
declining interest rates experienced nationally as well as management's
continued efforts to improve the net interest spread and the net yield on
earning assets.
Interest expense on deposits and borrowing increased $152 thousand or 11.48%
during the first quarter of 1995 compared to the corresponding period in 1994 as
a result of an increase in average interest bearing liabilities of $5.46 million
or 3.38% in the first quarter of 1995 over the corresponding period in 1994 and
the increase in cost of funds for interest-bearing liabilities of approximately
.27 basis points. Interest expense increased as the balances of interest-bearing
deposits and securities sold under agreements to repurchase increased. This
increase was mitigated by some maturing time deposits renewing at lower rates.
NET INTEREST INCOME
Net interest income, the amount by which interest revenue on earning assets
exceeds interest expense on interest-bearing liabilities, is the most
significant component of Sparks' earnings. Net interest income is a function of
several factors including changes in the volume and mix of earning assets and
funding sources and market interest rates. While management policies influence
these factors, they are also influenced by external forces including customer
needs and demands, competition, the economic policies of the federal government
and the monetary policies of the Federal Reserve Board.
Growth in average earning assets of 6.14% in 1994, funded principally by
increases of 5.35% in average total deposits for 1994 enabled net interest
income to rise by 7.01% in 1994 over 1993.
Net yield (tax equivalent) on average interest-earning assets was 4.37% in
1992, 4.34% during 1993 and 4.38% during 1994. The closeness of these amounts
reflects management's close matching of interest rate sensitive assets and
liabilities.
41
<PAGE>
The net interest margin increased from $1.71 million for the first quarter
of 1994 to $2.20 million for the first quarter of 1995, an increase of 68.38%.
The increase in the loan volume, particularly commercial loans, and higher
interest rates on these loans resulted in increased interest revenue. Growth in
average earning assets of $6.72 million or 3.79% in the first quarter of 1995 as
compared to the first quarter of 1994 was partially funded by increases of $1.87
million in deposits and borrowing.
The following table provides further analysis of the increase in net
interest income during 1992, 1993 and 1994, and the first quarter of 1995 and
indicates that the increases were primarily due to higher net volumes of earning
assets and interest-bearing liabilities in each period.
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------ -------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO: DUE TO:
----------------- ------------------
INCREASE/ INCREASE/
DECREASE VOLUME RATE(1) DECREASE VOLUME RATE(1)
--------- ------ ------- --------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Revenue
Loans.................................. $ 738 $252 $ 486 $ 726 $710 $ 16
Investment securities:
Fully taxable........................ (67) (71) 4 (217) 76 (293)
Tax advantaged....................... (15) (10) (5) 13 21 (8)
Federal funds sold..................... -- (2) 2 21 6 15
Interest-bearing deposits in other
banks................................ (5) (5) -- (8) (7) (1)
--------- ------ ------- --------- ------ -------
Total interest revenue............. 651 164 487 535 806 (271)
--------- ------ ------- --------- ------ -------
Interest Expense
Checking accounts...................... (7) (1) (6) 16 51 (35)
Savings deposits....................... 7 (25) 32 (11) 81 (92)
Time deposits.......................... 76 35 41 (38) 82 (120)
Short-term borrowings.................. 55 48 7 45 38 7
--------- ------ ------- --------- ------ -------
Total interest expense................. 131 57 74 12 252 (240)
--------- ------ ------- --------- ------ -------
Net interest income...................... $ 520 $107 $ 413 $ 523 $554 ($ 31)
--------- ------ ------- --------- ------ -------
--------- ------ ------- --------- ------ -------
</TABLE>
- ------------
(1) The volume/rate variance is allocated entirely to changes in rates.
(2) Interest on nontaxable loans and investments is presented on a fully taxable
equivalent basis using a 34% effective tax rate.
INCOME TAXES
In 1993 and 1994 Sparks' effective tax rate on earnings was 36.1% and 36.7%,
respectively. These effective rates differ from statutory rates due to
tax-exempt income and non-deductibility of some interest and other expenses.
LIQUIDITY
Sparks' asset and liability structure is different from that of an
industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Holding net monetary assets theoretically would cause Sparks
to incur purchasing power loss during periods of rising interest rates. More
important is the ability to react to changes in interest rates which, though
affected by inflation, do not necessarily move in the same direction or in the
same magnitude as the prices of other goods and services.
Liquidity describes the ability of Sparks to meet financial obligations that
arise during the normal course of business. Liquidity is primarily needed to
meet the borrowing and deposit withdrawal
42
<PAGE>
requirements of the customers of Sparks, as well as for meeting current and
planned expenditures. Sparks derives liquidity through customer deposits,
available lines of credit with other banks, the maturity distribution of the
investment portfolio, loan repayments and income. Sparks maintains a portfolio
of readily marketable investments that could be converted to cash on an
immediate basis except those securities pledged to secure deposits of public
funds, those sold under repurchase agreements, and those designated "held to
maturity."
At March 31, 1995, Sparks had available lines of credit of $9 million in
overnight federal funds and $10 million in term loans from other banks.
Management of Sparks believes that its current capital, short-term investments,
and lines of credit will satisfy Sparks' cash and capital needs for the
foreseeable future.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of Sparks' earning assets and funding
sources. The Asset/Liability Committee reviews the interest rate sensitivity
position in order to maintain an appropriate balance between the maturity and
repricing characteristics of assets and liabilities that is consistent with
Sparks' liquidity, growth and capital adequacy goals. It is the objective of the
Asset/Liability Committee to maximize net interest margins during periods of
volatile as well as stable interest rates, to attain earnings growth and to
maintain sufficient liquidity to satisfy depositors' requirements and meet
credit needs of customers.
The following table summarizes the anticipated maturities or repricing of
Sparks' interest-earning assets and interest-bearing liabilities as of March 31,
1995 and Sparks' interest sensitivity gap (i.e., interest-earning assets less
interest-bearing liabilities). A positive sensitivity gap for any time period
means more interest-earning assets will mature or reprice during that time
period than interest-bearing liabilities. During periods of rising interest
rates, a short-term negative interest sensitivity gap position generally
decreases net interest income, and during periods of falling interest rates, a
short-term negative interest sensitivity gap position would generally increase
net interest income. A risk factor which has not been incorporated into the
table is prepayment or extension risk associated with changes in general market
rates.
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
----------------------------------------------------------------
THREE AFTER THREE AFTER ONE
MONTHS OR THROUGH THROUGH AFTER
LESS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
--------- ----------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans(1)............................... $ 65,201 $ 24,165 $ 13,323 $ 28,123 $130,812
Securities(2).......................... 10,772 14,355 18,818 7,743 51,688
Federal funds sold..................... 3,198 3,198
--------- ----------- ---------- ---------- --------
Total interest-earning assets...... 79,171 38,520 32,141 35,866 185,698
--------- ----------- ---------- ---------- --------
Interest-Bearing Liabilities
Deposits:
Checking accounts.................... 11,109 11,109
Savings.............................. 38,450 38,450
Money market accounts................ 25,158 25,158
Certificates of deposit and other
time deposits...................... 12,913 27,756 26,497 67,166
Short-term borrowings.................. 4,621 4,621
--------- ----------- ---------- ---------- --------
Total interest-beariing
liabilities.............................. 92,251 27,756 26,497 0 146,504
--------- ----------- ---------- ---------- --------
Interest sensitivity gap................. (13,080) 10,764 5,644 35,866
--------- ----------- ---------- ---------- --------
--------- ----------- ---------- ---------- --------
Cumulative interest sensitivity gap...... $ (13,080) $ (2,316) $ 3,328 $ 39,194
--------- ----------- ---------- ---------- --------
--------- ----------- ---------- ---------- --------
Cumulative interest sensitivity gap
ratio.................................. (6.83%) (1.21%) 1.74% 20.47%
--------- ----------- ---------- ---------- --------
--------- ----------- ---------- ---------- --------
</TABLE>
- ------------
(1) Loans are stated net of deferred fees and costs, and before deducting
allowance for credit losses.
(2) Investments are stated at amortized cost.
43
<PAGE>
The analysis provided in the table above includes the following assumptions:
Fixed-rate loans are scheduled by contractual maturity, and variable-rate loans
are scheduled by repricing date. Investment securities are scheduled by earliest
repricing date. Due to their liquid nature, the entire balance of checking,
savings and money market accounts is assumed to be sensitive within three
months. Sparks' goal is generally to maintain a balanced cumulative gap position
for the period of one year or less in order to mitigate the impact of changes in
interest rates on liquidity, interest margins and operating results.
ANALYSIS OF INVESTMENT SECURITIES
For 1994 and the first quarter of 1995, Sparks' strategy has been to invest
in taxable securities with maturities of six months to seven years. The
composition of the investment portfolio as of December 31, 1992, 1993, 1994 and
March 31, 1995, valued at amortized cost, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1992 1993 1994 1995
------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $23,063 $16,024 $16,936 $13,847
Federal agency securities............................ 27,370 28,034 25,466 24,961
Mortgage-backed securities........................... 4,413 10,392 9,052 8,953
State and municipal securities....................... 3,887 4,200 3,775 3,218
Equity securities.................................... 8 3 709 709
------- ------- ------- ---------
$58,741 $58,653 $55,938 $51,688
------- ------- ------- ---------
------- ------- ------- ---------
</TABLE>
Sparks adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, during the
first quarter of 1994 and, accordingly, segregated the portfolio between
securities held to maturity and securities available for sale. The decline in
the total of investment securities of $4.25 million since December 31, 1994
reflected principal repayments and maturities in excess of purchases and was
used to fund loan growth and reduce borrowed funds.
44
<PAGE>
At March 31, 1995 the estimated weighted average life of investments in debt
securities was 4.20 years. The amortized cost and estimated fair values and tax
equivalent yield of debt securities at March 31, 1995, by contractual
maturities, are shown below.
<TABLE>
<CAPTION>
MARCH 31, 1995
-------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
----------------------------------------------- -----------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities:
Due in one year or
less.................. $ 2,001 $3 $ 6 $ 1,998 $ 3,992 $3 $ 16 $ 3,978
Due after one year
through five years... 3,860 1 163 3,698 3,994 4 90 3,909
Federal agency
securities:
Due in one year or
less................. 1,000 -- 2 998 1,450 -- 34 1,416
Due after one through
five years........... 7,508 -- 219 7,289 9,003 -- 393 8,610
Due over five through
ten years............ 2,000 -- 102 1,898 4,000 -- 325 3,675
State and municipal
securities(1):
Due in one year....... 606 1 1 606
Due after one through
five years........... 2,317 4 50 2,271
Due over five through
ten years............ 295 8 1 302
Mortgage-backed
securities:
Due after one year
through five years... 1,604 -- 61 1,543
Due after five through
ten years............ 2,618 -- 139 2,479
Due after ten years... 4,731 -- 259 4,472
--------- --- ---- --------- --------- --- ----- ---------
$19,587 $17 $544 $19,060 $31,392 $7 $1,317 $30,082
--------- --- ---- --------- --------- -- ----- ---------
--------- --- ---- --------- --------- -- ----- ---------
</TABLE>
- ------------
(1) All of the obligations of states and political subdivisions are rated "Baa"
or higher by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation.
As of March 31, 1995, Sparks had no investments that are obligations of an
issuer, or payable from or secured by a source of revenue or taxing authority of
an issuer, whose aggregate book value exceeded 10% of stockholders' equity at
March 31, 1995.
ANALYSIS OF LOANS
The table below represents a breakdown of loan balances of Sparks. Sparks
has no foreign loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- MARCH 31,
1992 1993 1994 1995
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage:
Construction................................... $ 5,434 $ 8,031 $ 7,468 $ 8,257
Residential.................................... 68,147 67,967 65,797 65,360
Commercial..................................... 19,007 25,163 37,312 37,916
Installment...................................... 7,196 6,837 8,611 8,945
Commercial and other loans....................... 9,138 8,535 9,510 10,290
Lease financing.................................. 1,836 169 86 44
-------- -------- -------- ---------
Total loans, net of deferred fees and
costs.................................... $110,758 $116,702 $128,784 $ 130,812
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
45
<PAGE>
The following table summarizes Sparks' exposure resulting from loan
concentrations in its loan portfolio. Loan concentrations result when loans are
made to a number of borrowers engaged in similar activities which may be
similarly impacted by economic or other conditions. This table presents Sparks'
credit concentration to borrowers involved in residential real estate
development and/or construction as of March 31, 1995 and includes secured and
unsecured loans. Sparks' real estate development lending policy dictates
evaluating the credit based upon the individual strength of the borrower and the
guarantors with emphasis placed on cash flow analysis in addition to the
economics of the development project. By relying on sources of repayment other
than the cash flow of the project, it is Sparks' opinion that the exposure to
loss is lowered substantially. There were no other loan concentrations exceeding
10% of gross loans as of March 31, 1995.
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------
(IN THOUSANDS)
<S> <C>
Loans receivable............................................................. $ 6,180
Unused credit lines.......................................................... 4,382
Letters of credit............................................................ 1,261
--------------
$ 11,823
--------------
--------------
</TABLE>
The following tables show the contractual final maturities and interest rate
sensitivities of loans of Sparks at March 31, 1995. Some loans may include
contractual installment payments which are not reflected in the tables until
final maturity. In addition, Sparks' experience indicates that a significant
number of loans will be extended or repaid prior to contractual final maturity.
Consequently, the table cannot necessarily be viewed as an accurate forecast of
future cash payments.
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------------------------------------------------------
IN ONE YEAR OR AFTER 1 THROUGH 5
LESS YEARS AFTER 5 YEARS
----------------- ------------------ ------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE TOTAL
------ -------- ------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial........................ $3,432 $ 51,741 $ 423 $ 7,610 $ -- $ 1,158 $ 64,364
Real estate--mortgage............. 1,387 4,021 4,632 3,568 26,742 15,672
Consumer.......................... 3,045 -- 7,309 -- 72 -- 10,426
------ -------- ------- -------- ------- -------- --------
$7,864 $ 55,762 $12,364 $ 11,178 $26,814 $ 16,830 $130,812
------ -------- ------- -------- ------- -------- --------
------ -------- ------- -------- ------- -------- --------
</TABLE>
The following table provides information concerning non-performing loans,
past due loans and non-performing assets (including other real estate owned and
property in liquidation).
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1992 1993 1994 1995
----- ----- ----- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Nonaccrual loans(1)..................................... $-- $-- $-- $--
Restructured loans(2)................................... -- -- -- --
----- ----- ----- ---------
Total non-performing loans............................ -- -- -- --
Other real estate owned and property in liquidation(3).... 37 1 49 49
----- ----- ----- ---------
Total non-performing assets........................... 37 1 49 49
----- ----- ----- ---------
----- ----- ----- ---------
Loans past due 90 days or more(4)......................... 286 189 150 --
----- ----- ----- ---------
----- ----- ----- ---------
Total nonperforming assets and past due loans......... $ 323 $ 190 199 49
----- ----- ----- ---------
----- ----- ----- ---------
Non-performing assets to total loans at year end........ 0.03% --% 0.04% .04%
Non-performing assets and past due loans to total loans,
net of deferred fees and costs, at year end........... 0.29% 0.16% 0.15% .04%
</TABLE>
(Footnotes on following page)
46
<PAGE>
(Footnotes for preceding page)
- ------------
(1) When scheduled principal or interest payments are past due 90 days or more
on any loan not fully secured by collateral or not in the process of
collection, the accrual of interest income is discontinued and recognized
only as collected. The loan is restored to accruing status when all amounts
past due have been paid and the borrower has demonstrated the ability to
service the debt on a current basis.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are not
included in these totals.
(3) Other real estate and property in liquidation were collateral on loans to
which Sparks had taken title. This property, which is held for resale, is
carried at the lower of fair value or principal balance of the related loan.
(4) Past due loans are loans that were contractually past due 90 days or more as
to principal or interest payments at the dates indicated. Nonaccrual and
restructured loans are not included in these totals.
At March 31, 1995, loans in Sparks' portfolio that are now current, but for
which there are doubts as to the ability of the borrower to comply with present
loan repayment terms, amount to $6.72 million. While these loans represent loans
where information about the borrowers causes management to believe the borrowers
may not be able to comply with present loan terms, the specific circumstances
associated with each loan do not suggest that any should be interpreted as
presenting significant risk of loss. There were no interest-bearing assets,
other than loans, at March 31, 1995, classifiable as nonaccrual, 90 days past
due, restructured or problem assets.
Sparks provides for loan losses based on a review of its loan portfolio
through the establishment of an allowance for loan losses (the "Allowance") by
provisions charged against earnings. Net charge-offs are applied against the
Allowance, and the Allowance balance is evaluated periodically by management to
determine its adequacy to absorb potential future charge-offs of existing loans.
The factors used by management in determining the adequacy of the Allowance
include the historical relationships among loans outstanding; credit loss
experience and the current level of the Allowance; a continuing evaluation of
non-performing loans and loans classified by management as having potential for
future deterioration taking into consideration collateral value and the
financial strength of the borrower and guarantors; and a continuing evaluation
of the present and future economic environment. Regular review of the loan
portfolio's quality is conducted by Sparks' staff. In addition, independent
consultants, bank regulatory agencies and independent accountants periodically
review the loan portfolio. At March 31, 1995 the Allowance was 1.53% of total
loans, net of deferred fees and costs. The Allowance at March 31, 1995 is
considered by Sparks' management to be sufficient to address the risks in the
current loan portfolio. If charges against the Allowance for loan losses should
exceed the amount of the Allowance or are substantial in relation to the
Allowance, it would be necessary to restore the Allowance to an adequate level
through charges to operating expenses.
47
<PAGE>
The following table presents certain information regarding loan loss
experience and the Allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------ MARCH 31,
1992 1993 1994 1995
------ ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance at beginning of period..................... $1,129 $ 1,434 $ 2,040 $ 2,003
Less losses charged-off:
Installment........................................ 56 56 21 --
Mortgage........................................... -- 14 -- --
Commercial and other loans......................... -- 25 129 7
------ ------- ------- ---------
Total losses charged-off........................... 56 95 150 7
------ ------- ------- ---------
Recoveries of losses previously charged-off:....... -- -- --
Installment........................................ 81 350 18 1
Commercial and other loans......................... 1 -- 62 --
------ ------- ------- ---------
Total recoveries................................... 82 350 80 1
------ ------- ------- ---------
Net losses charged-off (recoveries).................. (26) (255) 70 6
Additions to Allowance charged to operating
expenses............................................. 279 351 33 --
------ ------- ------- ---------
Allowance at end of period (1)....................... $1,434 $ 2,040 2,003 1,997
------ ------- ------- ---------
------ ------- ------- ---------
Ratio of net charge-offs (recoveries) to average
total loans(1)..................................... (0.02)% (0.23)% 0.06% 0%
------ ------- ------- ---------
------ ------- ------- ---------
Ratio of Allowance to non-performing and past due
loans (1)............................................ 5.01:1 10.79:1 13.35:1 0.0:1
------ ------- ------- ---------
------ ------- ------- ---------
Ratio of Allowance to loans, net of deferred fees
and costs........................................ 1.29% 1.75% 1.56% 1.53%
------ ------- ------- ---------
------ ------- ------- ---------
</TABLE>
- ------------
(1) There is no direct relation between the size of the Allowance (and the
related provision for credit losses) and the non-performing and past due
loans. Accordingly, the ratio of Allowance to non-performing and past due
loans may tend to fluctuate widely.
The Allowance of $2.0 million at March 31, 1995 represented 1.53% of gross
loans at March 31, 1995. At December 31, 1994, the Allowance was 1.56% of gross
loans. There was no provision for credit losses for the first quarter of 1995 as
compared to $33 thousand for the first quarter of 1994 because of minimal credit
losses and adequate funding of the allowance based on the risk-rating of loans.
There were no loan balances past due 90 days or more or in nonaccrual status at
March 31, 1995.
A breakdown of the Allowance is provided in the table below; however,
Sparks' management does not believe that the Allowance can be fragmented by
category with any precision that would be useful. The breakdown of the Allowance
is based primarily on those factors discussed previously in evaluating the
adequacy of the Allowance as a whole. Since all of those factors are subject to
change, the breakdown is not necessarily indicative of the category of future
credit losses. The following table presents the allocation of the Allowance
among the various loan categories:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1992 1993 1994 1995
------ ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage:
Construction............................................ $ 54 $ 80 $ 72 $ 83
Residential............................................. 705 714 382 277
Commercial.............................................. 183 349 587 777
Installment............................................... 73 69 75 89
Commercial and other loans................................ 120 86 196 103
Unallocated............................................... 299 742 691 668
------ ------ ------ ---------
Total Allowance........................................... $1,434 $2,040 $2,003 $ 1,997
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
48
<PAGE>
The table below provides a percentage breakdown of the loan portfolio by
category to total loans less unearned income.
<TABLE><CAPTION>
DECEMBER 31, MARCH 31,
1992 1993 1994 1995
----- ------------ ----- ---------
<S> <C> <C> <C> <C>
Mortgage:
Construction......................................... 4.9% 6.9% 5.8% 6.4%
Residential.......................................... 61.5 58.2 51.1 50.0
Commercial........................................... 17.2 21.6 29.0 29.0
Installment............................................ 6.5 5.9 6.7 6.7
Commercial and other loans............................. 8.2 7.3 7.4 7.9
Lease financing........................................ 1.7 .1 -- --
----- ----- ----- ---------
100.0% 100.0% 100.0% 100.0%
----- ----- ----- ---------
----- ----- ----- ---------
</TABLE>
At March 31, 1995, Sparks had no concentrations of loans in any one industry
exceeding 10% of its total loan portfolio.
DEPOSITS ANALYSIS
The following table sets forth the average deposit balances and average
rates paid on deposits during the periods indicated.
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1992 1993 1994 MARCH 31, 1995
------------------ ------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total noninterest-bearing
demand deposits........... $ 16,838 $ 19,324 $ 21,765 $ 21,664
Interest-bearing deposits:
Checking accounts....... 10,962 3.61% 10,606 2.83% 12,428 2.55% 11,745 2.50%
Savings accounts........ 31,225 3.92 38,262 3.10 43,130 2.97 40,356 2.98
Money market account.... 32,449 3.70 30,398 3.01 28,076 2.88 25,975 3.36
Certificates of deposit,
$100,000 or more........ 6,499 5.98 5,683 5.35 5,904 5.43 5,994 6.14
Other time.............. 56,523 6.13 51,915 5.24 53,239 5.01 55,191 5.26
-------- ------- -------- ------- -------- ------- -------- -------
Total
interest-bearing
deposits........ 137,658 4.85% 136,864 3.97% 142,777 3.78% 139,261 4.04%
-------- ------- -------- ------- -------- ------- -------- -------
Total deposits...... $154,496 $156,188 $164,542 $160,925
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The following table provides the maturities of certificates of deposit of
Sparks in amounts of $100,000 or more. Sparks had no brokered deposits as of
March 31, 1995.
<TABLE><CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1992 1993 1994 1995
------ ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturing or repricing in:
3 Months or less...................................... $1,553 $ 817 $ 858 $ 1,051
Over 3 months through 12 months....................... 1,877 1,675 1,711 3,295
Over 12 months........................................ 2,209 3,280 3,060 2,513
------ ------ ------ ---------
Total............................................. $5,639 $5,772 $5,629 $ 6,859
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
OTHER BORROWED FUNDS
To the extent that deposits are not adequate to fund customer loan demand,
liquidity needs can be met in the short-term funds markets. Other borrowed funds
at March 31, 1995, consisted of $4.62 million in securities sold under agreement
to repurchase.
During 1993, 1994 and the first quarter of 1995, the average balance of
other borrowed funds was 9.9%, 12.7% and 9.94%, respectively, of stockholders'
equity.
49
<PAGE>
CAPITAL ADEQUACY
The FDIC has historically determined the adequacy of a bank's capital
resources by comparison of its capital to its assets. Specifically, capital
adequacy is based on the ratios of Tier 1 capital to risk-weighted assets and
qualifying total capital to risk-weighted assets. The FDIC's capital adequacy
guidelines require Sparks to maintain specific minimum amounts of capital and
additional amounts based upon the amount and nature of their assets and
commitments currently at risk. The rules specify four categories of asset or
commitment risk, with each category being assigned a weight of 0% through 100%
depending upon the risk involved. Each asset or commitment of Sparks is
categorized and weighted appropriately, and the capital of Sparks is then
compared to the aggregate value of such risk-weighted assets or commitment to
determine if additional capital is required. At March 31, 1995, Sparks' ratio of
qualifying total capital to risk-weighted assets was 18.68% as compared to the
regulatory guideline of 8%. Failure to meet the capital guidelines could subject
a banking institution to a variety of enforcement remedies available to federal
bank regulatory agencies.
The tables below present Sparks' capital position relative to its various
minimum statutory and regulatory capital requirements at March 31, 1995.
<TABLE>
<CAPTION>
LEVERAGE CAPITAL RATIO
MARCH 31, 1995
---------------------------
PERCENT OF
AVERAGE
AMOUNT TOTAL ASSETS
-------- ------------
(DOLLARS
IN
THOUSANDS)
<S> <C> <C>
Tier 1 capital(1)................................................. $ 21,561 11.33%
Leverage capital ratio requirement................................ 5,711 3.00
-------- -----
Excess...................................................... 15,850 8.33%
-------- -----
-------- -----
Average total assets.............................................. $190,378
--------
--------
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIO
MARCH 31, 1995
-------------------------
PERCENT OF
RISK-BASED
AMOUNT CAPITAL
-------- ----------
(DOLLARS
IN
THOUSANDS)
<S> <C> <C>
Tier 1(1).......................................................... $ 21,561 17.42%
Risk-based Tier 1 capital requirement.............................. 4,950 4.00
-------- -----
Excess....................................................... 16,611 13.42
-------- -----
-------- -----
Tier 1 capital(1).................................................. 21,561 17.42
Tier 2 capital..................................................... 1,552 1.25
-------- -----
Total risk-based capital(3).................................. 23,113 18.68
Fully phased-in risk-based capital requirement..................... 9,900 8.00
-------- -----
Excess....................................................... 13,213 10.68%
-------- -----
-------- -----
Risk-weighted assets............................................... $123,749
--------
--------
</TABLE>
- ------------
(1) Total risk-based capital represents the sum of Tier 1 capital and Tier 2
capital.
In September, 1993, the federal bank regulatory agencies issued proposed
revisions to their capital adequacy guidelines which provide for consideration
of interest rate risk in the overall determination of a bank's minimum capital
requirement. The intended effect of the proposal would be to ensure the banking
institutions effectively measure and monitor their interest rate risk and that
they maintain adequate capital for the risk. Under the proposal, an
institution's exposure to interest rate risk would be measured using either a
supervisory model, developed by the federal bank regulatory agencies, or the
bank's own internal model. Measured exposure to interest rate risk that exceeds
more than a prescribed supervisory threshold would require additional capital.
Sparks does not believe that the proposed revisions, if adopted, would have a
material adverse effect on Sparks.
50
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
POOLING-OF-INTERESTS ACCOUNTING
The following unaudited pro forma condensed combined financial statements
give effect to the Affiliation under the "pooling-of-interests" method of
accounting. These pro forma financial statements are presented for illustrative
purposes only, and therefore, are not necessarily indicative of the operating
results and financial position that might have been achieved had the Affiliation
occurred as of an earlier date, nor are they necessarily indicative of operating
results and financial position which may occur in the future. For a description
of certain matters with respect to the accounting of the Affiliation under the
pooling-of-interests method of accounting, see "THE AFFILIATION--Accounting
Treatment."
A pro forma condensed combined balance sheet is provided as of March 31,
1995, giving effect to the Affiliation as though it had been consummated on that
date. Pro forma condensed combined income statements are provided for the
three-month periods ended March 31, 1994 and 1995, and the years ended December
31, 1992, December 31, 1993 and December 31, 1994, giving effect to the
Affiliation as though it had occurred at the beginning of the earliest period
presented.
The pro forma condensed combined financial statements include all
adjustments (consisting only of normal recurring entries) which the respective
managements of Mercshares and Sparks believe are necessary for the fair
presentation of the information presented. The pro forma condensed combined
financial statements are derived from the historical consolidated financial
statements of Mercshares and Sparks, and should be read in conjunction with
Mercshares 1994 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for
the three months ended March 31, 1995, incorporated herein by reference, and the
financial statements of Sparks appearing elsewhere herein. See "SPARKS SELECTED
FINANCIAL INFORMATION."
51
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITION PRO FORMA
MERCSHARES SPARKS ENTRIES (1) BALANCE WITH
BALANCE BALANCE ----------------- SPARKS
MARCH 31 MARCH 31 DEBIT CREDIT MARCH 31
---------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 241,666 $ 3,492 $ 245,158
Interest-bearing deposits in other banks.... 100 100
Fed funds sold.............................. 850 3,198 4,048
Investment securities held-to-maturity...... 1,247,522 19,587 1,267,109
Investment securities available-for-sale.... 250,297 30,965 281,262
Loans....................................... 4,063,428 130,812 4,194,240
Less: allowance for loan losses............. (92,738) (1,997) (94,735)
---------- -------- ------- ------- ------------
Loans, net................................ 3,970,690 128,815 0 0 4,099,505
---------- -------- ------- ------- ------------
Bank premises and equipment................. 75,136 2,254 77,390
Other real estate owned, net................ 8,953 203 9,156
Excess cost over equity in affiliates....... 18,580 18,580
Other assets................................ 122,944 2,999 125,943
---------- -------- ------- ------- ------------
Total................................... $5,936,738 $191,513 $ 0 $ 0 $6,128,251
---------- -------- ------- ------- ------------
---------- -------- ------- ------- ------------
LIABILITIES
Deposits:
Noninterest-bearing deposits.............. $ 897,956 $ 22,244 $ 920,200
Interest-bearing deposits................. 3,885,700 141,883 4,027,583
---------- -------- ------- ------- ------------
Total deposits.......................... 4,783,656 164,127 0 0 4,947,783
Short-term borrowings....................... 319,273 4,621 323,894
Accrued expenses and other liabilities...... 70,613 1,899 72,512
Long-term debt.............................. 31,242 31,242
---------- -------- ------- ------- ------------
Total liabilities....................... 5,204,784 170,647 0 0 5,375,431
---------- -------- ------- ------- ------------
STOCKHOLDERS' EQUITY
Preferred stock--none
Common stock................................ 95,315 7,712 $ 7,712 $ 3,599 98,914
Capital surplus............................. 14,386 7,815 7,815 11,928 26,314
Retained earnings........................... 621,647 6,034 627,681
Unrealized gains (losses) on securities..... 606 (695) (89)
---------- -------- ------- ------- ------------
Total stockholders' equity.............. 731,954 20,866 15,527 15,527 752,820
---------- -------- ------- ------- ------------
Total................................. $5,936,738 $191,513 $15,527 $15,527 $6,128,251
---------- -------- ------- ------- ------------
---------- -------- ------- ------- ------------
</TABLE>
- ------------
(1) The entries to record the acquisition of Sparks reflect the pooling method
of accounting on the assumption that 1,799,562 shares of Mercshares Common
Stock will be exchanged for 771,241 shares (100%) of Sparks Common Stock.
52
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------ ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans..................... $ 90,629 $2,971 $93,600
Taxable interest income on investment
securities....................................... 20,715 708 21,423
Other interest income.......................... 332 6 338
---------- ------ ----- -- -----------
Total interest income............................ 111,676 3,685 115,361
---------- ------ ----- -- -----------
Interest expense
Interest on deposits........................... 36,862 1,390 38,252
Interest on short-term borrowings.............. 4,958 86 5,044
Interest on long-term debt..................... 523 523
---------- ------ ----- -- -----------
Total interest expense........................... 42,343 1,476 43,819
---------- ------ ----- -- -----------
Net interest income.............................. 69,333 2,209 71,542
Provision for loan losses........................ 1,440 0 1,440
---------- ------ ----- -- -----------
Net interest income after provision for loan
losses........................................... 67,893 2,209 70,102
---------- ------ ----- -- -----------
Noninterest income
Trust division services........................ 10,742 10,742
Service charges on deposit accounts............ 3,908 103 4,011
Other fees..................................... 4,516 69 4,585
Other income................................... 1,455 11 1,466
---------- ------ ----- -- -----------
Total noninterest income......................... 20,621 183 20,804
---------- ------ ----- -- -----------
Noninterest expenses
Salaries....................................... 22,126 559 22,685
Employee benefits.............................. 6,488 109 6,597
Net occupancy expense of bank premises......... 4,353 64 4,417
Furniture and equipment expenses............... 3,647 69 3,716
Other expenses................................. 13,195 373 13,568
---------- ------ ----- -- -----------
Total noninterest expenses....................... 49,809 1,174 50,983
---------- ------ ----- -- -----------
Income before income taxes....................... 38,705 1,218 39,923
Applicable income taxes.......................... 14,497 431 14,928
---------- ------ ----- -- -----------
Net income....................................... $ 24,208 $ 787 $ 0 $0 $24,995
---------- ------ ----- -- -----------
---------- ------ ----- -- -----------
Average shares outstanding....................... 47,989 771 49,789
Net income per share of common stock............. $ 0.50 $ 1.02 $ 0.50
</TABLE>
53
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------ ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans...................... $ 71,546 $2,246 $73,792
Taxable interest income on investment
securities........................................ 22,065 785 22,850
Other interest income........................... 364 11 375
---------- ------ ----- -- -----------
Total interest income............................. 93,975 3,042 97,017
---------- ------ ----- -- -----------
Interest expense
Interest on deposits............................ 29,854 1,315 31,169
Interest on short-term borrowings............... 2,447 9 2,456
Interest on long-term debt...................... 536 536
---------- ------ ----- -- -----------
Total interest expense............................ 32,837 1,324 34,161
---------- ------ ----- -- -----------
Net interest income............................... 61,138 1,718 62,856
Provision for loan losses......................... 1,822 33 1,855
---------- ------ ----- -- -----------
Net interest income after provision for loan
losses............................................ 59,316 1,685 61,001
---------- ------ ----- -- -----------
Noninterest income
Trust division services......................... 10,611 10,611
Service charges on deposit accounts............. 3,795 98 3,893
Other fees...................................... 4,764 48 4,812
Other income.................................... 5,949 10 5,959
---------- ------ ----- -- -----------
Total noninterest income.......................... 25,119 156 25,275
---------- ------ ----- -- -----------
Noninterest expenses
Salaries........................................ 20,836 533 21,369
Employee benefits............................... 6,307 115 6,422
Net occupancy expense of bank premises.......... 4,598 70 4,668
Furniture and equipment expenses................ 3,436 66 3,502
Other expenses.................................. 13,529 317 13,846
---------- ------ ----- -- -----------
Total noninterest expenses........................ 48,706 1,101 49,807
---------- ------ ----- -- -----------
Income before income taxes........................ 35,729 740 36,469
Applicable income taxes........................... 13,911 254 14,165
---------- ------ ----- -- -----------
Net income........................................ $ 21,818 $ 486 $ 0 $0 $22,304
---------- ------ ----- -- -----------
---------- ------ ----- -- -----------
Average shares outstanding........................ 48,224 771 50,024
Net income per share of common stock.............. $ 0.45 $0.63 $ 0.45
</TABLE>
54
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------- ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans.................... $315,094 $10,106 $ 325,200
Taxable interest income on investment
securities...................................... 86,432 2,920 89,352
Other interest income......................... 1,863 306 2,169
---------- ------- ----- -- -----------
Total interest income........................... 403,389 13,332 416,721
---------- ------- ----- -- -----------
Interest expense
Interest on deposits.......................... 126,197 5,395 131,592
Interest on short-term borrowings............. 12,111 132 12,243
Interest on long-term debt.................... 2,125 2,125
---------- ------- ----- -- -----------
Total interest expense.......................... 140,433 5,527 145,960
---------- ------- ----- -- -----------
Net interest income............................. 262,956 7,805 270,761
Provision for loan losses....................... 7,056 33 7,089
---------- ------- ----- -- -----------
Net interest income after provision for loan
losses.......................................... 255,900 7,772 263,672
---------- ------- ----- -- -----------
Noninterest income
Trust division services....................... 43,360 43,360
Service charges on deposit accounts........... 15,655 414 16,069
Other fees.................................... 21,342 309 21,651
Other income.................................. 11,829 11,829
---------- ------- ----- -- -----------
Total noninterest income........................ 92,186 723 92,909
---------- ------- ----- -- -----------
Noninterest expenses
Salaries...................................... 86,941 2,079 89,020
Employee benefits............................. 23,929 472 24,401
Net occupancy expense of bank premises........ 18,250 305 18,555
Furniture and equipment expenses.............. 13,977 263 14,240
Other expenses................................ 58,103 1,586 59,689
---------- ------- ----- -- -----------
Total noninterest expenses...................... 201,200 4,705 205,905
---------- ------- ----- -- -----------
Income before income taxes...................... 146,886 3,790 150,676
Applicable income taxes......................... 56,445 1,393 57,838
---------- ------- ----- -- -----------
Net income...................................... $ 90,441 $ 2,397 $ 0 $0 $ 92,838
---------- ------- ----- -- -----------
---------- ------- ----- -- -----------
Average shares outstanding...................... 48,166 771 49,966
Net income per share of common stock............ $ 1.88 $ 3.11 $ 1.86
</TABLE>
55
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------ ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans.................... $295,450 $9,418 $ 304,868
Taxable interest income on investment
securities...................................... 87,211 3,138 90,349
Other interest income......................... 3,282 271 3,553
---------- ------ ----- -- -----------
Total interest income........................... 385,943 12,827 398,770
---------- ------ ----- -- -----------
Interest expense
Interest on deposits.......................... 130,098 5,429 135,527
Interest on short-term borrowings............. 7,824 86 7,910
Interest on long-term debt.................... 1,539 1,539
---------- ------ ----- -- -----------
Total interest expense.......................... 139,461 5,515 144,976
---------- ------ ----- -- -----------
Net interest income............................. 246,482 7,312 253,794
Provision for loan losses....................... 12,969 351 13,320
---------- ------ ----- -- -----------
Net interest income after provision for loan
losses.......................................... 233,513 6,961 240,474
---------- ------ ----- -- -----------
Noninterest income
Trust division services....................... 41,673 41,673
Service charges on deposit accounts........... 16,367 452 16,819
Other fees.................................... 19,582 288 19,870
Other income.................................. 8,691 402 9,093
---------- ------ ----- -- -----------
Total noninterest income........................ 86,313 1,142 87,455
---------- ------ ----- -- -----------
Noninterest expenses
Salaries...................................... 83,249 1,949 85,198
Employee benefits............................. 23,188 455 23,633
Net occupancy expense of bank premises........ 16,633 266 16,899
Furniture and equipment expenses.............. 13,180 258 13,438
Other expenses................................ 47,605 1,297 48,902
---------- ------ ----- -- -----------
Total noninterest expenses...................... 183,855 4,215 188,070
---------- ------ ----- -- -----------
Income before income taxes...................... 135,971 3,888 139,859
Applicable income taxes......................... 52,503 1,403 53,906
---------- ------ ----- -- -----------
Net income...................................... $ 83,468 $2,485 $ 0 $0 $ 85,953
---------- ------ ----- -- -----------
---------- ------ ----- -- -----------
Average shares outstanding...................... 48,139 760 49,939
Net income per share of common stock............ $ 1.73 $ 3.27 $ 1.72
</TABLE>
56
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
--------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------- ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans................... $297,006 $10,065 $ 307,071
Taxable interest income on investment
securities..................................... 94,866 3,431 98,297
Other interest income........................ 2,775 372 3,147
---------- ------- ----- -- -----------
Total interest income.......................... 394,647 13,868 408,515
---------- ------- ----- -- -----------
Interest expense
Interest on deposits......................... 154,750 6,675 161,425
Interest on short-term borrowings............ 10,150 27 10,177
Interest on long-term debt................... 1,207 1,207
---------- ------- ----- -- -----------
Total interest expense......................... 166,107 6,702 172,809
---------- ------- ----- -- -----------
Net interest income............................ 228,540 7,166 235,706
Provision for loan losses...................... 45,346 279 45,625
---------- ------- ----- -- -----------
Net interest income after provision for loan
losses......................................... 183,194 6,887 190,081
---------- ------- ----- -- -----------
Noninterest income
Trust division services...................... 39,903 39,903
Service charges on deposit accounts.......... 15,140 431 15,571
Other fees................................... 17,242 247 17,489
Other income................................. 34,703 62 34,765
---------- ------- ----- -- -----------
Total noninterest income....................... 106,988 740 107,728
---------- ------- ----- -- -----------
Noninterest expenses
Salaries..................................... 76,680 1,905 78,585
Employee benefits............................ 18,406 441 18,847
Net occupancy expense of bank premises....... 15,196 262 15,458
Furniture and equipment expenses............. 11,893 245 12,138
Other expenses............................... 45,231 1,285 46,516
---------- ------- ----- -- -----------
Total noninterest expenses..................... 167,406 4,138 171,544
---------- ------- ----- -- -----------
Income before income taxes..................... 122,776 3,489 126,265
Applicable income taxes........................ 46,478 1,274 47,752
---------- ------- ----- -- -----------
Net income..................................... $ 76,298 $ 2,215 $ 0 $0 $ 78,513
---------- ------- ----- -- -----------
---------- ------- ----- -- -----------
Average shares outstanding..................... 45,589 748 47,389
Net income per share of common stock........... $ 1.67 $ 2.96 $ 1.66
</TABLE>
57
<PAGE>
PURCHASE ACCOUNTING
The following unaudited pro forma condensed combined financial statements
give effect to the Affiliation under the "purchase" method of accounting. These
pro forma financial statements are presented for illustrative purposes only, and
therefore, are not necessarily indicative of the operating results and financial
position that might have been achieved had the Affiliation occurred as of an
earlier date, nor are they necessarily indicative of operating results and
financial position which may occur in the future. Amounts allocated to the
Sparks tangible and intangible assets acquired by Mercshares will be based upon
the estimated fair values at the Effective Time of the Affiliation. The
allocation of the purchase price in the accompanying unaudited pro forma
condensed combined financial statements is based on management's preliminary
estimates and is subject to revision based on further studies and valuations.
For a description of certain matters with respect to the accounting of the
Affiliation under the purchase method of accounting, see " THE
AFFILIATION--Accounting Treatment."
A pro forma condensed combined balance sheet is provided as of March 31,
1995, giving effect to the Affiliation as though it had been consummated on that
date. Pro forma condensed combined income statements are provided for the
three-month period ended March 31, 1995, and the year ended December 31, 1994,
giving effect to the Affiliation as though it had occurred at the beginning of
the earliest period presented.
The pro forma condensed combined financial statements include all
adjustments (consisting only of normal recurring entries) which the respective
managements of Mercshares and Sparks believe are necessary for the fair
presentation of the information presented. The pro forma condensed combined
financial statements are derived from the historical consolidated financial
statements of Mercshares and Sparks, and should be read in conjunction with
Mercshares 1994 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for
the three months ended March 31, 1995, incorporated herein by reference, and the
financial statements of Sparks appearing elsewhere herein. See "SPARKS SELECTED
FINANCIAL INFORMATION."
58
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITION PRO FORMA
MERCSHARES SPARKS ENTRIES (1) BALANCE WITH
BALANCE BALANCE ----------------- SPARKS
3/31/95 3/31/95 DEBIT CREDIT 3/31/95
---------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 241,666 $ 3,492 $ 245,158
Interest-bearing deposits in other banks.... 100 100
Fed funds sold.............................. 850 3,198 4,048
Investment securities held-to-maturity...... 1,247,522 19,587 1,267,109
Investment securities available-for-sale.... 250,297 30,965 281,262
Loans....................................... 4,063,428 130,812 4,194,240
Less: allowance for loan losses............. (92,738) (1,997) (94,735)
---------- -------- ------- ------- ------------
Loans, net................................ 3,970,690 128,815 0 0 4,099,505
---------- -------- ------- ------- ------------
Bank premises and equipment................. 75,136 2,254 77,390
Other real estate owned, net................ 8,953 203 9,156
Excess cost over equity in affiliates (2)... 18,580 13,776 32,356
Other assets................................ 122,944 2,999 125,943
---------- -------- ------- ------- ------------
Total................................... $5,936,738 $191,513 $13,776 $ 0 $6,142,027
---------- -------- ------- ------- ------------
---------- -------- ------- ------- ------------
LIABILITIES
Deposits:
Noninterest-bearing deposits.............. $ 897,956 $ 22,244 $ 920,200
Interest-bearing deposits................. 3,885,700 141,883 4,027,583
---------- -------- ------- ------- ------------
Total deposits.......................... 4,783,656 164,127 0 0 4,947,783
Short-term borrowings....................... 319,273 4,621 323,894
Accrued expenses and other liabilities...... 70,613 1,899 72,512
Long-term debt (3).......................... 31,242 31,242
---------- -------- ------- ------- ------------
Total liabilities....................... 5,204,784 170,647 0 0 5,375,431
---------- -------- ------- ------- ------------
STOCKHOLDERS' EQUITY
Preferred stock--none
Common stock................................ 95,315 7,712 $ 7,712 $ 3,599 98,914
Capital surplus............................. 14,386 7,815 7,815 31,043 45,429
Retained earnings........................... 621,647 6,034 6,034 621,647
Unrealized gains (losses) on securities..... 606 (695) 695 606
---------- -------- ------- ------- ------------
Total stockholders' equity.............. 731,954 20,866 21,561 35,337 766,596
---------- -------- ------- ------- ------------
Total................................. $5,936,738 $191,513 $21,561 $35,337 $6,142,027
---------- -------- ------- ------- ------------
---------- -------- ------- ------- ------------
</TABLE>
- ------------
(1) The entries to record the acquisition of Sparks reflect the purchase method
of accounting on the assumption that 1,799,562 shares of Mercshares Common
Stock will be exchanged for 771,241 shares (100%) of Sparks Common Stock.
The entries reflect a stock price of $19.25 for Mercshares Common Stock
which was the closing price at December 14, 1994, the last full trading day
preceding the public announcement of the affiliation.
59
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS (1)
----------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------ ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans................. $ 90,629 $2,971 $ 93,600
Taxable interest income on investment
securities............................... 20,715 708 21,423
Other interest income...................... 332 6 338
---------- ------ ----- ------ -----------
Total interest income........................ 111,676 3,685 115,361
---------- ------ ----- ------ -----------
Interest expense
Interest on deposits....................... 36,862 1,390 38,252
Interest on short-term borrowings.......... 4,958 86 5,044
Interest on long-term debt................. 523 523
---------- ------ ----- ------ -----------
Total interest expense....................... 42,343 1,476 43,819
---------- ------ ----- ------ -----------
Net interest income.......................... 69,333 2,209 71,542
Provision for loan losses.................... 1,440 0 1,440
---------- ------ ----- ------ -----------
Net interest income after provision for loan
losses..................................... 67,893 2,209 70,102
---------- ------ ----- ------ -----------
Noninterest income
Trust division services.................... 10,742 10,742
Service charges on deposit accounts........ 3,908 103 4,011
Other fees................................. 4,516 69 4,585
Other income............................... 1,455 11 1,466
---------- ------ ----- ------ -----------
Total noninterest income..................... 20,621 183 20,804
---------- ------ ----- ------ -----------
Noninterest expenses
Salaries................................... 22,126 559 22,685
Employee benefits.......................... 6,488 109 6,597
Net occupancy expense of bank premises..... 4,353 64 4,417
Furniture and equipment expenses........... 3,647 69 3,716
Other expenses............................. 13,195 373 $ 248 13,816
---------- ------ ----- ------ -----------
Total noninterest expenses................... 49,809 1,174 248 51,231
---------- ------ ----- ------ -----------
Income before income taxes................... 38,705 1,218 248 39,675
Applicable income taxes...................... 14,497 431 14,928
---------- ------ ----- ------ -----------
Net income................................... $ 24,208 $ 787 $ 248 $ 24,747
---------- ------ ----- ------ -----------
---------- ------ ----- ------ -----------
Average shares outstanding................... 47,989 771 49,789
Net income per share of common stock......... $ 0.50 $ 1.02 $ 0.50
</TABLE>
- ------------
(1) The pro forma adjustments represent the annual amortization of the excess
cost over equity in the net assets of Sparks. Amortization is on a
straight-line basis over fifteen years. The excess cost is based on the
assumption that 1,799,562 shares of Mercshares Common Stock will be
exchanged for 771,241 shares (100%) of Sparks Common Stock using $19.25 for
Mercshares Common Stock which was the closing price at December 14, 1994,
the last full trading day preceding the public announcement of the
Affiliation.
60
<PAGE>
MERCANTILE BANKSHARES CORPORATION AND THE SPARKS STATE BANK
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS (1)
----------------- PRO FORMA
MERCSHARES SPARKS DEBIT CREDIT WITH SPARKS
---------- ------- ----- ------ -----------
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans................ $315,094 $10,106 $ 325,200
Taxable interest income on investment
securities.............................. 86,432 2,920 89,352
Other interest income..................... 1,863 306 2,169
---------- ------- ----- ------ -----------
Total interest income....................... 403,389 13,332 416,721
---------- ------- ----- ------ -----------
Interest expense
Interest on deposits...................... 126,197 5,395 131,592
Interest on short-term borrowings......... 12,111 132 12,243
Interest on long-term debt................ 2,125 2,125
---------- ------- ----- ------ -----------
Total interest expense...................... 140,433 5,527 145,960
---------- ------- ----- ------ -----------
Net interest income......................... 262,956 7,805 270,761
Provision for loan losses................... 7,056 33 7,089
---------- ------- ----- ------ -----------
Net interest income after provision for loan
losses.................................... 255,900 7,772 263,672
---------- ------- ----- ------ -----------
Noninterest income
Trust division services................... 43,360 43,360
Service charges on deposit accounts....... 15,655 414 16,069
Other fees................................ 21,342 309 21,651
Other income.............................. 11,829 11,829
---------- ------- ----- ------ -----------
Total noninterest income.................... 92,186 723 92,909
---------- ------- ----- ------ -----------
Noninterest expenses
Salaries.................................. 86,941 2,079 89,020
Employee benefits......................... 23,929 472 24,401
Net occupancy expense of bank premises.... 18,250 305 18,555
Furniture and equipment expenses.......... 13,977 263 14,240
Other expenses............................ 58,103 1,586 $ 991 60,680
---------- ------- ----- ------ -----------
Total noninterest expenses.................. 201,200 4,705 991 206,896
---------- ------- ----- ------ -----------
Income before income taxes.................. 146,886 3,790 991 149,685
Applicable income taxes..................... 56,445 1,393 57,838
---------- ------- ----- ------ -----------
Net income.................................. $ 90,441 $ 2,397 $ 991 $ 91,847
---------- ------- ----- ------ -----------
---------- ------- ----- ------ -----------
Average shares outstanding.................. 48,166 771 49,966
Net income per share of common stock........ $ 1.88 $ 3.11 $ 1.84
</TABLE>
- ------------
(1) The pro forma adjustments represent the annual amortization of the excess
cost over equity in the net assets of Sparks. Amortization is on a
straight-line basis over fifteen years. The excess cost is based on the
assumption that 1,799,562 shares of Mercshares Common Stock will be
exchanged for 771,241 shares (100%) of Sparks Common Stock using $19.25 for
Mercshares Common Stock which was the closing price at December 14, 1994,
the last full trading day preceding the public announcement of the
affiliation.
61
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF MERCSHARES
AND SPARKS COMMON STOCK
The rights of Sparks Stockholders currently are governed by the MGCL, the
Financial Institutions Article of the Maryland Code Annotated (the "Financial
Institution Article"), Sparks' Charter and its By-laws. Upon consummation of the
Affiliation, Sparks Stockholders will become stockholders of Mercshares. Their
rights as stockholders of Mercshares will be governed by the MGCL, Mercshares'
Charter and its By-laws. The following is a summary comparison of the material
differences in the rights of holders of Sparks Common Stock and Mercshares
Common Stock under governing provisions of their respective constituent
documents and the MGCL. This summary does not purport to be a complete
discussion of, and is qualified in its entirety by reference to, the MGCL, the
Financial Institutions Article and the constituent documents of Sparks and
Mercshares.
NOTICE OF ANNUAL MEETING, PLACE OF ANNUAL MEETING
The Sparks By-laws and the Financial Institutions Article require, in
addition to other required notice of the annual meeting, that notice of an
annual meeting be published at least ten business days prior to the annual
meeting in a newspaper published in the county where Sparks has it principal
banking office. Such published notice is required unless waived in writing by
all Sparks Stockholders. The MGCL and Mercshares By-laws do not require that
notice of meetings be published in such a manner.
The Sparks By-laws require that meetings of Sparks stockholders be held in
the State of Maryland. The Mercshares By-laws provide that meetings of
Mercshares stockholders may be held within or without the state of Maryland.
DISSENTER'S RIGHTS
Under the MGCL, a stockholder does not have appraisal rights in certain
circumstances, including 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. As Sparks Stockholders will be receiving Mercshares
Common Stock pursuant to the Affiliation, which stock is publicly traded and
quoted on The Nasdaq National Market under the symbol "MRBK," appraisal rights
with respect to such transactions affecting Mercshares Common Stock will not be
available.
PREFERRED STOCK
Sparks' 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, no par value ("Mercshares Preferred Stock").
Mercshares' Board of Directors may reclassify already classified, but unissued,
shares of Mercshares Preferred Stock and may alter the rights, privileges and
restrictions on the unissued Mercshares Preferred Stock. Currently, no
Mercshares Preferred Stock is outstanding.
PREEMPTIVE RIGHTS
Sparks Stockholders have preemptive rights, under certain circumstances,
which give Sparks Stockholders the right to subscribe for a pro rata share of a
new issue of Sparks Common Stock before such stock is offered to others for
cash. The Mercshares Charter specifically provides that Mercshares stockholders
do not have preemptive rights. As a result, the issuance of additional shares of
Mercshares Common Stock or the issuance of Mercshares Preferred Stock may have
the effect of decreasing the proportionate interest held by existing holders of
Mercshares Common Stock.
62
<PAGE>
QUALIFICATION, NOMINATION AND NUMBER OF DIRECTORS
Under Sparks' By-laws, a director must be a Sparks Stockholder owning 50
shares of unencumbered Sparks Common Stock continuously throughout his tenure as
director, and a majority of Sparks directors must be resident in Maryland. The
Sparks' By-laws provide that the number of Sparks directors must be between 7
and 15, and currently Sparks has 10 directors. A majority of the Sparks Board of
Directors may fix, within this range, the number of directors to be elected at
the next annual meeting of Sparks Stockholders. If vacant directorships are
established by the Sparks Stockholders (the Financial Institutions Article
provides for a maximum of two), the Sparks Board may increase the number of
directors by not more than the number of additional directorships created by the
Sparks Stockholders and left vacant. Under Mercshares' Charter and By-laws,
directors have no stock ownership or residency requirements. The number of
directors set forth in the By-laws is 18 and may be decreased or increased to
not less than seven nor more than 30 by amendment to the By-laws.
DIRECTOR AND OFFICER LIABILITY
Under the Mercshares Charter, the liability of directors and officers to
Mercshares or its stockholders for money damages is limited to the maximum
extent that such liability can be limited under the MGCL. Maryland law provides
that although the charter of a Maryland corporation may include any provision
limiting the liability of its directors and officers for money damages, the
charter of such a corporation may not include any provision that restricts or
limits the liability of its directors or officers to the corporation or its
stockholders: (1) to the extent that it is proved that the person actually
received an improper benefit or profit in money, property, or services for the
amount of the benefit or profit in money, property, or services actually
received; or (2) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. This limitation of liability applies 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. The Sparks Charter contains no provision limiting the liability of
directors and officers.
DESCRIPTION OF MERCSHARES CAPITAL STOCK
GENERAL
Mercshares is authorized to issue up to 67,000,000 shares of Mercshares
Common Stock. On April 30, 1995, 47,539,864 shares of Mercshares Common Stock
were issued and outstanding and were held of record by 9,113 holders. Mercshares
is also authorized to issue 2,000,000 shares of 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 Mercshares
Common Stock. Mercshares Common Stock is publicly traded and quoted on The
Nasdaq National Market under the symbol "MRBK."
63
<PAGE>
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 Sparks
Stockholders in exchange for Sparks 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.
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, LLP, Baltimore, Maryland. William J. McCarthy, a
principal of William J. McCarthy, P.C., which is a partner in Venable, Baetjer
and Howard, LLP, is a director of Mercshares. Certain legal matters in
connection with the Affiliation will be passed upon for Sparks by Piper &
Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements incorporated in this Prospectus and Proxy Statement
by reference to the Annual Report on Form 10-K of Mercshares as of December 31,
1994 and 1993 and for each of the three years in the period ended December 31,
1994 have been audited by Coopers & Lybrand L.L.P. 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 of Sparks included in this Prospectus and Proxy
Statement for the three years ended December 31, 1994 have been audited by
Rowles & Company, 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.
Representatives of Rowles & Company are expected to be present at the Sparks
Special Meeting, will have an opportunity to make a statement if they so desire,
and are expected to be available to respond to appropriate questions.
64
<PAGE>
THE SPARKS STATE BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of independent auditors.................................................... F-2
FINANCIAL STATEMENTS
Balance sheets as of December 31, 1994, 1993 and 1992............................. F-3
Statements of income for the three years ended December 31, 1994.................. F-4
Statements of changes in stockholders' equity for the three years ended December
31, 1994........................................................................ F-5
Statements of cash flows for the three years ended December 31, 1994.............. F-6-7
Notes to financial statements..................................................... F-7-18
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance sheets as of March 31, 1995 and December 31, 1994......................... F-19
Statements of income for the three months ended March 31, 1995 and 1994........... F-20
Statements of changes in stockholders' equity for the three months ended March 31,
1995 and 1994................................................................... F-21
Statements of cash flows for the three months ended March 31, 1995 and 1994....... F-22
Note to unaudited financial statements for the three months ended March 31, 1995
and 1994........................................................................ F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
THE SPARKS STATE BANK
Sparks, Maryland
We have audited the accompanying balance sheets of The Sparks State Bank as
of December 31, 1994, 1993, and 1992, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Sparks State Bank as of
December 31, 1994, 1993, and 1992, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Bank changed its
method of accounting for investment securities in 1994.
/s/ ROWLES & COMPANY
......................................
Baltimore, Maryland
January 31, 1995
F-2
<PAGE>
THE SPARKS STATE BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 4,614,212 $ 3,831,817 $ 4,760,943
Federal funds sold.......................... -- -- 25,000
Certificates of deposit..................... -- 521,863 614,916
Securities available for sale, at market
value..................................... 32,288,898 -- --
Securities held to maturity (market value of
$20,833,894, $59,360,849, and $60,405,170) 21,746,843 58,653,343 58,741,415
Loans, less allowance for credit losses of
$2,003,078, $2,040,309 and $1,434,309..... 126,781,626 114,662,115 109,323,635
Property and equipment...................... 2,402,097 1,945,074 1,771,705
Accrued interest receivable................. 1,563,961 1,317,923 1,446,250
Deferred income taxes....................... 1,414,932 652,939 638,836
Other assets................................ 215,209 152,996 77,968
------------ ------------ ------------
$191,027,778 $181,738,070 $177,400,668
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing......................... $ 23,733,755 $ 22,014,577 $ 20,486,688
Interest-bearing............................ 139,785,779 137,880,454 138,325,841
------------ ------------ ------------
Total deposits.......................... 163,519,534 159,895,031 158,812,529
Federal funds purchased and securities sold
under repurchase agreements............... 5,558,104 1,190,707 105,529
Accrued interest payable.................... 305,808 295,672 346,952
Dividend payable............................ 642,748 527,822 472,361
Other liabilities........................... 1,232,583 1,004,197 1,113,468
------------ ------------ ------------
171,258,777 162,913,429 160,850,839
------------ ------------ ------------
Stockholders' equity
Common stock, par value $10 per share;
authorized 1,000,000 shares; issued and
outstanding 771,241 shares in 1994,
633,348 shares in 1993, and 519,550 shares
in 1992................................... 7,712,410 6,333,477 5,195,499
Surplus..................................... 7,814,627 7,548,484 7,310,222
Undivided profits........................... 5,409,736 4,942,680 4,044,108
Net unrealized loss on securities available
for sale, net of income taxes............. (1,167,772) -- --
------------ ------------ ------------
19,769,001 18,824,641 16,549,829
------------ ------------ ------------
$191,027,778 $181,738,070 $177,400,668
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST AND DIVIDEND REVENUE
Taxable loans, including fees..................... $ 9,892,871 $ 9,287,326 $ 9,986,889
Tax-exempt loans, including fees.................. 212,072 130,790 78,151
U.S. Treasury securities.......................... 912,475 1,081,636 1,553,932
U.S. Government agency securities................. 2,007,827 2,055,733 1,877,452
State and municipal securities.................... 184,416 198,645 172,530
Equity securities................................. 46,700 10,353 15,603
Bank deposits..................................... 14,741 23,243 43,337
Federal funds sold................................ 60,387 39,098 140,587
----------- ----------- -----------
Total interest and dividend revenue........... 13,331,489 12,826,824 13,868,481
----------- ----------- -----------
INTEREST EXPENSE
Deposits.......................................... 5,395,170 5,428,554 6,675,567
Other............................................. 131,580 86,274 26,681
----------- ----------- -----------
Total interest expense........................ 5,526,750 5,514,828 6,702,248
----------- ----------- -----------
NET INTEREST INCOME................................. 7,804,739 7,311,996 7,166,233
Provision for credit losses....................... 33,000 351,192 278,689
----------- ----------- -----------
Net interest income after provision for credit
losses.......................................... 7,771,739 6,960,804 6,887,544
----------- ----------- -----------
OTHER OPERATING REVENUE
Service charges on deposit accounts............... 413,923 452,461 431,013
Other fees and commissions........................ 308,132 287,686 247,213
Gain on sale of investment securities............. 695 401,544 61,426
----------- ----------- -----------
Total other revenue........................... 722,750 1,141,691 739,652
----------- ----------- -----------
OTHER EXPENSES
Salaries.......................................... 2,079,479 1,948,435 1,904,525
Employee benefits................................. 472,498 444,597 441,139
Occupancy......................................... 304,649 266,253 261,718
Furniture and equipment........................... 262,987 258,427 245,050
Other operating................................... 1,585,252 1,297,144 1,285,940
----------- ----------- -----------
Total other expenses.......................... 4,704,865 4,214,856 4,138,372
----------- ----------- -----------
Income before income taxes........................ 3,789,624 3,887,639 3,488,824
Income taxes...................................... 1,392,685 1,402,690 1,274,026
----------- ----------- -----------
Net income.................................... $ 2,396,939 $ 2,484,949 $ 2,214,798
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share......................... $ 3.11 $ 3.27 $ 2.96
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
COMMON STOCK UNDIVIDED SECURITIES
SHARES PAR VALUE SURPLUS PROFITS AVAILABLE FOR SALE
------------ ---------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1991..... 467,428 $4,674,283 $5,735,867 $ 4,190,889 $ --
Net income................... -- -- 2,214,798
Cash distribution from
fractional shares.......... -- -- (1,656)
Cash dividend, $0.63 per
share...................... -- -- (472,361)
Dividend reinvestment........ 4,933 49,326 158,683 -- --
10% stock dividend........... 47,189 471,890 1,415,672 (1,887,562) --
------------ ---------- ---------- ----------- ------------------
BALANCE, December 31, 1992..... 519,550 5,195,499 7,310,222 4,044,108 --
Net income................... -- -- 2,484,949
Cash distribution from
fractional shares.......... -- -- (3,300)
Cash dividend, $0.69 per
share...................... -- -- (527,822)
Dividend reinvestment........ 8,272 82,723 238,262 -- --
Stock split effected in the
form of a 20% stock
dividend................... 105,526 1,055,255 -- (1,055,255) --
------------ ---------- ---------- ----------- ------------------
BALANCE, December 31, 1993..... 633,348 6,333,477 7,548,484 4,942,680 --
Unrealized gains on
securities available for
sale at January 1, 1994.... -- -- -- 195,600
Net income................... -- -- 2,396,939
Cash distribution from
fractional shares.......... -- -- (2,208)
Cash dividend, $0.83 per
share...................... -- -- (642,748)
Dividend reinvestment........ 9,400 94,006 266,143 -- --
Stock split effected in the
form of a 20% stock
dividend................... 128,493 1,284,927 -- (1,284,927) --
Change in unrealized gain
(loss) on securities
available for sale......... -- -- -- (1,363,372)
------------ ---------- ---------- ----------- ------------------
BALANCE, December 31, 1994..... 771,241 $7,712,410 $7,814,627 $ 5,409,736 $ (1,167,772)
------------ ---------- ---------- ----------- ------------------
------------ ---------- ---------- ----------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received................................. $13,018,212 $ 12,844,315 $ 13,965,533
Fees and commissions received..................... 722,055 724,202 668,145
Interest paid..................................... (5,516,614) (5,566,108) (6,917,500)
Cash paid to suppliers and employees.............. (4,270,722) (3,945,772) (3,459,313)
Income taxes paid................................. (1,248,169) (1,556,267) (1,363,858)
----------- ------------ ------------
2,704,762 2,500,370 2,893,007
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of investment securities
and certificates of deposit
Held to maturity................................ 12,676,863 28,198,862 24,537,506
Available for sale.............................. 3,829,810 -- --
Purchase of investment securities and certificates
of deposit
Held to maturity................................ (3,673,600) (27,707,162) (36,176,520)
Available for sale.............................. (9,611,032) -- --
Loans made, net of principal collected............ (12,069,681) (5,487,867) 1,052,724
Purchases of premises and equipment............... (896,746) (471,333) (167,452)
----------- ------------ ------------
(9,744,386) (5,467,500) (10,753,742)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.......................... 3,624,503 1,082,502 7,869,375
Net increase (decrease) in other borrowed funds... 4,367,397 1,085,178 (1,538,847)
Dividends paid.................................... (530,030) (475,661) (299,136)
Dividends reinvested.............................. 360,149 320,985 208,009
----------- ------------ ------------
7,822,019 2,013,004 6,239,401
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... 782,395 (954,126) (1,621,334)
Cash and cash equivalents at beginning of year...... 3,831,817 4,785,943 6,407,277
----------- ------------ ------------
Cash and cash equivalents at end of year............ $ 4,614,212 $ 3,831,817 $ 4,785,943
----------- ------------ ------------
----------- ------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income........................................ $ 2,396,939 $ 2,484,949 $ 2,214,798
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization, and losses.......... 435,852 198,601 178,695
Provision for credit losses..................... 33,000 351,192 278,689
Deferred income taxes........................... (27,236) (14,103) (79,839)
(Gain) on sale of investment securities......... (695) (401,544) (61,426)
Amortization of premiums and discounts.......... 15,591 90,969 92,922
(Increase) decrease in
Accrued interest receivable................... (246,038) 128,327 166,414
Other assets.................................. (80,709) 3,713 4,255
Increase (decrease) in
Accrued interest payable...................... 10,136 (51,280) (221,443)
Income taxes payable.......................... 179,318 (139,474) (9,993)
Other liabilities............................. 71,434 50,825 492,219
Deferred loan fees and costs.................. (82,830) (201,805) (162,284)
----------- ------------ ------------
$ 2,704,762 $ 2,500,370 $ 2,893,007
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected in the financial statements
conform to generally accepted accounting principles and to general practices
within the banking industry. Certain reclassifications have been made to amounts
previously reported to conform with the current classifications.
CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
INVESTMENT SECURITIES. In 1994, Sparks adopted Statement No. 115 of the
Financial Accounting Standards Board (FASB), Accounting for Certain Investments
in Debt and Equity Securities. Management has reviewed its portfolio and
classified securities as held to maturity or available for sale. Securities
which management has the intent and ability to hold to maturity are recorded at
amortized cost which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life of mortgage-backed
securities. Securities held to meet liquidity needs or which may be sold before
maturity are classified as available for sale and carried at fair value with
unrealized gains and losses included in stockholders' equity on an after-tax
basis. Equity securities are stated at the lower of cost or market value.
Prior to 1994, securities which management had the intent and ability to
hold on a long-term basis were classified as investment securities and carried
at amortized cost.
Gains and losses on disposal are determined using the
specific-identification method.
LOANS. Loans are stated at the current amount of unpaid principal plus
deferred origination costs, less deferred origination fees and the allowance for
credit losses.
Interest on loans is accrued based on the principal amounts outstanding.
Origination fees and costs are amortized to income over the terms of the loans.
The accrual of interest is discontinued when management believes, after
considering business conditions and collection efforts, that collection is
doubtful.
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current economic conditions which may
affect the borrowers' ability to pay, and the underlying collateral value of the
loans. Loans which are deemed to be uncollectible are charged off and deducted
from the allowance. The provision for credit losses and recoveries of loans
previously charged off are added to the allowance.
BANK PREMISES AND EQUIPMENT. Sparks' premises and equipment are recorded at
cost less accumulated depreciation. Depreciation is computed using straight-line
and accelerated methods.
INCOME TAXES. The provision for income taxes includes taxes payable for the
current year and deferred income taxes. Sparks recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
F-7
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1994
Available for sale
U. S. Treasury...................... $ 9,976,697 $ 1,023 $ 210,932 $ 9,766,788
U. S. Government agency............. 14,453,215 -- 1,152,859 13,300,356
Mortgage-backed..................... 9,052,186 -- 699,373 8,352,813
----------- ---------- ----------- -----------
33,482,098 1,023 2,063,164 31,419,957
Equity securities................... 709,329 159,612 -- 868,941
----------- ---------- ----------- -----------
$34,191,427 $ 160,635 $ 2,063,164 $32,288,898
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Held to maturity
U. S. Treasury...................... $ 6,959,228 $ -- $ 274,278 $ 6,684,950
U. S. Government agency............. 11,012,790 -- 560,221 10,452,569
State and municipal................. 3,774,825 9,489 87,939 3,696,375
----------- ---------- ----------- -----------
$21,746,843 $ 9,489 $ 922,438 $20,833,894
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
December 31, 1993
U. S. Treasury...................... $16,024,279 $ 247,461 $ 12,010 $16,259,730
U. S. Government agency............. 28,033,817 228,781 57,102 28,205,496
Mortgage-backed..................... 10,392,655 62,149 66,246 10,388,558
State and municipal................. 4,199,763 108,742 19,033 4,289,472
----------- ---------- ----------- -----------
58,650,514 647,133 154,391 59,143,256
Equity securities................... 2,829 214,764 -- 217,593
----------- ---------- ----------- -----------
$58,653,343 $ 861,897 $ 154,391 $59,360,849
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
December 31, 1992
U. S. Treasury...................... $23,063,538 $ 312,121 $ 10,220 $23,365,439
U. S. Government agency............. 27,369,860 318,002 28,612 27,659,250
Mortgage-backed..................... 4,412,921 8,159 332 4,420,748
State and municipal................. 3,887,267 69,008 5,175 3,951,100
----------- ---------- ----------- -----------
58,733,586 707,290 44,339 59,396,537
Equity securities................... 7,829 1,000,804 -- 1,008,633
----------- ---------- ----------- -----------
$58,741,415 $1,708,094 $ 44,339 $60,405,170
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
At December 31, 1994, 1993, and 1992, securities with an amortized cost of
$2,004,988 (market value of $1,882,499), $1,309,079, and $549,407 are pledged as
collateral for government deposits and securities sold under repurchase
agreements.
F-8
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT SECURITIES--(CONTINUED)
Contractual maturities at December 31, 1994, 1993 and 1992, are shown below.
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------------------ ------------------------------
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Due within one year................... $ 6,479,052 $ 6,431,508 $ 5,259,968 $ 5,233,669
Due over one to five years............ 13,950,860 13,091,836 13,687,975 13,010,134
Due over five to ten years............ 4,000,000 3,543,800 2,798,900 2,590,091
Mortgage-backed, due in monthly
installments........................ 9,052,186 8,352,813 -- --
-------------- ------------ -------------- ------------
$ 33,482,098 $ 31,419,957 $ 21,746,843 $ 20,833,894
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------ ------------------------------
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Due within one year................... $ 12,669,416 $ 12,805,285 $ 14,356,667 $ 14,569,370
Due over one to five years............ 26,168,405 26,453,881 36,555,963 36,991,679
Due over five to ten years............ 9,220,038 9,270,328 3,103,035 3,103,930
Due over ten years.................... 200,000 225,204 305,000 310,810
Mortgage-backed, due in monthly
installments........................ 10,392,655 10,388,558 4,412,921 4,420,748
-------------- ------------ -------------- ------------
$ 58,650,514 $ 59,143,256 $ 58,733,586 $ 59,396,537
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
</TABLE>
Proceeds from sales, prior to maturity, of investments in debt securities
during 1993 and 1992, were $1,777,546 and $1,416,335, respectively. There were
no sales prior to maturity in 1994. Gains of $8,812 and losses of $25,000 were
realized on those sales for 1993. Gains of $57,926 and no losses were realized
on those sales for 1992. Sparks realized gains of $417,212 on the sale of equity
securities in 1993. Income taxes on security gains were $268, $155,076, and
$23,723 for 1994, 1993, and 1992, respectively.
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Real estate
Residential................................... $ 65,796,847 $ 67,966,608 $ 68,146,534
Commercial.................................... 37,312,053 25,163,922 19,007,400
Construction and land development............. 7,468,381 8,031,180 5,433,582
Commercial...................................... 9,510,080 8,534,743 9,138,202
Lease financing................................. 86,306 169,037 1,835,952
Installment and credit card..................... 8,611,037 6,836,934 7,196,274
------------ ------------ ------------
128,784,704 116,702,424 110,757,944
Allowance for credit losses..................... 2,003,078 2,040,309 1,434,309
------------ ------------ ------------
$126,781,626 $114,662,115 $109,323,635
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-9
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS--(CONTINUED)
The maturity and rate repricing distribution of the loan portfolio follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Variable rate................................... $ 83,125,241 $ 75,260,501 $ 69,566,772
Maturing within one year........................ 7,868,425 5,013,053 5,375,861
Maturing over one to five years................. 11,487,593 10,191,876 10,538,411
Maturing over five years........................ 26,696,891 26,713,270 25,965,199
------------ ------------ ------------
129,178,150 117,178,700 111,446,243
Deferred origination fees....................... (725,005) (778,284) (973,578)
Deferred origination costs...................... 331,559 302,008 285,279
------------ ------------ ------------
$128,784,704 $116,702,424 $110,757,944
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Sparks makes loans to customers located primarily in Baltimore County and
surrounding areas of central Maryland and South-central Pennsylvania. Although
the loan portfolio is diversified, its performance will be influenced by the
economy of the region.
Transactions in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Beginning of year...................................... $2,040,309 $1,434,309 $1,128,929
Provision charged to operations........................ 33,000 351,192 278,689
Recoveries............................................. 79,581 349,841 82,583
---------- ---------- ----------
2,152,890 2,135,342 1,490,201
Loans charged off...................................... 149,812 95,033 55,892
---------- ---------- ----------
End of year............................................ $2,003,078 $2,040,309 $1,434,309
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Recoveries for 1993 include a legal settlement of approximately $300,000.
There were no loans on which the accrual of interest has been discontinued
at December 31, 1994, 1993, and 1992. Amounts past due 90 days or more are as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Commercial.................................................. $ -- $ 1,378 $ 10,221
Installment................................................. 5,443 -- 40,746
Real estate................................................. 144,172 187,377 235,467
-------- -------- --------
$149,615 $188,755 $286,434
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines, and letters of credit are as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Loan commitments
Construction and land development.................. $ 2,123,478 $ 2,606,900 $1,814,721
Mortgage loans..................................... 2,787,050 2,779,700 2,122,250
Commercial loans................................... -- -- 265,000
----------- ----------- ----------
$ 4,910,528 $ 5,386,600 $4,201,971
----------- ----------- ----------
----------- ----------- ----------
Unused lines of credit
Home-equity lines.................................. $ 2,791,524 $ 2,643,513 $2,148,416
Commercial lines................................... 8,287,291 8,172,604 5,130,823
Unsecured consumer lines........................... 2,242,270 1,397,380 429,993
----------- ----------- ----------
$13,321,085 $12,213,497 $7,709,232
----------- ----------- ----------
----------- ----------- ----------
Letters of credit.................................... $ 1,338,223 $ 2,007,445 $1,178,457
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest rates fixed at current market rates, fixed expiration
dates, and may require payment of a fee. Lines of credit generally have variable
interest rates. Such lines do not represent future cash requirements because it
is unlikely that all customers will draw upon their lines in full at any time.
Letters of credit are commitments issued to guarantee the performance of a
customer to a third party.
Loan commitments, lines, and letters of credit are made on the same terms,
including collateral, as outstanding loans.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment and the related depreciation is as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES 1994 1993 1992
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Land...................................... $ 534,438 $ 250,438 $ 251,338
Buildings and improvements................ 7-50 years 1,439,869 1,439,796 1,437,936
Rented buildings and improvements......... 10-50 years 280,243 195,243 196,143
Improvements in process................... 432,725 170,071 40,157
Furniture and equipment................... 5-40 years 1,720,106 1,716,297 1,626,445
---------- ---------- ----------
4,407,381 3,771,845 3,552,019
Accumulated depreciation.................. 2,005,284 1,826,771 1,780,314
---------- ---------- ----------
Net property and equipment................ $2,402,097 $1,945,074 $1,771,705
---------- ---------- ----------
---------- ---------- ----------
Depreciation expense...................... $ 203,173 $ 198,601 $ 178,695
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-11
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. DEPOSITS
Major classifications of interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Checking........................................ $ 12,561,448 $ 11,951,918 $ 11,299,825
Money market.................................... 26,201,993 28,100,362 31,795,849
Savings......................................... 41,576,459 40,069,759 36,003,130
Certificates of deposit, $100,000 or more....... 5,628,989 5,772,401 5,639,517
Other time deposits............................. 53,816,890 51,986,014 53,587,520
------------ ------------ ------------
$139,785,779 $137,880,454 $138,325,841
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Certificates of deposit of $100,000 or more mature as follows:
<TABLE>
<S> <C> <C> <C>
Variable rate immediately.............................. $ 303,167 $ 199,738 $ 186,205
Due in three months or less............................ 555,470 617,228 1,366,901
Due over three through twelve months................... 1,710,831 1,675,659 1,876,975
Due over twelve months to five years................... 3,059,521 3,279,776 2,209,436
---------- ---------- ----------
$5,628,989 $5,772,401 $5,639,517
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Interest on these deposits was $320,392, $303,854, and $389,282 for the
years ended December 31, 1994, 1993, and 1992, respectively.
7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal.............................................. $1,141,154 $1,142,848 $1,095,573
State................................................ 278,767 273,945 258,292
---------- ---------- ----------
1,419,921 1,416,793 1,353,865
Deferred............................................... (27,236) (14,103) (79,839)
---------- ---------- ----------
$1,392,685 $1,402,690 $1,274,026
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the deferred tax benefits are as follows:
<TABLE>
<S> <C> <C> <C>
Provision for loan losses.................................. $(12,787) $(125,280) $(117,938)
Deferred origination fees and costs........................ 4,790 98,533 41,491
Deferred compensation plan................................. (33,143) (3,412) (22,074)
Depreciation............................................... 3,559 1,787 6,595
Prepaid or accrued pension................................. 951 27,947 10,422
Discount accretion......................................... 9,394 (13,678) 1,665
-------- --------- ---------
$(27,236) $ (14,103) $ (79,839)
-------- --------- ---------
-------- --------- ---------
</TABLE>
F-12
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses............................... $ 521,204 $508,417 $383,137
Deferred origination fees and costs..................... 86,352 91,142 189,676
Deferred compensation plan.............................. 202,274 169,131 165,719
Unrealized loss on securities available for sale........ 734,757 -- --
Accrued pension liability............................... -- -- 8,858
---------- -------- --------
1,544,587 768,690 747,390
---------- -------- --------
Deferred tax liabilities
Depreciation............................................ 93,707 90,148 88,362
Discount accretion...................................... 15,908 6,514 20,192
Prepaid pension contribution............................ 20,040 19,089 --
---------- -------- --------
129,655 115,751 108,554
---------- -------- --------
Net deferred tax assets................................... $1,414,932 $652,939 $638,836
---------- -------- --------
---------- -------- --------
</TABLE>
The differences between the federal income tax rate of 34 percent and the
effective tax rate for Sparks are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................................ 34.0% 34.0% 34.0%
Increase (decrease) in income tax rate resulting from
Tax-exempt income...................................................... (3.2) (2.5) (2.1)
State income taxes, net of federal income tax benefit.................. 4.6 4.6 4.6
Nondeductible expenses................................................. 1.3 -- --
---- ---- ----
36.7% 36.1% 36.5%
---- ---- ----
---- ---- ----
</TABLE>
8. OTHER OPERATING EXPENSES
Other operating expenses include the following:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
FDIC assessment........................................ $ 360,146 $ 348,471 $ 340,371
Professional services.................................. 258,011 128,517 129,697
Abandonment of building expansion costs................ 212,864 -- --
Printing and supplies.................................. 109,127 133,120 106,249
ATM services........................................... 94,899 100,001 94,300
Marketing and advertising.............................. 88,315 75,081 49,748
Postage................................................ 74,614 86,050 92,045
Directors' fees and expenses........................... 70,170 86,730 60,019
Liability insurance.................................... 49,825 48,545 54,058
Telephone.............................................. 31,186 38,880 29,593
Bad check losses....................................... 5,154 2,675 94,167
Other.................................................. 230,941 249,074 235,693
---------- ---------- ----------
$1,585,252 $1,297,144 $1,285,940
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-13
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. LEASE COMMITMENTS
Sparks leases the Jacksonville office from a joint venture in which one of
the directors has an interest, under a ten-year lease expiring December 31,
2003. The lease provides for a ten-year renewal option at a cost to be
determined at the time of renewal. Sparks may cancel the lease, with penalty, at
any time by giving six months advance notice of its intention to cancel. Sparks
is liable for taxes and assessments above the base year amount in addition to
rent.
Sparks leases the Kingsville office under a ten-year lease expiring January
1, 2003. Sparks is liable for all real estate taxes in addition to rent.
Rent expense was $67,536 for 1994, $60,466 for 1993, and $56,532 for 1992.
Lease obligations will require payments as follows:
PERIOD MINIMUM RENTALS
- ------------------------------------------------------------ ---------------
1995........................................................ $ 68,215
1996........................................................ 68,893
1997........................................................ 69,600
1998........................................................ 70,307
1999........................................................ 71,043
Remaining years............................................. 258,263
---------------
$ 606,321
---------------
---------------
Sparks leases two buildings adjacent to its headquarters in Sparks, and
office space in Hunt Valley, to tenants under short-term agreements. Rent
revenue was $32,732 for 1994, $21,444 for 1993, and $11,879 for 1992.
10. PENSION PLANS
Sparks has a noncontributory defined benefit pension plan covering
substantially all of the employees. Benefits are based on the highest five-year
compensation in the last ten years of service. Sparks makes annual contributions
to the plan in the amounts sufficient to satisfy minimum funding standards.
Assets of the plan are held in trust and invested primarily in interest-bearing
deposits with Sparks and other financial institutions. Approximately nine
percent of the plan's assets are invested in listed equity securities.
F-14
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PENSION PLANS--(CONTINUED)
The following table sets forth the financial status of the plan:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated benefit obligation
Vested............................................ $ 663,901 $ 516,023 $ 630,473
Nonvested......................................... 108,228 85,512 93,037
----------- ----------- -----------
$ 772,129 $ 601,535 $ 723,510
----------- ----------- -----------
----------- ----------- -----------
Fair value of plan assets........................... $ 1,361,593 $ 1,162,756 $ 1,049,596
Projected benefit obligation........................ (1,700,124) (1,207,528) (1,233,697)
----------- ----------- -----------
Benefit obligation (in excess of) plan assets....... (338,531) (44,772) (184,101)
Unrecognized net gain............................... 347,905 47,904 109,200
Unamortized net obligation from transition.......... 42,516 47,240 51,964
----------- ----------- -----------
Prepaid (accrued) pension expense included in other
assets (liabilities).............................. $ 51,890 $ 50,372 $ (22,937)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Net pension expense includes the following:
<TABLE>
<S> <C> <C> <C>
Service cost................................................ $ 56,677 $102,613 $ 96,551
Interest cost............................................... 120,455 85,740 78,144
Actual return on assets..................................... (91,022) (53,287) (52,937)
Net asset gain (loss)....................................... 9,395 (31,945) (19,022)
Amortization of transition obligation....................... 4,724 4,724 4,724
-------- -------- --------
Net pension expense......................................... $100,229 $107,845 $107,460
-------- -------- --------
-------- -------- --------
</TABLE>
Assumptions used in the accounting for net pension expense were:
<TABLE>
<CAPTION>
1994 1993 1992
--- --- ---
<S> <C> <C> <C>
Discount rates.............................................................. 7.5% 8.0% 7.5%
Rate of increase in compensation levels..................................... 6.5 6.5 6.5
Long-term rate of return on assets.......................................... 7.5 8.0 8.0
</TABLE>
Employees with over one year of service may participate in a contributory
thrift plan that was amended in 1993 to qualify under Section 401(k) of the
Internal Revenue Code. Sparks' contributions to this plan, included in expenses,
were $65,712, $58,547, and $52,145 for 1994, 1993, and 1992, respectively.
Directors may contribute to a nonqualified deferred compensation plan.
Amounts deferred under this plan are included in current operating expenses, and
the accumulated deferrals are included in other liabilities. Interest thereon is
included in other interest expense.
F-15
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Sparks' financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks.................. $4,614,212 $4,614,212 $3,831,817 $3,831,817
Certificates of deposit.................. -- -- 521,863 521,863
Investment securities.................... 54,035,741 53,122,792 58,653,343 59,360,849
Variable rate loans...................... 82,776,064 82,776,064 74,893,478 74,893,478
Accrued interest receivable.............. 1,563,961 1,563,961 1,317,923 1,317,923
Financial liabilities
Noninterest-bearing deposits............. 23,733,755 23,733,755 22,014,577 22,014,577
Variable rate deposits................... 83,664,538 83,664,538 81,450,576 81,450,576
Federal funds purchased and securities
sold under repurchase agreements....... 5,558,104 5,558,104 1,190,707 1,190,707
Accrued interest payable................. 305,808 305,808 295,672 295,672
</TABLE>
The fair value of equity securities is determined by market quotations. The
fair value of state and municipal securities is estimated using the yield curve
as the basis for a pricing matrix. The fair values of other investment
securities are obtained from third-party pricing services.
It is not practicable to estimate the fair value of loans with fixed
maturities, deposit liabilities with fixed maturities, or outstanding credit
commitments. Sparks does not presently have available resources to estimate fair
values based on quoted prices or discounted cash flows for individual accounts.
Maturities and weighted-average interest rates on loans and deposits with fixed
maturities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- -------------------
AMOUNT RATE AMOUNT RATE
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Loans
Maturing within one year............................ $ 7,868,425 7.4% $ 5,013,053 9.1%
Maturing over one to five years..................... 11,487,593 7.8 10,191,876 8.2
Maturing over five years............................ 26,696,891 8.0 26,713,270 8.2
----------- -----------
$46,052,909 $41,918,199
----------- -----------
----------- -----------
Deposits
Maturing within one year............................ $30,741,253 4.8% $31,283,751 4.2%
Maturing over one to five years..................... 25,379,988 5.5 25,144,371 6.2
Maturing over five years............................ -- -- 1,757 5.2
----------- -----------
$56,121,241 $56,429,879
----------- -----------
----------- -----------
</TABLE>
F-16
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
The officers and directors of Sparks enter into loan transactions with
Sparks in the ordinary course of business. These loans were made on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable loans with unrelated borrowers, except a reduced rate of interest
is charged to nonexecutive officers. At December 31, 1994, 1993, and 1992, the
total amounts of loans outstanding to senior officers and directors were
$1,138,729, $896,818, and $850,207, respectively. During 1994, additions to
loans outstanding were $363,204 and repayments were $121,293.
13. BORROWINGS
Sparks has available lines of credit of $9,000,000 in overnight federal
funds. Outstanding borrowings were $2,200,000 and $575,000 at December 31, 1994
and 1993, respectively.
Sparks may borrow up to $11,000,000 under a line of credit with the Federal
Home Loan Bank. The line of credit is secured by a floating lien on Sparks'
residential mortgage loans. Sparks had no outstanding borrowings at December 31,
1994.
Securities are sold under repurchase agreements to provide cash management
services to commercial account customers. Sparks pays interest on these
overnight borrowings at a slight discount to the federal funds rate. Outstanding
balances were $3,358,104, $615,707, and $105,529 at December 31, 1994, 1993, and
1992, respectively.
14. PER SHARE DATA
Earnings per common share are determined by dividing net income by the
weighted average number of shares outstanding giving retroactive effect to stock
dividends declared. Weighted average shares were 771,234 for 1994, 759,905 for
1993, and 747,800 for 1992. Dividends per common share are restated giving
retroactive effect to stock dividends declared.
15. PROPOSED AFFILIATION
On December 15, 1994, the board of directors of Sparks entered into an
agreement and plan of affiliation and share exchange with Mercantile Bankshares
Corporation ("Mercshares"). Each share of the Bank's stock will be exchanged for
2 1/3 shares of Mercshares common stock. The transaction is subject to approval
of stockholders and regulatory authorities. Sparks' dividend reinvestment plan
has been suspended until the transaction is consummated.
16. REGULATORY MATTERS
The Federal Deposit Insurance Corporation has adopted risk-based capital
standards for banks. These standards require minimum ratios of capital to
risk-based assets of 4 percent for Tier 1 capital and 8 percent for total
capital. Tier 1 capital consists of stockholders' equity excluding the
unrealized net gains or losses, after applicable income taxes, on
available-for-sale investment securities. Total capital includes a limited
amount of the allowance for credit losses. In calculating risk-weighted assets,
specified risk percentages are applied to each category of asset and off-balance
sheet items.
F-17
<PAGE>
THE SPARKS STATE BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. REGULATORY MATTERS--(CONTINUED)
The Bank must also maintain a minimum capital leverage ratio of 3 to 5
percent of Tier 1 capital to average total assets. The standard is based on a
discretionary evaluation of the Bank's risk profile by the FDIC.
A bank is considered well capitalized if it has minimum Tier 1 and total
risk-based capital ratios of 6 percent and 10 percent, respectively, and a
minimum leverage ratio of 5 percent.
The Bank's capital ratios, capital balances, and risk-weighted assets at
December 31, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Risk-based ratios
Tier 1 capital............................................... 17.4% 18.6% 17.9%
Total risk-based capital..................................... 18.7 19.9 19.2
Leverage ratio................................................. 10.9 10.4 9.5
Capital balances
Tier 1....................................................... $20,937 $18,825 $16,550
Total........................................................ 22,444 20,098 17,706
Risk-weighted assets........................................... 120,090 101,125 92,268
</TABLE>
Banks are required to carry cash reserves of specified percentages of
deposit balances. The Bank's normal balances of cash on hand and on deposit with
other banks are sufficient to satisfy the reserve requirements.
This statement has not been reviewed, or confirmed for accuracy or
relevance, by the FDIC.
F-18
<PAGE>
THE SPARKS STATE BANK
BALANCE SHEETS
MARCH 31, 1995 (UNAUDITED) AND DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 3,492 $ 4,559
Federal funds sold............................................... 3,198 55
Investment securities
Held to maturity, at amortized cost............................ 19,587 21,747
Available for sale, at fair value.............................. 30,965 32,289
Loans............................................................ 130,812 128,785
Allowance for credit losses...................................... 1,997 2,003
----------- ------------
128,815 126,782
----------- ------------
Bank premises and equipment...................................... 2,254 2,264
Accrued interest receivable...................................... 1,540 1,561
Deferred income taxes............................................ 1,121 1,418
Other assets..................................................... 541 349
----------- ------------
$ 191,513 $191,024
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing............................................ $ 22,244 $ 23,734
Interest-bearing............................................... 141,883 139,785
----------- ------------
164,127 163,519
Federal funds purchased and securities sold under repurchase
agreements........................................................... 4,621 5,558
Accrued interest payable......................................... 357 306
Dividend payable................................................. 0 643
Other liabilities................................................ 1,542 1,225
----------- ------------
170,647 171,251
----------- ------------
Stockholders' equity
Common stock, par value $10 per share; authorized 1,000,000
shares; issued and outstanding 771,241 shares.................. 7,712 7,712
Surplus.......................................................... 7,815 7,815
Undivided profits................................................ 6,034 5,410
Unrealized losses on securities available for sale............... (695) (1,164)
----------- ------------
20,866 19,773
----------- ------------
$ 191,513 $191,024
----------- ------------
----------- ------------
</TABLE>
See Note to Unaudited Financial Statements.
F-19
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
------ ------
<S> <C> <C>
Interest revenue
Loans, including fees............................................... $2,971 $2,246
Investment securities............................................... 708 785
Deposits in banks................................................... 0 5
Federal funds sold.................................................. 6 6
------ ------
Total interest revenue.......................................... 3,685 3,042
------ ------
Interest expense
Deposits............................................................ 1,390 1,315
Other............................................................... 86 9
------ ------
Total interest expense.......................................... 1,476 1,324
------ ------
Net interest income............................................. 2,209 1,718
Provision for loan losses............................................. 0 33
------ ------
Net interest income after provision for loan losses............. 2,209 1,685
------ ------
Other operating revenue............................................... 183 156
------ ------
Other expenses
Salaries and benefits............................................... 668 648
Occupancy and equipment............................................. 133 136
Other operating..................................................... 373 317
------ ------
Total other expenses............................................ 1,174 1,101
------ ------
Income before income taxes............................................ 1,218 740
Applicable income taxes............................................... 431 254
------ ------
Net income............................................................ $ 787 $ 486
------ ------
------ ------
Earnings per common share............................................. $ 1.02 $ 0.63
</TABLE>
See Note to Unaudited Financial Statements.
F-20
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1995 1994
------- ------
<S> <C> <C>
Common stock
Balance, beginning of year............................................ $ 7,712 $6,333
Dividend reinvestment................................................. 0 94
------- ------
Balance, end of period................................................ 7,712 6,427
------- ------
------- ------
Surplus
Balance, beginning of year............................................ 7,815 7,549
Dividend reinvestment................................................. 0 266
------- ------
Balance, end of period................................................ 7,815 7,815
------- ------
------- ------
Undivided profits
Balance, beginning of year............................................ 5,410 4,943
Net income............................................................ 787 486
Cash distribution from fractional shares.............................. 0 (1)
Cash dividend declared................................................ (163) 0
------- ------
Balance, end of period 6,034 5,428
------- ------
------- ------
Unrealized gain (loss) on securities available for sale
Balance, beginning of year............................................ (1,164) 196
Change in net unrealized holding gains (losses) on securities
available for sale.................................................. 469 (386)
------- ------
Balance, end of period................................................ $ (695) $ (190)
------- ------
------- ------
</TABLE>
See Note to Unaudited Financial Statements.
F-21
<PAGE>
THE SPARKS STATE BANK
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received................................................ $ 3,699 $ 2,993
Fees and commissions received.................................... 183 156
Interest paid.................................................... (1,425) (1,328)
Cash paid to suppliers and employees............................. (1,193) (1,177)
Income taxes paid................................................ (230) (73)
----------- -----------
1,034 571
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities and
deposits
Held to maturity............................................... 2,155 3,110
Available for sale............................................. 2,098 550
Purchase of investment securities and deposits
Held to maturity............................................... 0 (745)
Available for sale............................................. 0 (3,657)
Loans made, net of principal repayments.......................... (2,029) (814)
Cash paid for bank premises and equipment........................ (48) (43)
----------- -----------
2,176 (1,599)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in customer deposits.................................. 608 2,432
Net change in federal funds purchased and securities sold under
repurchase agreements.............................................. (937) (517)
Dividends paid................................................... (805) (529)
Dividends reinvested............................................. 0 360
----------- -----------
(1,134) 1,746
----------- -----------
Net increase (decrease) in cash and cash equivalents............... 2,076 718
Cash and cash equivalents, beginning of year....................... 4,614 3,832
----------- -----------
Cash and cash equivalents, end of period........................... $ 6,690 $ 4,550
----------- -----------
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income....................................................... $ 787 $ 486
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................. 52 54
Deferred income taxes.......................................... (1) (1)
Provision for loan losses...................................... 0 33
Amortization of premiums and accretion of discounts, net....... (3) 20
Decrease (increase) in accrued interest receivable and other
assets............................................................. (171) (245)
Increase (decrease) in
Deferred loan origination fees............................... (4) (32)
Accrued interest and other liabilities....................... 374 256
----------- -----------
$ 1,034 $ 571
----------- -----------
----------- -----------
</TABLE>
See Note to Unaudited Financial Statements.
F-22
<PAGE>
THE SPARKS STATE BANK
NOTE TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form F-4 of the Federal
Deposit Insurance Corporation. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Sparks' management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been made. Operating results of the three month periods
ended March 31, 1995 and 1994, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995 or for future
periods. For further information, refer to the financial statements and
footnotes thereto included in Sparks' Form F-2 for the fiscal period ended
December 31, 1994.
F-23
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF AFFILIATION AND SHARE EXCHANGE
BETWEEN
MERCANTILE BANKSHARES CORPORATION
AND
THE SPARKS STATE BANK
A-1
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION AND SHARE EXCHANGE
BETWEEN MERCANTILE BANKSHARES CORPORATION
AND THE SPARKS STATE BANK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
- --------- -------------------------------------------------------------------------- ----
<C> <S> <C>
1.1 The Affiliation........................................................... A-5
1.2 Exchange Ratio............................................................ A-5
1.3 Commercially Reasonable Efforts Requirement............................... A-5
1.4 Representations of the Corporation; Antidilution.......................... A-5
</TABLE>
(a) Representations
<TABLE>
<S> <C> <C>
(1) Bank Holding Company Status...................................... A-5
(2) Federal Reserve Application...................................... A-5
(3) Good Standing.................................................... A-5
(4) Capitalization................................................... A-5
(5) SEC Registration of Common Stock................................. A-6
(6) Financial Statements............................................. A-6
(7) Material Adverse Changes......................................... A-6
(8) No Conflicting Agreements........................................ A-6
(9) Validly Issued Stock............................................. A-6
(10) Due Authorization................................................ A-7
</TABLE>
<TABLE>
<S> <C> <C>
(b) Antidilution.......................................................... A-7
</TABLE>
<TABLE>
<C> <S> <C>
1.5 Bank Representations...................................................... A-7
</TABLE>
<TABLE>
<S> <C> <C>
(a) Corporate Status...................................................... A-7
(b) Capitalization........................................................ A-7
(c) Blue Sky Information Accuracy......................................... A-7
(d) Number of Stockholders................................................ A-7
(e) Unpaid Dividends...................................................... A-8
(f) Compliance with Laws and Regulations.................................. A-8
(g) Employment Agreements, Leases, Material Contracts, List of Securities,
Community Reinvestment Act Statement, Financial Reports, Material
Adverse Changes, Losses and Liabilities............................. A-8
(h) Accuracy of Financial Statements...................................... A-8
(i) Stock Issuance, Distributions since September 30, 1994................ A-9
(j) Litigation............................................................ A-9
(k) Tax Returns and Liability............................................. A-9
(l) Brokers............................................................... A-9
(m) Employee Benefit Plans................................................ A-9
(n) Title to Assets....................................................... A-11
(o) No Conflicting Agreements............................................. A-11
(p) Personal Property..................................................... A-11
(q) Zoning Laws, Etc...................................................... A-11
(r) Title to Offices...................................................... A-11
(s) Conditions of Buildings............................................... A-12
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
---- ---------------------------------------------------------------------- ----
<S> <C> <C>
(t) Environmental Matters................................................. A-12
</TABLE>
<TABLE>
<C> <S> <C>
1.6 Access to Records and Information; Operation of Business.................. A-12
</TABLE>
<TABLE>
<S> <C> <C>
(a) Access................................................................ A-12
(b) Operations............................................................ A-12
</TABLE>
<TABLE>
<C> <S> <C>
1.7 Audits; Income and Capital Account Requirements, Certified Financial
Statements Accuracy of Representations, Loan Portfolio, Deposits and
Other Liabilities and Expenses; Securities List Accuracy................ A-13
1.8 Regulatory Approvals...................................................... A-14
1.9 Commercially Reasonable Efforts Regarding Pooling, Tax Free Reorganization
and Proxy Statement....................................................... A-14
1.10 Exclusive Dealing......................................................... A-14
1.11 Conditions to Corporation's Obligation.................................... A-15
</TABLE>
<TABLE>
<S> <C> <C>
(a) Federal Reserve Approval.............................................. A-15
(b) Other Regulatory Approvals............................................ A-15
(c) SEC Registration Statement and Proxy Clearance........................ A-15
(d) Agreements With Respect to Pooling and SEC Rule 145................... A-15
(e) Pooling Letter........................................................ A-15
(f) Consents.............................................................. A-15
(g) Legal Proceedings and Impediments..................................... A-15
(h) Dividends............................................................. A-16
(i) Stock Issuance, Evidences of Indebtedness, Distributions.............. A-16
(j) Compensation; Employee Benefit Plans.................................. A-16
(k) Sale of Securities.................................................... A-16
(l) Other Approvals....................................................... A-16
(m) Limit on Dissenters................................................... A-16
(n) Office Openings and Closings.......................................... A-17
(o) Representation Update and Certificate re Representations and
Conditions............................................................ A-17
</TABLE>
<TABLE>
<C> <S> <C>
1.12 Conditions to the Bank's Obligations...................................... A-17
</TABLE>
<TABLE>
<S> <C> <C>
(a) Federal Reserve Approval.............................................. A-17
(b) Other Regulatory Approvals............................................ A-17
(c) SEC Registration Statement and Proxy Clearance........................ A-17
(d) Tax Opinion........................................................... A-17
(e) Fairness Opinion...................................................... A-17
(f) Representation Update and Certificate re Representations and
Conditions............................................................ A-17
</TABLE>
<TABLE>
<C> <S> <C>
1.13 Bank Directors............................................................ A-18
1.14 Confidentiality........................................................... A-18
1.15 Employee Benefit Matters.................................................. A-18
2.1 Effective Date............................................................ A-19
2.2 Corporation's Obligation in Accomplishing Share Exchange.................. A-19
2.3 Bank's Obligations in Accomplishing Share Exchange........................ A-19
2.4 Stockholder Approval...................................................... A-20
2.5 Terms of Share Exchange................................................... A-20
2.6 Cancellation of Certificates.............................................. A-20
2.7 Dissenters' Rights........................................................ A-21
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
- --------- -------------------------------------------------------------------------- ----
<C> <S> <C>
2.8 Dissenters' Escrow Agent.................................................. A-21
2.9 Procedural Matters........................................................ A-21
3.1 Termination for Regulatory Reasons........................................ A-21
3.2 Termination by Consent or Due to Passage of Time.......................... A-22
3.3 Termination with Respect to Acquisition Proposal.......................... A-22
3.4 Amendment................................................................. A-22
3.5 Expenses; Limited Liability............................................... A-22
3.6 Termination If Support Agreement Not Delivered............................ A-22
3.7 Notices................................................................... A-23
3.8 Counterparts.............................................................. A-23
3.9 Binding Effect; No Third Party Rights..................................... A-23
3.10 Governing Law............................................................. A-24
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION AND SHARE EXCHANGE
THIS AGREEMENT AND PLAN OF AFFILIATION AND SHARE EXCHANGE (the "Agreement"),
made this 15th day of December, 1994, by and between Mercantile Bankshares
Corporation, a body corporate of the State of Maryland (the "Corporation"), and
The Sparks State Bank, a Maryland commercial bank (the "Bank").
WITNESSETH, That for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable consideration,
and in the expectation of the delivery of a Support Agreement, to be dated and
delivered as of the first business day after the date hereof, between the
Corporation and certain stockholders of the Bank, the parties hereto agree as
follows:
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, as a
wholly-owned subsidiary thereof (the "Affiliation"), pursuant to the procedures
described in Article II of this Agreement (the "Share Exchange").
1.2. Exchange Ratio. The Affiliation shall be accomplished on the basis of
two and one-third shares of the Corporation's Common Stock, $2.00 par value per
share (the'Common Stock"), for each share of common stock of the Bank after
giving effect to the Bank's twenty percent (20%) stock dividend declared on
November 9, 1994 and payable on December 31, 1994 to stockholders of record on
November 30, 1994 (the "Stock Dividend"). Fractional shares shall be treated as
provided elsewhere herein. The Exchange Ratio may be adjusted pursuant to
Section 1.4(b).
1.3. Commercially Reasonable Efforts Requirement. The Corporation and the
Bank shall each use all commercially reasonable efforts to consummate the
transactions contemplated in this Agreement.
1.4. Representations of the Corporation; Antidilution. (a) The obligations
of the Bank under this Agreement are based upon and subject to the correctness
and accuracy of the following representations of the Corporation:
(1) The Corporation is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHCA").
(2) Pursuant to Section 3(a)(3) of the BHCA, the Corporation will, as
promptly as practicable, file an application with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") for approval of the
Affiliation and prosecute such application in good faith and with diligence.
(3) 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.
(4) As of September 30, 1994, the authorized capital stock of the
Corporation consisted of 2,000,000 shares of preferred stock, no par value
("Mercantile Preferred"), and 67,000,000 shares of Common Stock. At
September 30, 1994, no shares of Mercantile Preferred were outstanding,
45,885,310 shares of Common Stock were outstanding; and all of the
outstanding shares of Common Stock were validly issued, fully paid and
nonassessable. Under the Corporation's Shareholder Protection Rights Plan
adopted September 12, 1989, and as amended, each share of
A-5
<PAGE>
issued and outstanding Common Stock, including the Common Stock to be issued
hereunder, carries a right to purchase additional securities of the
Corporation under certain circumstances.
(5) The Corporation with the assistance and cooperation of the Bank and
its representatives will prepare and file with the Securities and Exchange
Commission ("SEC") as soon as practicable, a Registration Statement
("Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock issuable upon
consummation of the Share Exchange and shall use all commercially reasonable
efforts to have the Registration Statement declared effective by the SEC.
The Corporation and the Bank may each rely upon all information provided to
it by the other party in this connection and shall not be liable for any
untrue statement of a material fact or any omission to state a material fact
in the Registration Statement, or in the Proxy Statement which is prepared
as a part thereof, if such statement is made in reliance upon any
information provided to it by the other party or by any of its officers or
authorized representatives. The Corporation, relying on certain Blue Sky
information provided by the Bank, shall promptly take all such actions, with
the assistance and cooperation of the Bank and its authorized
representatives, as may be necessary or appropriate in order to comply with
all applicable securities laws of any state having jurisdiction over the
transactions contemplated by this Agreement.
(6) The Corporation has delivered to the Bank (i) copies of its
consolidated financial statements for the year ended December 31, 1993
containing the following consolidated financial statements of the
Corporation (collectively, 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 certified public accountants, and (ii) copies of its
unaudited consolidated financial statements for the nine months ended
September 30, 1994 containing a consolidated balance sheet as of September
30, 1994 and statements of consolidated income, consolidated cash flows and
consolidated changes in stockholders' equity for the nine months then ended
(the "Corporation's September 30, 1994 Financial Statements"). All of the
Corporation's Financial Statements and the Corporation's September 30, 1994
Financial Statements are true and complete in all material respects, have
been prepared in accordance with generally accepted accounting principles
consistently followed throughout the periods covered thereby, and present
fairly the information presented therein.
(7) Since September 30, 1994, 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. There is
no material liability, actual or contingent, known or anticipated, of a
character that should be disclosed in the Corporation's Financial Statements
or in the Corporation's September 30, 1994 Financial Statements and that is
not disclosed therein, other than liabilities arising since the respective
dates thereof in the ordinary course of business, which are not materially
adverse.
(8) 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 the Corporation's Charter or Bylaws, or any 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.
(9) The Common Stock deliverable pursuant to this Agreement will be,
prior to its issuance, duly authorized for issuance and will, when issued
and delivered in accordance with this Agreement, be duly and validly issued,
fully paid and nonassessable.
A-6
<PAGE>
(10) The execution, delivery, and performance of this Agreement by the
Corporation have been duly authorized by its Board of Directors and require
no action on the part of the stockholders of the Corporation. This Agreement
constitutes a valid and binding obligation of the Corporation, enforceable
against the Corporation in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally or by general equitable
principles.
(b) 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 the Bank will be exchanged
in the Share Exchange for the same number of shares of Common Stock (whether
such number is greater or less than the number otherwise provided for herein)
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 exchange ratio set forth in
Section 1.2 hereof shall be adjusted accordingly. The Bank hereby agrees to any
revision in the exchange ratio pursuant to the foregoing sentence.
1.5. Representations of the Bank. The obligations of the Corporation under
this Agreement are based upon and subject to the correctness and accuracy of the
following representations of the Bank:
(a) The Bank is a Maryland commercial bank, without trust powers,
legally formed, validly existing and in good standing under the laws of
Maryland, the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC"), and is not a member of the Federal Reserve System.
The Bank has the corporate power and authority to carry on its business as
it is now conducted. The Bank has five offices, with its main office in
Sparks, Maryland and branch offices located in each of Jacksonville,
Kingsville, Hereford, and Maryland Line, Maryland. The offices in
Jacksonville and Kingsville, Maryland are leased by the Bank, and the other
offices are owned by the Bank. No application for any additional office is
pending. The Bank has no subsidiaries or affiliated companies and is not a
general partner or coventurer in any joint venture or other business
enterprise.
(b) The authorized capital stock of the Bank consists of 1,000,000
shares of a single class of common stock, par value of $10.00 per share, of
which 642,750.48 shares are issued and outstanding as of the date of this
Agreement and, pursuant to the Stock Dividend, up to but not more than
771,300.57 shares will be issued and outstanding as of December 31, 1994.
All of such issued and outstanding shares are, and all of the shares to be
issued pursuant to the Stock Dividend will be, validly issued, fully paid
and nonassessable. Except for the Stock Dividend, the Bank has no 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 of shares of the
Bank's capital stock or any security representing the right to purchase or
receive any capital stock of the Bank. The Bank's Dividend Reinvestment and
Stock Purchase Plan has been suspended for so long as this Agreement is in
effect.
(c) All Blue Sky information provided to the Corporation for purposes of
the obligation contained in Section 1.4(a)(5) shall be true and correct in
all material respects.
(d) The Bank has more than 500 stockholders of record and its common
stock is registered under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Except as disclosed heretofore in
writing by the Bank to the Corporation, as of the date of this
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Agreement, to the knowledge of the Bank, based upon a list of affiliates and
nominee names provided by the Corporation, neither the Corporation nor any
of its affiliates or nominees is a record or beneficial owner of any shares
of the Bank's outstanding capital stock. The Bank has filed with the FDIC
all registration statements and reports required by the Exchange Act and
applicable rules and regulations of the FDIC 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 statement therein not misleading.
(e) At the date of this Agreement, there are no declared and unpaid
dividends or distributions on, or with respect to, the shares of common
stock of the Bank except for the Stock Dividend and a cash dividend of $1.00
per share (paid only on shares outstanding prior to the Stock Dividend)
declared on November 9, 1994 and payable on January 3, 1995 to stockholders
of record as of November 30, 1994 (the "1994 Cash Dividend"). The 1994 Cash
Dividend is not subject to the Bank's Dividend Reinvestment and Stock
Purchase Plan.
(f) The Bank has complied in all material respects with all laws and
regulations applicable to the Bank, its properties and operations and all
valid orders of regulatory authorities having jurisdiction over the Bank and
has received no notice of any asserted violations of the same.
(g) The Bank has previously furnished to the Corporation copies of its
Charter and Bylaws, including all amendments thereto, copies of all written
agreements or understandings, and written memoranda of all oral agreements
or understandings, if any, between the Bank and each present or former
director, officer and employee of the Bank relating to his compensation,
employment or severance, copies of all leases, mortgages and agreements with
respect to its offices, copies or descriptions of all other material
contracts and leases, a list of all securities held by the Bank on November
30, 1994, a copy of the Bank's Community Reinvestment Act Statement,
(together with all related documents required to be made available for
public inspection pursuant to 12 C.F.R. 345.5(a)), copies of the Bank's
year-end reports of condition and year-end reports of income filed with the
FDIC for all years subsequent to 1988, copies of all interim reports of
condition and income filed with the FDIC in 1994 (the Bank's September 30,
1994 report of condition and income being hereinafter referred to as the
"Bank's September 30, 1994 call reports"), copies of the Bank's audited
financial statements for the years ended December 31, 1989, 1990, 1991, 1992
and 1993, together with the notes thereto, certified by Rowles & Company,
independent certified public accountants (the said financial statements for
the year ended December 31, 1993 being hereinafter referred to as the
"Bank's December 31, 1993 Financial Statements"), copies of the Bank's
unaudited financial statements for the nine months ended September 30, 1994
(the Bank's "September 30, 1994 Financial Statements"), a copy of the most
recent management letter rendered by the Bank's independent certified public
accountants, copies of the Bank's Federal and Maryland income and franchise
tax returns for the years 1991, 1992, and 1993, a copy of the Bank's initial
Form F-1 (with exhibits) filed with the FDIC on April 26, 1994 and any
amendments thereto, and a copy of all subsequent filings by the Bank with
the FDIC pursuant to the Exchange Act.. Since September 30, 1994, there has
been no material adverse change in the balance sheet, income statement,
financial position, results of operation, or business of the Bank. No
material loss is presently realizable or anticipated, with respect to any
material asset included in the Bank's December 31, 1993 Financial Statements
or the Bank's September 30, 1994 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
the Bank's December 31, 1993 Financial Statements or the Bank's September
30, 1994 Financial Statements and that is not disclosed therein, other than
liabilities arising since the respective dates thereof in the ordinary
course of business, which are not materially adverse.
(h) All of the financial statements previously provided to the
Corporation pursuant to subparagraph (g) of this Section 1.5 are true and
complete in all material respects, have been
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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 stockholders'
equity) of the Bank at the close of business at the dates thereof and for
the periods covered thereby.
(i) Except for the Stock Dividend and the 1994 Cash Dividend, since
September 30, 1994, the Bank has not authorized or issued any additional
shares of capital 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 in the
normal course of business) or authorized or made payment or distribution of
any of its assets to its stockholders by way of dividends or otherwise or,
except for this Agreement, entered into any agreement or commitment of any
character with respect to any of the foregoing.
(j) Except as previously disclosed in writing by the Bank to the
Corporation, there is no litigation or regulatory or other proceeding
pending against or threatened against the Bank and the Bank is not subject
to any order or decree of any court or regulatory agency or any formal or
informal agreement or memorandum of understanding with any regulatory
agency.
(k) The Bank has filed with the appropriate governmental agencies all
tax returns required to be filed and has paid all taxes shown to be due on
such returns. The Bank does not have any material liability for taxes except
as set forth and provided for in the Bank's December 31, 1993 Financial
Statements and September 30, 1994 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 the Bank's December 31, 1993 Financial
Statements and September 30, 1994 Financial Statements. The Bank is not
aware of any currently pending or threatened investigations or proceedings
concerning its tax returns by any governmental agency. The Bank's federal
and Maryland tax returns have not been audited in recent years and,
therefore, all open years remain subject to audit.
(l) There is no finder or broker acting, or who acted, for the Bank, or,
to the knowledge of the directors of the Bank, for any stockholder of the
Bank, in connection with the transactions contemplated by this Agreement,
except that the Bank has retained Berwind Financial Group, Inc. as its
financial advisor pursuant to a retainer agreement, a copy of which has been
provided to the Corporation.
(m) Except as set forth in a schedule previously provided by the Bank
(the " Benefit Plan Schedule"), the Bank does not sponsor or maintain and is
not 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, as amended ("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 appreciation right, stock purchase or restricted
stock plan, severance or "golden parachute" arrangement, consulting
agreement, incentive plan, or any other compensation, perquisite, 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, officers
or directors of the Bank or the beneficiaries of such persons (such plans,
programs and arrangements set forth in such Benefit Plan Schedule,
collectively, the "Employee Plans").
(1) Except as disclosed on the Benefit Plan Schedule, each Employee
Plan and any related funding arrangement is in compliance in all material
respects with all applicable requirements of ERISA, the Internal Revenue
Code of 1986, as amended (the "Code"), and other applicable law, and each
Employee Plan has been administered in all material respects in
accordance with its written terms to the extent consistent with such
requirements of law; all
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benefits due and payable under any Employee Plan have been paid in
accordance with the terms of such Employee Plan; the Bank has timely made
(and at the Effective Date will have timely made) all contributions
required to be made to any Employee Plan; except for claims for benefits
in the ordinary course of plan administration, there is no litigation or
other legal proceeding pending or threatened against or with respect to
any Employee Plan or, to the knowledge of the Bank, its fiduciaries and,
to the knowledge of the Bank, no facts exist which could give rise to
such proceedings or litigation; 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; no nonexempt "prohibited transaction" (as defined in Section
4975 of the Code or Section 406 of ERISA) has occurred or will occur
prior to the Effective Date with respect to any Employee Plan subject to
such rules that could reasonably be expected to have a material adverse
effect on such Employer Plan, any parties in interest or fiduciaries; no
material excise taxes are payable or will become payable prior to the
Effective Date with respect to any Employee Plan; except as set forth on
the Benefit Plan Schedule, the Bank is not 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) The Bank has previously delivered to the Corporation complete
copies of: each Employee Plan; all related summary plan descriptions; 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; and 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 the Bank which
are intended to be qualified under Section 401(a) of the Code are a
defined benefit plan (the "Pension Plan") and a profit sharing plan with
a cash or deferred arrangement (collectively, the "Qualified Plans");
each Qualified Plan has received a favorable determination letter from
the Internal Revenue Service with respect to its tax-qualified status and
the Bank has delivered to the Corporation complete copies of all such
determination letters and all material correspondence relating to the
applications therefor; to the knowledge of the Bank, 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; with respect to each
Qualified Plan, the Bank will have timely taken all actions necessary
through the Effective Date to amend such Qualified Plan to comply with
the Tax Reform Act of 1986, the Unemployment Compensation Amendments of
1992, the 1993 Omnibus Budget Reconciliation Act, and any other
applicable legislation (including any regulations issued thereunder), and
will have filed with the Internal Revenue Service an application for a
determination letter regarding such amendments on or before the
expiration of the applicable remedial amendment period provided under
Section 401(b) of the Code.
(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; 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 the Bank to provide security to the Pension Plan under
Section 401(a)(29) of the Code; as of the last valuation date, 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
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methods, tables and assumptions used for minimum funding purposes, and
second on those actuarial methods, tables and assumptions used for
calculating termination liability; as of the last valuation date for such
Pension Plan, the present value of the accumulated benefit obligations
(determined on the basis of reasonable assumptions employed by its
independent actuary for such Pension Plan) did not exceed the fair market
value of the assets of such Pension Plan; since the last valuation date
for the Pension Plan, there has been no amendment or change to such
Pension Plan, nor will there be any such amendment or change to the
Pension Plan prior to the Effective Date, that would increase the amount
of benefits thereunder and there has been no event or occurrence, nor
will there be any such event or occurrence prior to the Effective Date,
that would cause the accumulated benefit obligations or accrued benefits
to exceed the fair market value of the assets; and 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) The Bank does not have any obligation, and has not made any
representation, in connection with any medical, death or other welfare
benefits for its employees after they retire, except to the extent
required under the group health plan continuation requirements of Section
601 of ERISA.
(n) The Bank has good and marketable title to all of its material
property and assets, including those reflected on the Bank's September 30,
1994 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 1.5(r) below with respect to
certain real estate and except for securities pledged to secure government
deposits or that are the subject of repurchase transactions in the ordinary
course of business).
(o) The execution, delivery and performance of this Agreement have been
duly authorized by the Bank's Board of Directors and, except for stockholder
approval, require no further corporate action. The Board of Directors of the
Bank has taken all action necessary or advisable to render the provisions of
Sections 3-601 through 3-604 of the Maryland General Corporation Law
("MGCL") and Sections 3-701 through 3-709 of the MGCL inapplicable to
transactions with the Corporation and its affiliates and associates. Neither
the execution and delivery of this Agreement nor the carrying out of the
transactions contemplated hereunder will result in any violation,
termination, modification of, or be in conflict with the Charter or Bylaws
of the Bank, or the terms of any material contract or other instrument to
which the Bank is a party, or of any judgment, decree, order or regulatory
agreement applicable to the Bank, or result in the creation of any material
lien, charge, or encumbrance upon any of the properties or assets of the
Bank. No consent to this Agreement by any private party is required under
any contract, lease, mortgage or other instrument to which the Bank is a
party. This Agreement constitutes a valid and binding obligation of the
Bank, enforceable against the Bank in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally or by general
equitable principles.
(p) The tangible personal property of the Bank is in good operating
condition and repair, subject to ordinary wear and tear.
(q) Except as previously disclosed in writing by the Bank to the
Corporation, there is no material violation of any zoning, building, fire or
other regulatory laws, statutes, ordinances or regulations relating to the
Bank's offices or other real property; no condemnation proceeding exists or,
to the knowledge of the Bank, is threatened that would preclude or impair
the use of the Bank's offices as presently being used in the conduct of its
business.
(r) The Bank has good and merchantable fee simple title to the real
estate for the offices owned by the Bank, for the three parcels owned by the
Bank adjacent to its main office property,
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and for the property owned by the Bank in Hunt Valley near the intersection
of Shawan Rd. and York Rd., free and clear of liens and encumbrances of
every kind and nature except use, occupancy and similar restrictions of
public record that are generally applicable to properties in the immediate
neighborhood or subdivision in which the real property is located, easements
and encumbrances that are of record or 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.
The leases for Bank offices located in Jacksonville and Kingsville, Maryland
are valid and in full force and effect; neither the Bank nor, to the
knowledge of the Bank, either of its lessors has breached any provision of,
or is in default in any respect under the terms of either such lease. The
lease from the Bank to the U.S. Post Office for a parcel adjacent to the
Bank's main office is valid and in full force and effect, no provision
thereof having in any respect been breached or being in default by the Bank,
or to the Bank's knowledge, any other party thereto.
(s) Except as previously disclosed in writing by the Bank to the
Corporation, all electrical, plumbing, heating, air conditioning and other
mechanical systems and related equipment in the Bank's offices are in good
working order, subject to ordinary wear and tear. The roofs of the office
buildings are waterproof and their basements, if any, are not subject to
water seepage.
(t) (1) to the Bank's knowledge (i) all real estate (including, without
limitation, offices and foreclosed properties) owned by the Bank (the "Real
Estate") is in compliance with all environmental laws and regulations, (ii)
there are no underground tanks on the Real Estate other than two heating oil
tanks located on the main office property and one heating oil tank located
on the Maryland Line property and (iii) there has been no release of
hazardous substances or petroleum products on the Real Estate.
(2) to the Bank's knowledge (i) all property in which the Bank holds a
security interest is in compliance with applicable environmental laws and
regulations, and (ii) there has been no release of hazardous substances or
petroleum products on any such property.
1.6. Access to Records and Information; Operation of Business. (a) From the
date of this Agreement until the Effective Date, as hereinafter defined, the
Bank will afford the Corporation, its officers and other authorized
representatives, such access to all books, accounts, records, bank examination
reports (subject to any permission from regulatory agencies as may be required),
tax returns, leases, contracts and documents of the Bank and furnish to the
Corporation such information with respect to 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 1.7 hereof, to obtain all
required approvals of the Affiliation by the Federal Reserve, the Maryland Bank
Commissioner (the "Bank Commissioner"), the Virginia State Corporation
Commission, 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, the FDIC or other
authorities, and to meet any of the other conditions set forth in this
Agreement, and further will fully cooperate with the Corporation in satisfying
the conditions set forth in this Agreement.
(b) Unless the Corporation shall otherwise consent in writing, from the date
of this Agreement until the Effective Date, the Bank will:
(1) preserve and keep in full force and effect its corporate existence;
(2) operate its business only in the usual, regular and ordinary manner
and consistent with past operations; follow its current lending practices
with regard to the setting of rates, credit standards and collection
procedures; preserve its present business organization intact; make no
material increase in levels of staffing; make no material changes in duties
or responsibilities of senior management; make no changes in or appointments
of senior management; and use all
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commercially reasonable efforts to preserve its present relationships with
persons having business dealings with it;
(3) maintain its 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 its business without
material default;
(4) not enter into any material agreement or incur any material
obligation;
(5) not make or commit to make any capital expenditures aggregating in
excess of $50,000;
(6) not pledge, sell, lease, transfer, dispose or otherwise encumber any
of its property or assets other than in the ordinary course of business;
(7) except for the Stock Dividend, not issue any shares of its capital
stock, any securities convertible into or exchangeable for its 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;
(8) not amend its Charter or Bylaws;
(9) except as provided in Section 1.10, not provide for the
consolidation with or merger of the Bank or a share exchange or any other
reorganization involving Bank capital stock with or into another corporation
or the liquidation or dissolution of the Bank;
(10) not create any subsidiary, affiliate or other related business
entity; and
(11) 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 except as provided in Section 1.10, or cause the Affiliation not
to qualify for pooling-of-interests accounting treatment or as a tax-free
reorganization under Section 368(a)(1)(B) of the Code.
1.7. Audits, Income and Capital Account Requirements, Etc. Immediately upon
the execution of this Agreement, the Bank 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 the Bank for the
calendar years ended December 31, 1991, 1992 and 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 opinion of the Corporation, (1) that
the Bank's net income, determined in accordance with generally accepted
accounting principles, consistently applied, for the calendar year ended
December 31, 1993 was less than $2,484,000, or for the nine month period ending
September 30, 1994 was less than $1,688,000, or for the year ending December 31,
1994 is less than $2,350,000, or for the three months ending March 31, 1995 is
less than $587,500, or if the Effective Date is after June 30, 1995, for the six
months ending June 30, 1995 is less than $1,175,000, or if the Effective Date is
after September 30, 1995, for the nine months ending September 30, 1995 is less
than $1,762,500, or (2) that the stockholders' equity of the Bank, determined in
accordance with generally accepted accounting principles, consistently applied,
at December 31, 1993 aggregated less than $18,800,000, or at September 30, 1994
aggregated less than $20,872,000, or at December 31, 1994 aggregates less than
$20,891,000, or at March 31, 1995 aggregates less than $21,317,000, or if the
Effective Date is after June 30, 1995, at June 30, 1995 aggregates less than
$21,744,000, or if the Effective Date is after September 30, 1995, at September
30, 1995 aggregates less than $21,171,000; provided, however, that the foregoing
net income and stockholders' equity figures, as the case may be, shall be
determined after accrual of the dividends permitted in Section
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1.11(h) and shall not take into account, as either additions or subtractions,
the impact of (i) FAS 115 or (ii) reasonable expenses of the transaction
contemplated by this Agreement, or (3) that any inability of independent public
accountants to certify financial statements of 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 the
Bank or for the Corporation and its consolidated subsidiaries, or (4) that the
representations contained in Section 1.5 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 is materially different from the nature or composition
of the Bank's loan portfolio as reflected in the Bank's September 30, 1994 call
reports, 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 the Bank 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
September 30, 1994 call reports, or (8) that the Bank's accrued expenses or
other liabilities are different in nature from those associated with the normal
operation of a commercial bank, or (9) that the list of its securities supplied
by the Bank to the Corporation pursuant to Section 1.5(g) hereof is inaccurate,
as of its date, in any material respect, then the Corporation shall have the
right by written notice to the Bank 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 3.5 with respect to expenses.
1.8 Regulatory Approvals. When requested by the Corporation, and through
counsel for the Corporation, the Bank will cooperate with the Corporation and
use all commercially reasonable efforts to obtain the approval of the
Affiliation by all appropriate State and Federal regulatory agencies.
1.9 Commercially Reasonable Efforts Regarding Pooling, Tax-Free
Reorganization and Proxy Statement. The Bank agrees to use all commercially
reasonable efforts to (i) cause the Share Exchange to qualify as a tax-free
reorganization under Section 368(a)(1)(B) 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
included in the Registration Statement to be delivered to the Bank's
stockholders in connection with the Share Exchange (the "Proxy Statement").
1.10 Exclusive Dealing. The Board of Directors of the Bank 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 the Bank, 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 the Bank has, at the Bank's expense,
received the written opinion of Berwind Financial Group, Inc., its financial
advisor, that the consideration to be received in the Affiliation is fair to the
stockholders of the Bank 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 the Bank nor any of
its officers, directors, employees, agents or representatives (including,
without limitation, investment bankers) shall, directly or indirectly: (i)
encourage, solicit or initiate the submission of any Acquisition Proposal, as
hereinafter defined, 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 the
Bank's 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 the Bank shall conclude, based on a written opinion of counsel,
which may be based with respect to financial matters on the written opinion of
the Bank's financial advisor, that its
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fiduciary obligations require consideration of such Acquisition Proposal because
such Acquisition Proposal may be in the best interest of the Bank's stockholders
and is more favorable to the Bank's 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 the Bank, (B) sale, lease or other disposition directly or indirectly
by merger, consolidation, share exchange or otherwise of assets of the Bank
representing 10% or more of the consolidated assets of the Bank, (C) issue, sale
or other disposition (including by way of merger, consolidation, share exchange
or any similar transactions) of securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 10% or
more of the voting power of 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 Bank's outstanding common stock. The Bank shall promptly advise the
Corporation of, and communicate to the Corporation the terms of, any such
inquiry or proposal addressed to the Bank or of which the Bank, or its officers,
directors, employees, agents, or representatives (including, without limitation,
any investment banker) has knowledge. The Bank's Board of Directors shall use
all commercially reasonable efforts to cause its officers, directors, employees,
agents and representatives to comply with the requirements of this Section 1.10.
1.11 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 or elsewhere in 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 such approvals
shall have become effective and all required waiting times with respect
thereto shall have expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Bank Commissioner, the Virginia State Corporation
Commission, and the Delaware Bank Commissioner (if required by law), and any
appropriate Federal regulatory agencies in addition to the Federal Reserve)
shall have approved the Affiliation to the extent 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 there shall not be in effect a stop order with respect
thereto, and, to the extent required by law, that the Proxy Statement of the
Bank shall have been cleared by the FDIC.
(d) That stockholders of the Corporation and the Bank 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.
(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 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.
(g) That there shall be no actual or threatened legal proceeding or
impediment that in the reasonable opinion of counsel for the Corporation
might prevent the consummation of the Affiliation.
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(h) That since September 30, 1994, the Bank shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except for (i) the Stock Dividend and the 1994 Cash Dividend,
(ii) if the Effective Date will be after the record date for the
Corporation's regular first quarter dividend for 1995, a first quarter cash
dividend of $.21 per share may be paid on the last business day of March,
1995, (iii) if the Effective Date will be after the record date for the
Corporation's regular second quarter dividend for 1995, a second quarter
cash dividend of $.21 per share may be paid on the last business day of
June, 1995, (iv) if the Effective Date will be after the record date for the
Corporation's regular third quarter dividend for 1995, a third quarter cash
dividend of $.21 per share may be paid on the last business day of September
1995 and (v) if the Effective Date will be after the record date for the
Corporation's regular fourth quarter dividend for 1995, a fourth quarter
cash dividend of $.21 per share may be paid on the last business day of
December, 1995.
(i) That since September 30, 1994, the Bank shall not have issued or
authorized the issuance of additional shares of 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 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 common stock, or
repurchased or redeemed any of its common stock or changed its
capitalization or made any distribution of its earnings or assets other than
as provided in Section 1.11(h) above, or as otherwise agreed in writing by
the Corporation.
(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 the Bank to any director,
officer or employee thereof, other than in accordance with past practices,
or the establishment of, or an agreement to establish by the Bank, any early
retirement program or arrangement for certain employees, or any payment of
any bonus, profit sharing, severance or other extraordinary compensation, or
any change (other than changes required by law or described in writing by
the Bank to the Corporation prior to the date of this Agreement) 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 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 between November 30, 1994, and the Effective Date, no change by
way of acquisition or sale shall have been made in the Bank's securities
portfolio without the approval of the Corporation.
(l) That there are granted or issued any such consents or approvals,
governmental or otherwise (including, without limitation, lessor consents),
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 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 the Bank's common stock (or
holders 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 with the Bank,
at or before the stockholders' meeting at which the Share Exchange will be
considered, a written objection to the proposed Share Exchange and not have
voted in favor of the Share Exchange, pursuant to Title 3 Subtitle 2 of the
Maryland General Corporation Law.
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(n) That the Bank shall not have applied for or opened any new, or
closed any existing, branch offices without the written consent of the
Corporation.
(o) That the representations of the Bank contained in Section 1.5 of
this Agreement 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 the Bank shall
deliver a written certificate to the Corporation that to his knowledge,
information and belief, the representations set forth in this Agreement 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 which are
required to have been met by such date have, without exception, been met.
Conditions (d), (e), (f), (g), (h), (i), (j), (k), (l), (m), (n), and (o)
may be waived by the Corporation.
1.12 Conditions to the Bank's Obligations. The obligation of the Bank to
consummate the Affiliation under this Agreement is subject to the following
conditions:
(a) That pursuant to applicable statutes, the Federal Reserve shall have
given all required approvals to permit the Affiliation and such approvals
shall have become effective and all required waiting times with respect
thereto shall have expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Bank Commissioner, the Virginia State Corporation
Commission, and the Delaware Bank Commissioner (if required by law), and any
appropriate Federal regulatory agencies in addition to the Federal Reserve)
shall have approved the Affiliation to the extent 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 there shall not be in effect a stop order with respect
thereto, and, to the extent required by law, that the Proxy Statement of the
Bank shall have been cleared by the FDIC.
(d) That the Bank shall have received an opinion of its 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 by the stockholders of the
Bank upon receipt by them of Common Stock in exchange for common stock of
the Bank;
(2) provided that the Bank's common stock is held as a capital asset,
the basis of the Common Stock received by such stockholders of the Bank
will be the same as the basis of the common stock of the Bank surrendered
by such stockholders in exchange for the Common Stock;
(3) provided that the Bank's 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 the
Bank which is surrendered in exchange for such Common Stock.
(e) That the Bank's Proxy Statement shall contain the written opinion of
Berwind Financial Group, Inc. (or such other recognized investment firm as
the Bank 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 the Bank from a financial point
of view.
(f) That the representations of the Corporation contained in Section
1.4(a) of this Agreement (other than Section 1.4(a)(4)) 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 Bank, and as of the Effective Date,
the President of the Corporation shall deliver a written certificate to the
Bank that, to his knowledge,
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information and belief, the representations of the Corporation set forth in
this Agreement (other than in Section 1.4(a)(4)) 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.
Conditions (e) and (f) may be waived by the Bank.
1.13 Bank Directors. The Corporation agrees that after the Effective Date,
no person now serving as a director of the Bank who is 60 years of age or over
as of the date of this Agreement shall become ineligible to serve as a director
of the Bank solely by virtue of attaining any age less than 75.
1.14 Confidentiality. Between the date of this Agreement and the Effective
Date, the Corporation and the Bank each will maintain in confidence, and cause
its directors, officers, employees, agents and advisors to maintain in
confidence, and will not use for any purpose other than those contemplated in
this Agreement, 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.
1.15 Employee Benefit Matters. (a) 401(k) Plans. Effective not later than
January 1, 1997, the Bank's 401(k) plan will be merged with and into the
Corporation's 401(k) plan. The terms of the merger will comply with applicable
requirements of the Internal Revenue Code, including Section 401(a), 414(1) and
411(d)(6), and will provide that employees of the Bank will be given credit
under the Corporation's 401(k) plan for service with the Bank for purposes of
eligibility to participate and vesting. Prior to the merger of the Bank's 401(k)
plan into the Corporation's 401(k) plan, employees of the Bank will continue to
participate in the Bank's 401(k) plan in accordance with its terms.
(b) Pension Plans. (1) Employees of the Bank shall be given credit under the
Corporation's pension plan for service with the Bank for purposes of eligibility
to participate, benefit accrual and vesting. In addition, the Bank's defined
benefit pension plan will be merged, not later than January 1, 1997, with and
into the Corporation's pension plan. The terms of the merger will provide that:
(i) each employee of the Bank will receive a benefit under the
Corporation's pension plan equal to the employee's accrued benefit under the
Bank's pension plan at the time of the merger (the "Prior Plan Benefit")
plus benefits accrued after the date of the merger under the benefit formula
of the Corporation's pension plan;
(ii) the Prior Plan Benefit shall include, and the terms of the merger
shall protect, all "Section 411(d)(6) protected benefits" (as defined in
Treas. Reg. Section 1.411(d)-4) which had been accrued by employees under
the Bank's pension plan as of the effective date of the merger; and
(iii) without limiting the generality of item (ii) above, the Prior Plan
Benefit shall include, and the terms of the merger shall protect, the right
of employees of the Bank to receive the Prior Plan Benefit in a lump sum at
retirement and the right to receive the Prior Plan Benefit as an unreduced
benefit at Normal Retirement Age (including normal retirement at age 60
under the "rule of 80").
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(c) Accumulated Sick Leave. The Bank shall be entitled to continue its sick
leave policy, to the extent permitted by law, with respect to sick leave credit
accumulated through the date of the Affiliation.
(d) Other Benefits. Except with respect to the 401(k) and pension plans
described in Sections 1.15(a) and (b) above (the disposition of which shall be
governed by Sections 1.15(a) and (b) above), and except as provided in Section
1.15(c) above, at the option of the Corporation, which may be applied on a plan
by plan or program by program basis, after the Effective Date employees of the
Bank shall be entitled to participate either (1) 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 (2) in plans and programs
which, subject to changes required by applicable laws or by limitations imposed
by insurance companies providing plan benefits, are comparable to and provide
for participation on substantially the same basis as the Bank's plans and
programs currently in effect. If and to the extent option (1) is effectuated,
the Corporation agrees to treat service with the Bank before the Effective Date
as service with the Corporation for purposes of all employee benefit and
seniority based plans and programs.
ARTICLE II
SHARE EXCHANGE
The following terms, provisions and conditions are in addition to those
contained in Articles I and III of this Agreement:
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 the Bank will execute
and deliver Articles of Share Exchange in form satisfactory to counsel to the
Corporation and counsel to the Bank (the "Articles") and any other documents
required by law to effectuate the Share Exchange, and will file the Articles
with the State Department of Assessments and Taxation of the State of Maryland
(the "Department"). The Share Exchange will be made effective on the earliest
practicable date, as determined by the Corporation, that is the last business
day of a month, or such other date as may be acceptable to the Corporation and
the Bank (the "Effective Date").
2.2 Corporation's Obligation in Accomplishing the Share Exchange. In order
to effect the Share Exchange, the Corporation will prepare and file with the
Federal Reserve, an application requesting approval of the acquisition of the
common stock of the Bank by the Corporation.
2.3 Bank's Obligations in Accomplishing the Share Exchange. At such times as
shall be requested by the Corporation, the Bank and its management and directors
will, (i) through counsel for the Corporation, file or participate in filing
with the Bank Commissioner an application requesting her approval pursuant to
the Financial Institutions Article of the Annotated Code of Maryland of the
Corporation's acquisition of all of the shares of common stock of the Bank and
the affiliation of the Bank with the Corporation and with its affiliated
Maryland state banks pursuant to the Share Exchange, (ii) cause the publication
of any newspaper notices required by law or by the Commissioner with respect to
the Share Exchange, and (iii) duly call and convene a meeting of the Bank's
stockholders to vote on the Share Exchange and, in connection therewith, approve
and recommend the Share Exchange to the Bank's stockholders and use all of their
commercially reasonable efforts to obtain a favorable vote thereon.
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2.4 Stockholder Approval. The Share Exchange is subject to the additional
non-waivable condition that it shall have been approved by the affirmative vote
of not less than two-thirds of the votes entitled to be cast on the matter at a
meeting of the Bank's stockholders duly called for that purpose, subject,
however, to the rights of the Corporation under Section 1.11(m) hereof.
2.5 Terms of Share Exchange. On the Effective Date, and upon consummation of
the Share Exchange:
(a) Subject to Section 2.7 with respect to dissenting stockholders,
therein defined, each holder of common stock of the Bank on the Effective
Date will be deemed, without further act, to have automatically exchanged
his shares of common stock of the Bank for shares of Common Stock on the
basis of two and one-third shares (subject to adjustment pursuant to Section
1.4(b)) of Common Stock for each share of the Bank's common stock, and the
right to receive cash in lieu of fractional shares of Common Stock. As a
result of the Share Exchange, the Corporation will become the owner of all
shares of common stock of the Bank issued and outstanding at the Effective
Date. Each certificate representing shares of the common stock of the Bank
(other than certificates for shares of dissenting stockholders) will
thereafter represent a number of whole shares of Common Stock (and the right
to receive cash in lieu of fractional shares of Common Stock) determined in
accordance with the exchange ratio set forth above.
(b) In order to save the expense and inconvenience of issuing and
transferring fractional shares, no fractional shares of Common Stock or
certificates therefor will be issued, but, in lieu thereof, and solely as a
mechanism for rounding shares to whole shares, the Corporation will pay cash
for such fractional shares on the basis of the closing price for 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 common stock of the Bank representing such
fractional shares. No such holder shall be entitled to dividends, voting
rights or any other rights of stockholders in respect of any fractional
share.
(c) Each holder of record of common stock of the Bank on the Effective
Date (other than dissenting stockholders) shall, without any action on his
part whatsoever other than the surrender to Mercantile-Safe Deposit and
Trust Company, a Maryland banking institution, acting as exchange agent, or
such other or additional exchange agent as the Corporation may select (the
"Exchange Agent"), of his stock certificate and the completion of any
transmittal materials or endorsements as may be required by the Exchange
Agent, be entitled to receive for each share of common stock of the Bank
represented by said certificate, a new certificate representing the number
of whole shares of Common Stock (and to receive cash in lieu of fractional
shares of Common Stock) for which the stockholder's shares of common stock
of the Bank have been exchanged pursuant to the Share Exchange. After the
Effective Date, no dividends or other distributions shall be paid on shares
of Common Stock with respect to which certificates formerly representing
shares of common stock of the Bank have not been surrendered; but whenever a
dividend is declared by the Corporation on the Common Stock after the
Effective Date, the declaration shall include dividends on all shares of
Common Stock issuable hereunder and upon such surrender, all dividends not
paid because of this provision shall be paid, without interest. The
Corporation shall be entitled, however, after the Effective Date, to treat
the certificates of outstanding common stock of the Bank as evidencing the
ownership of the number of whole shares of Common Stock for which the common
stock of the Bank, represented by such certificates, shall have been
exchanged, notwithstanding the failure to surrender such certificates.
2.6 Cancellation of Certificates. All certificates for common stock of the
Bank surrendered to the Exchange Agent in exchange for new certificates
representing shares of Common Stock pursuant to the provisions of Section 2.5 of
this Agreement will be cancelled. On the Effective Date, the Bank will issue
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to the Corporation a certificate representing all shares of common stock of the
Bank issued and outstanding on the Effective Date after giving effect to the
Share Exchange and taking into account potential dissenting stockholders.
2.7 Dissenters' Rights. Shares of common stock of the Bank owned by any
stockholder (a "dissenting stockholder") who files with the Bank a written
objection to the proposed Share Exchange at or before the meeting of the holders
of the common stock of the Bank at which the Share Exchange is approved, and who
does not vote in favor of the Share Exchange at such stockholders' meeting, and
who within twenty days after the Department accepts the Articles for record,
makes a written demand upon the Bank for payment of the fair value of the
stockholder's shares pursuant to the provisions of Title 3, Subtitle 2 of the
Maryland General Corporation Law, will cease to have any rights of a holder of
common stock of the Bank with respect to such stock. The certificates formerly
representing those shares will represent only the right to receive payment in
cash of the fair value of the dissenting stockholder's shares of common stock of
the Bank ("Fair Value") as provided in Title 3, Subtitle 2 of the Maryland
General Corporation Law. The Bank will obtain all necessary approvals from the
Bank Commissioner, the FDIC and all other appropriate regulatory authorities for
any reduction of Bank capital resulting from the payments required to be made
for such dissenting stockholder's shares.
2.8 Dissenters' Escrow Agent. Payment of Fair Value to dissenting
stockholders will be made through an escrow agent (the "Dissenters' Escrow
Agent") to be appointed by the Bank prior to the Effective Date. Pursuant to the
terms of an escrow agreement to be entered into by the Bank and the Dissenters'
Escrow Agent prior to the Effective Date (the "Escrow Agreement"), the Bank will
transfer in escrow to the Dissenters' Escrow Agent prior to the Effective Date,
and at such time as it may be directed by the Corporation, an amount of money
estimated by the Bank, with the concurrence of the Corporation, to be sufficient
to pay in full the aggregate Fair Value of all shares of common stock of the
Bank owned by dissenting stockholders. Upon surrender to the Dissenters' Escrow
Agent of the certificates which represented a dissenting stockholder's shares of
common stock of the Bank prior to the Effective Date and upon compliance by the
dissenting stockholder with the provisions of Title 3, Subtitle 2 of the
Maryland General Corporation Law, the Dissenters' Escrow Agent will pay to the
dissenting stockholder in cash, from the funds held in escrow, the Fair Value of
those shares, after their Fair Value has been determined. The certificates which
represented dissenting stockholders' shares of common stock of the Bank prior to
the Effective Date, when surrendered to the Dissenters' Escrow Agent for payment
of Fair Value, will be cancelled. Any surplus remaining from the funds held in
escrow after payment by the Dissenters' Escrow Agent to dissenting stockholders
of the Fair Value of all dissenting stockholders' shares of common stock of the
Bank will be immediately returned by the Dissenters' Escrow Agent to the Bank,
with accumulated interest, if any. The Bank shall be responsible for all
obligations with respect to dissenting stockholders imposed by Title 3, Subtitle
2 of the Maryland General Corporation Law upon a corporation the stock of which
was acquired in a share exchange and will indemnify and hold harmless the
Corporation from and against all liabilities, damages, losses, costs and
expenses (including attorney's fees) incurred by the Corporation in connection
therewith.
2.9 Procedural Matters. The Corporation, at its option, may revise the
sequence of events or other matters relating to the accomplishment of the Share
Exchange in such manner as it may reasonably determine will best facilitate
accomplishment of the Affiliation.
ARTICLE III
MISCELLANEOUS
3.1. Termination For Regulatory Reasons. 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
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the transactions provided for 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 concluding that the required
regulatory approval will not be granted or that the Affiliation or such
transactions will be so challenged, the Corporation may, subject to the
provisions of Section 3.5 with respect to expenses, terminate all obligations
under this Agreement by giving fourteen (14) days written notice of such
termination to the other party. Upon such termination, except as set forth in
Section 3.5, this Agreement shall become null and void and none of the parties
hereto shall have any obligation or liability to the others with respect to this
Agreement.
3.2. Termination By Consent or Due to Passage of Time. At any time prior to
the Effective Date, notwithstanding the approval of the Share Exchange by the
stockholders of the Bank, this Agreement may be terminated by mutual consent of
the Bank and the Corporation. Moreover, either party shall be entitled to
terminate this Agreement after December 31, 1995, unless the Effective Date
shall have occurred on or before such date or the parties hereto shall have
extended the Effective Date of this Agreement in writing.
3.3 Termination With Respect to Acquisition Proposal. This Agreement may be
terminated by the Corporation if the Bank recommends to its stockholders or
accepts an Acquisition Proposal and may be terminated by the Bank if, in
compliance with Section 1.10 hereof, it recommends to its stockholders or
accepts an Acquisition Proposal. In any such case, the Bank shall pay the
Corporation a termination fee in the amount of $700,000 and shall also pay its
own expenses as provided in Section 3.5 below.
3.4. Amendment. This Agreement may be amended, but only in writing approved
by the Bank 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 the Bank have approved the Share Exchange, no
amendment shall be made that alters the exchange rate set forth in Section 1.2
(except pursuant to Section 1.4(b)) or otherwise materially adversely affects
the rights of the Bank's stockholders.
3.5. Expenses; Limited Liability. 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, subject to the provisions of the next sentence of this Section
3.5, in the event the transactions hereunder are not consummated, other than
pursuant to Section 3.3, 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 Proxy Statement, and all fees and disbursements
of accountants (not including routine auditing fees) for either of the parties
hereto. The termination of this Agreement in accordance with the terms of
Sections 3.1, 3.2 or 3.3 shall create no liability on the part of either party,
except as set forth in Section 3.3, or on the part of either party's directors,
officers, stockholders, agents or representatives; provided, however, that if
this Agreement is terminated under any of such provisions or otherwise by the
Corporation by reason of a material breach by the Bank, or by the Bank by reason
of a material breach by the Corporation, and such breach involves an
intentional, willful or grossly negligent misrepresentation or breach of
covenant, the breaching party shall be liable to the nonbreaching party for all
costs and expenses reasonably incurred by the nonbreaching party in connection
with the preparation, execution and attempted consummation of this Agreement,
including the fees of its counsel, accountants, consultants and other advisors
and representatives.
3.6 Termination If Support Agreement Not Delivered. This Agreement may be
terminated by the Corporation unless stockholders owning beneficially at least
20% of the Bank's outstanding capital stock have executed and delivered to the
Corporation by the end of the first business day following the date of this
Agreement, a "Support Agreement," in a form satisfactory to the Corporation,
agreeing to vote in favor of the Share Exchange and to certain other related
matters with respect to the transactions contemplated in this Agreement;
provided, however, that any such termination must be by written
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notice delivered by the Corporation by the end of the second business day
following the date of this Agreement.
3.7. 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 3.6, if sent by telecopy, addressed as follows:
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
Copy to:
Venable, Baetjer and Howard
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 1-410-244-7742
Attention: Lee M. Miller, Esq.
If to the Bank:
The Sparks State Bank
14804 York Road
Sparks, Maryland 21152
Fax No. 1-410-472-3380
Attention: Bradley G. Moore, President
Copy to:
Piper & Marbury
36 South Charles Street
Baltimore, Maryland 21201
Fax No. 1-410-576-1803
Attention: James J. Winn, Jr., Esq.
or to such other address as shall hereafter be provided in writing by the
Corporation or the Bank, respectively. Any notice or communication given
pursuant to this Agreement shall be deemed to have been given on the day it is
mailed or telecopied, as the case may be.
3.8. 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.
3.9. Binding Effect; No Third Party Rights. This Agreement shall bind the
Corporation and the Bank and their respective successors and assigns. 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 of or by reason of this Agreement.
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3.10. Governing Law. This Agreement shall be governed by the laws of the
State 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/ H. FURLONG BALDWIN (SEAL)
------------------------------
H. Furlong Baldwin
Chairman of the Board
THE SPARKS STATE BANK
By: /s/ CHARLES E. ENSOR, SR. (SEAL)
---------------------------------
Charles E. Ensor, Sr.
Chairman of the Board
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[LETTERHEAD OF BERWIND FINANCIAL GROUP, L.P.]
ANNEX B
JUNE , 1995
Board of Directors
The Sparks State Bank
14804 York Road
Sparks, Maryland 21152
Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of The Sparks State Bank ("Sparks') of the financial
terms of the affiliation whereby Sparks will become a subsidiary of Mercantile
Bankshares Corporation ("Mercshares"). The terms of the proposed affiliation
(the "Affiliation") between Sparks and Mercshares are set forth in the Agreement
and Plan of Affiliation and Share Exchange (the "Affiliation Agreement") dated
December 15, 1994, and provide that each outstanding share of Sparks common
stock will be converted into two and one-third shares of Mercshares common stock
subject to certain terms and conditions as detailed in the Agreement.
Berwind Financial Group, L.P., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements and valuations for various other
purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of Sparks and Mercshares, (ii) reviewed the Affiliation Agreement,
(iii) reviewed and analyzed stock market performance of Mercshares, (iv) studied
and analyzed the consolidated financial and operating data of Sparks and
Mercshares, (v) considered the terms and conditions of the Affiliation between
Sparks and Mercshares as compared with the terms and conditions of comparable
bank mergers and acquisitions, (vi) met and/or communicated with certain members
of Sparks and Mercshares' senior management to discuss their respective
operations, historical financial statements, and future prospects, (vii)
reviewed the Prospectus and Proxy Statement and (viii) conducted such other
financial analyses, studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Sparks and Mercshares, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by Sparks and Mercshares including financial statements,
financial projections, and stock price data as well as certain information from
recognized independent sources. We have not independently verified the
information concerning Sparks and Mercshares nor other data which we have
considered in our review and, for purposes of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data. Additionally, we assume that the Affiliation is, in all
respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Sparks and Mercshares, we have assumed that such information has
been reasonably prepared and reflects the best currently available estimates and
judgments of the managements of Sparks and Mercshares as to Sparks' and
Mercshares's most likely future performance. In rendering our opinion, we have
assumed that in the course of obtaining the necessary regulatory approvals for
the Affiliation, and in preparation of the final proxy statement, no conditions
will be imposed that will have a material adverse effect on the contemplated
benefits of the Affiliation to Sparks.
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<PAGE>
Our opinion is based upon information provided to us by the management of
Sparks and Mercshares, as well as market, economic, financial, and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration of the Affiliation and does not constitute a recommendation to the
Board of Sparks and does not constitute a recommendation to Sparks' stockholders
as to how such stockholders should vote on the agreement.
Based on the foregoing, it is our opinion that, as of the date hereof, the
consideration to be received in the Affiliation between Sparks and Mercshares is
fair, from a financial point of view, to the stockholders of Sparks.
Sincerely,
/s/ BERWIND FINANCIAL GROUP, L.P.
BERWIND FINANCIAL GROUP, L.P.
B-2
<PAGE>
ANNEX C
MGCL TITLE 3, SUBTITLE 2
MARYLAND GENERAL CORPORATION LAW
TITLE 3.
SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS
3-201 "SUCCESSOR" DEFINED.--(a) Corporation amending charter. In this
subtitle, except as provided in subsection (b) of this section, "successor"
includes a corporation which amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock, unless the right to do so is reserved by the charter of the corporation.
(b) Corporation whose stock is acquired. When used with reference to a share
exchange, "successor" means the corporation the stock of which was acquired in
the share exchange.
3-202 RIGHT TO FAIR VALUE OF STOCK.--(a) General rule. Except as provided in
subsection (c) of this section, a stockholder of a Maryland corporation has the
right to demand and receive payment of the fair value of the stockholder's stock
from the successor if: (1) The corporation consolidates or merges with another
corporation; (2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring corporate action
under Sec.3-105 of this title; (4) The corporation amends its charter in a way
which alters the contract rights, as expressly set forth in the charter, of any
outstanding stock and substantially adversely affects the stockholder's rights,
unless the right to do so is reserved by the charter of the corporation; or (5)
The transaction is governed by Sec.3-602 of this title or exempted by
Sec.3-603(b) of this title.
(b) Basis of fair value. (1) Fair value is determined as of the close of
business: (i) With respect to a merger under Sec.3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the day notice is given or
waived under Sec.3-106; or (ii) With respect to any other transaction, on the
day the stockholders voted on the transaction objected to. (2) Except as
provided in paragraph (3) of this subsection, fair value may not include any
appreciation or depreciation which directly or indirectly results from the
transaction objected to or from its proposal. (3) In any transaction governed by
Sec.3-602 of this title or exempted by Sec.3-603(b) of this title, fair value
shall be value determined in accordance with the requirements of Sec.3-603(b) of
this title.
(c) When right to fair value of stock does not apply. Unless the transaction
is governed by Sec.3-602 of this title or is exempted by Sec.3-603(b) of this
title, a stockholder may not demand the fair value of his stock and is bound by
the terms of the transaction if: (1) The stock is listed on a national
securities exchange or is designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.: (i) With respect to a merger under Sec.3-106 of this title of a 90 percent
or more owned subsidiary into its parent, on the date notice is given or waived
under Sec.3-106; or (ii) With respect to any other transaction, on the record
date for determining stockholders entitled to vote on the transaction objected
to; (2) The stock is that of the successor in a merger, unless: (i) The merger
alters the contract rights of the stock as expressly set forth in the charter,
and the charter does not reserve the right to do so; or (ii) The stock is to be
changed or converted in whole or in part in the merger into something other than
either stock in the successor or cash, scrip, or other rights or interests
arising out of provisions for the treatment of fractional shares of stock in the
successor; or (3) The stock is that of an open-end investment company registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net asset
value.
3-203 PROCEDURE BY STOCKHOLDER.--(a) Specific duties. A stockholder of a
corporation who desires to receive payment of the fair value of his stock under
this subtitle: (1) Shall file with the
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corporation a written objection to the proposed transaction: (i) With respect to
a merger under Sec.3-106 of this title of a 90 percent or more owned subsidiary
into its parent, within 30 days after notice is given or waived under Sec.3-106;
or (ii) With respect to any other transaction, at or before the stockholders'
meeting at which the transaction will be considered; (2) May not vote in favor
of the transaction; and (3) Within 20 days after the Department accepts the
articles for record, shall make a written demand on the successor for payment
for his stock, stating the number and class of shares for which he demands
payment.
(b) Failure to comply with section. A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share exchange,
transfer of assets, or charter amendment.
3-204 EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.--A stockholder who
demands payment for his stock under this subtitle: (1) Has no right to receive
any dividends or distributions payable to holders of record of that stock on a
record date after the close of business on the day as at which fair value is to
be determined under Sec.3-202 of this subtitle; and (2) Ceases to have any
rights of a stockholder with respect to that stock, except the right to receive
payment of its fair value.
3-205 WITHDRAWAL OF DEMAND.--A demand for payment may be withdrawn only with
the consent of the successor.
3-206 RESTORATION OF DIVIDEND AND OTHER RIGHTS.--(a) When rights
restored. The rights of a stockholder who demands payment are restored in full,
if: (1) The demand for payment is withdrawn; (2) A petition for an appraisal is
not filed within the time required by this subtitle; (3) A court determines that
the stockholder is not entitled to relief; or (4) The transaction objected to is
abandoned or rescinded.
(b) Effect of restoration. The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
3-207 NOTICE AND OFFER TO STOCKHOLDERS.--(a) Duty of successor. (1) The
successor promptly shall notify each objecting stockholder in writing of the
date the articles are accepted for record by the Department. (2) The successor
also may send a written offer to pay the objecting stockholder what it considers
to be the fair value of his stock. Each offer shall be accompanied by the
following information relating to the corporation which issued the stock: (i) A
balance sheet as of a date not more than six months before the date of the
offer; (ii) A profit and loss statement for the 12 months ending on the date of
the balance sheet; and (iii) Any other information the successor considers
pertinent.
(b) Manner of sending notice. The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
3-208 PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER OF
OBJECTORS.--(a) Petition for appraisal. Within 50 days after the Department
accepts the articles for record, the successor or an objecting stockholder who
has not received payment for his stock may petition a court of equity in the
county where the principal office of the successor is located or, if it does not
have a principal office in this State, where the resident agent of the successor
is located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. (1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation of
all the proceedings on terms and conditions it
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<PAGE>
considers proper. (2) Two or more objecting stockholders may join or be joined
in an appraisal proceeding.
3-209 NOTATION ON STOCK CERTIFICATE.--(a) Submission of certificate. At any
time after a petition for appraisal is filed, the court may require the
objecting stockholders parties to the proceeding to submit their stock
certificates to the clerk of the court for notation on them that the appraisal
proceeding is pending. If a stockholder fails to comply with the order, the
court may dismiss the proceeding as to him or grant other appropriate relief.
(b) Transfer of stock bearing notation. If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
3-210 APPRAISAL OF FAIR VALUE.--(a) Court to appoint appraisers. If the
court finds that the objecting stockholder is entitled to an appraisal of his
stock, it shall appoint three disinterested appraisers to determine the fair
value of the stock on terms and conditions the court considers proper. Each
appraiser shall take an oath to discharge his duties honestly and faithfully.
(b) Report of appraisers--Filing. Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) Same--Contents. The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same--Service; objection. (1) On the same day that the report is filed,
the appraisers shall mail a copy of it to each party to the proceedings. (2)
Within 15 days after the report is filed, any party may object to it and request
a hearing.
3-211 ACTION BY COURT ON APPRAISERS' REPORT.--(a) Order of court. The court
shall consider the report and, on motion of any party to the proceeding, enter
an order which: (1) Confirms, modifies, or rejects it; and (2) If appropriate,
sets the time for payment to the stockholders.
(b) Procedure after order. (1) If the appraiser's report is confirmed or
modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock. (2) If the appraiser's report is rejected, the court
may: (i) Determine the fair value of the stock and enter judgment for the
stockholder; or (ii) Remit the proceedings to the same or other appraisers on
terms and conditions it considers proper.
(c) Judgment includes interest. (1) Except as provided in paragraph (2) of
this subsection, a judgment for the stockholder shall award the value of the
stock and interest from the date as at which fair value is to be determined
under Sec.3-202 of this subtitle. (2) The court may not allow interest if it
finds that the failure of the stockholder to accept an offer for the stock made
under Sec.3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider: (i) The price which the
successor offered for the stock; (ii) The financial statements and other
information furnished to the stockholder; and (iii) Any other circumstances it
considers relevant.
(d) Costs of proceedings. (1) The costs of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the stock
made under Sec.3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider: (i) The price which the
successor offered for the stock; (ii) The financial statements and other
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<PAGE>
information furnished to the stockholder; and (iii) Any other circumstances it
considers relevant. (2) Costs may not include attorney's fees or expenses. The
reasonable fees and expenses of experts may be included only if: (i) The
successor did not make an offer for the stock under Sec.3-207 of this subtitle;
or (ii) The value of the stock determined in the proceeding materially exceeds
the amount offered by the successor.
(e) Effect on judgment. The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
3-212 SURRENDER OF STOCK.--The successor is not required to pay for the
stock of an objecting stockholder or to pay a judgment rendered against it in a
proceeding for an appraisal unless simultaneously with payment: (1) The
certificates representing the stock are surrendered to it, indorsed in blank,
and in proper form for transfer; or (2) Satisfactory evidence of the loss or
destruction of the certificates and sufficient indemnity bond are furnished.
3-213 RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.--(a) General rule. A
successor which acquires the stock of an objecting stockholder is entitled to
any dividends or distributions payable to holders of record of that stock on a
record date after the close of business on the day as at which fair value is to
be determined under Sec.3-202 of this subtitle.
(b) Successor in transfer of assets. After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
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<PAGE>
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 Charter provides, 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 By-law,
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.
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>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<C> <S>
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
</TABLE>
<TABLE>
<S> <C>
A. Agreement and Plan of Affiliation and Share Exchange, dated December 15,
1994 between the Registrant and The Sparks State Bank (included as Annex A
to the Prospectus and Proxy Statement)
</TABLE>
<TABLE>
<C> <S>
(4) Instruments defining the rights of security holders, including indentures,
charter and by-laws:
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<C> <S>
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, Commission File No. 0-5127)
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, Commission File No. 0-5127)
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, Commission File No.
0-5127)
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, Commission File No. 0-5127)
</TABLE>
<TABLE>
<C> <S>
(5) Opinion regarding legality. Opinion of Venable, Baetjer and Howard, LLP
(8) Opinion regarding tax matters. Form of Tax Opinion of Piper & Marbury L.L.P.
(23) Consent of Experts and counsel.
</TABLE>
<TABLE>
<S> <C>
A. Consent of Coopers & Lybrand L.L.P. as to Registrant
B. Consent of Rowles & Company as to Sparks
C. Consent of Venable, Baetjer and Howard, LLP (included in the opinion filed
as Exhibit 5)
D. Consent of Piper & Marbury L.L.P.
E. Consent of Berwind Financial Group, L.P.
</TABLE>
<TABLE>
<C> <S>
(24) Power of Attorney. Power of Attorney dated March 14, 1995 of the Mercshares Board
of Directors
(99) Additional Exhibits. Form of Proxy Card for Sparks Special 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 Berwind Financial Group, L.P.
included as Annex C to the Prospectus and Proxy Statement.
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"), to
reflect in the Prospectus and Proxy Statement 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, 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; provided, however, that paragraphs (a)(1) and (a)(1) above do not
apply if the registration statement is on Form
II-2
<PAGE>
S-3, Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the Registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(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 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 May 31, 1995.
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
- ---------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ H. FURLONG BALDWIN Chairman of the Board and May 31, 1995
- ---------------------------------------- Chief Executive Officer
H. Furlong Baldwin (Principal Executive
Officer)
/s/ KENNETH A., BOURNE, JR. Executive Vice President and May 31, 1995
- ---------------------------------------- Treasurer (Principal
Kenneth A., Bourne, Jr. Financial Officer)
/s/ JERRY F. GRAHAM Vice President and May 31, 1995
- ---------------------------------------- Controller (Principal
Jerry F. Graham Accounting Officer)
</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, Calman J. Zamoiski, Jr.
Date: May 31, 1995
By: /s/ H. FURLONG BALDWIN
---------------------------------------
H. Furlong Baldwin
For Himself and as Attorney-in-Fact
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<C> <S>
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
</TABLE>
<TABLE>
<S> <C>
A. Agreement and Plan of Affiliation and Share Exchange, dated December 15,
1994 between the Registrant and The Sparks State Bank (included as Annex A
to the Prospectus and Proxy Statement)
</TABLE>
<TABLE>
<C> <S>
(5) Opinion regarding legality. Opinion of Venable, Baetjer and Howard, LLP
(8) Opinion regarding tax matters. Form of Tax Opinion of Piper & Marbury L.L.P.
(23) Consent of Experts and counsel.
</TABLE>
<TABLE>
<S> <C>
A. Consent of Coopers & Lybrand L.L.P. as to Registrant
B. Consent of Rowles & Company as to Sparks
C. Consent of Venable, Baetjer and Howard, LLP (included in the opinion filed
as Exhibit 5)
D. Consent of Piper & Marbury L.L.P.
E. Consent of Berwind Financial Group, L.P.
</TABLE>
<TABLE>
<C> <S>
(24) Power of Attorney. Power of Attorney dated March 14, 1995 of the Mercshares Board
of Directors
(99) Additional Exhibits. Form of Proxy Card for Sparks Special Meeting
</TABLE>
EXHIBIT 5
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK & TRUST BUILDING
2 HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
May 31, 1995
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 ("Mercshares"), in connection with the preparation of the
Registration Statement on Form S-4 of Mercshares (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 1,799,562 shares (the "Shares") of Mercshares' common
stock, par value $2.00 per share ("Mercshares Common Stock"), issuable pursuant
to the Agreement and Plan of Affiliation and Share Exchange (the "Affiliation
Agreement"), dated December 15, 1994, by and between Mercshares and The Sparks
State Bank ("Sparks") whereby each holder of Sparks Common Stock, par value
$10.00 per share ("Sparks Common Stock"), on the date of consummation (other
than a Sparks Stockholder who follows the procedures with respect to dissenting
stockholders set forth in Title 3, Subtitle 2 of the Maryland General
Corporation Law) will be deemed, without further act, to have automatically
exchanged his shares of Sparks Common Stock for the Mercshares Common Stock, on
the basis of two and one-third shares of Mercshares Common Stock for each share
of Sparks 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 Mercshares, as
amended and as currently in effect; (iii) certain resolutions of the Board of
Directors of Mercshares 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
Mercshares and others.
Based upon the foregoing, we are of the opinion that if and when issued in
exchange for shares of Sparks 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.
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,
/s/ VENABLE, BAETJER AND HOWARD, LLP
EXHIBIT 8
May , 1995
The Sparks State Bank
14804 York Road
Sparks, Maryland 21152
Re: U.S. INCOME TAX STATUS OF THE AFFILIATION AND SHARE EXCHANGE
Gentlemen:
This opinion is being delivered to you pursuant to Section 1.12(d) of that
certain Agreement and Plan of Affiliation and Share Exchange dated December 15,
1994 (the "Affiliation Agreement"), by and between The Sparks State Bank, a
commercial bank organized under Title 3 of the Financial Institutions Article of
the Annotated Code of Maryland ("Sparks"), and Mercantile Bankshares
Corporation, a corporation organized under the Maryland General Corporation Law
("Mercshares"). Pursuant to the Affiliation Agreement, Sparks will become a
wholly-owned subsidiary of Mercshares, as more fully described below.
Sparks is principally engaged in the business of providing deposit, loan and
general banking services in Baltimore County, Maryland (the "Business").
Sparks has authorized capital stock consisting of 1,000,000 shares of common
stock, par value of $10.00 per share (the "Sparks Common Stock"), of which
771,241 shares are issued and outstanding. The 771,241 outstanding shares of the
Sparks Common Stock are owned by approximately 569 holders of record
(hereinafter referred to as the "Sparks Stockholders").
Mercshares is a multi-bank holding company engaged directly and through its
subsidiaries in the business of providing deposit, loan and general banking
services in Maryland, Virginia and Delaware. As of the date of this letter,
Mercshares has authorized share capital consisting of (1) 67,000,000 shares of
common stock, par value of $2.00 per share (the "Mercshares Common Stock"), of
which, as of , 1995, shares are issued and outstanding and
(2) 2,000,000 shares of preferred stock, no par value, of which no shares are
issued and outstanding. The Mercshares Common Stock is widely held and traded on
the NASDAQ National Market. Each share of Mercshares Common Stock is entitled to
vote for the election of directors of Mercshares and on all other matters
requiring shareholder approval under applicable corporate law.
Under Mercshares' Shareholder Rights Protection Plan adopted September 12,
1989, and as amended, each issued and outstanding share of Mercshares Common
Stock, including Mercshares Common Stock to be issued in the transaction
described below, possesses certain rights (the "Protective Rights") in the event
(a "Trigger Event") that any person becomes a beneficial owner of more than 10%
of the outstanding Mercshares Common Stock (an "Acquiring Person"). Generally,
upon the occurrence of a Trigger Event, each Common Share held by a person other
than an Acquiring Person has the right to purchase for $60 (i) that number of
shares of Mercshares Common Stock which has an
<PAGE>
aggregate fair market value of $120 at the time of exercise or (ii) in any case
in which Mercshares enters into an agreement with an Acquiring Person relating
to the acquisition of Mercshares, that number of shares of stock of any entity
that would acquire or control Mercshares upon consummation of such an agreement
which has an aggregate fair market value of $120 at the time of exercise. Prior
to the tenth day after a Trigger Event, no Protective Right may be exercised and
each Protective Right will be transferable only together with, and will be
transferred by a transfer of, its associated Common Share. Mercshares may redeem
the Protective Rights for $0.0033 per Protective Right at any time prior to the
tenth day after a Trigger Event. The Protective Rights expire on September 29,
1999.
Mercshares desires to acquire Sparks in order to expand its regional banking
business. Sparks believes that its local banking business would benefit from
economies of scale that may result from affiliation with the regional banking
business currently carried on by Mercshares and its subsidiaries.
Accordingly, Mercshares and Sparks have entered into the Agreement under the
terms of which the following transactions will take place:
1. Upon fulfillment of numerous conditions set forth in the Agreement
including approval of the share exchange provided for under the Agreement
(i) by the affirmative vote of not less than two-thirds of the stockholders
of Sparks entitled to vote, (ii) by the Board of Governors of the Federal
Reserve System, and (iii) by the Maryland State Bank Commissioner, Articles
of Share Exchange (the "Articles") will be filed with the Maryland State
Department of Assessments and Taxation ("SDAT"). Upon filing of the Articles
and acceptance thereof by SDAT, each holder of Sparks Common Stock (other
than a Dissenter, as defined below) will be deemed, without further act, to
have automatically exchanged each of his shares of Sparks Common Stock for
two and one-third (2 1/3) shares of Mercshares Common Stock and the right to
receive cash in lieu of fractional shares of Mercshares Common Stock. The
exchange described in the preceding sentence shall sometimes hereafter be
referred to as the "Share Exchange". Immediately after the effective time of
the Articles, Mercshares will own all of the issued and outstanding Sparks
Common Stock.
2. No fractional Shares of Mercshares Common Stock will be issued in the
Share Exchange. In lieu thereof, and solely as a mechanism for rounding
shares to whole shares, Mercshares will pay cash for such fractional shares
on the basis of the closing price for shares of Mercshares Common Stock (as
reported by the NASDAQ National Market) on the effective date of the
Articles.
3. Any holder of Sparks Common Stock who (i) files a written objection
to the Shares Exchange prior to the stockholders' meeting convened to vote
thereon; (ii) does not vote in favor of the Share Exchange; and (iii) within
the times frames specified in a dissenter's notice delivered to him by
Mercshares after consummation of the Share Exchange, submits a payment
demand and deposits his Sparks stock certificates in accordance with the
terms of the dissenter's notice (a "Dissenter"), will not have his Sparks
Common Stock automatically exchanged for Mercshares Common Stock and will
become entitled to receive from Sparks a cash payment in the amount of the
fair value of his Sparks Common Stock pursuant to Subtitle 2 of Title 3 of
the Maryland General Corporation Law.
We have acted as legal counsel to Sparks in connection with the Agreement
and the Share Exchange. As such, and for the purpose of rendering this opinion,
we have examined (or will examine on or prior to the effective time of the Share
Exchange) and are relying (or will rely) upon (without any independent
investigation or review thereof) the truth and accuracy, at all relevant times,
of the statements, covenants, representations and warranties contained in the
following documents:
1. The Affiliation Agreement (including the exhibits thereto);
2. Representations made to us by Mercshares (the substance of which is
set forth below);
3. Representations made to us by Sparks and certain affiliates of Sparks
(the substance of which is set forth below);
2
<PAGE>
4. The Registration Statement on Form S-4 containing a proxy statement
of Sparks and a prospectus of Mercshares that has been filed with the
Securities Exchange Commission in connection with the proposed exchange; and
5. Such other instruments and documents related to the formation,
organization and operation of Mercshares and Sparks or to the consummation
of the Share Exchange and the transactions contemplated thereby as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has
been (or will be by the effective time of the Share Exchange) due execution
and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof.
2. The Share Exchange will be effective under the applicable state law.
3. To the extent any expenses relating to the Share Exchange (or the
"plan of reorganization" within the meaning of Treas. Reg. Sec.1,368-1(c)
with respect to the Share Exchange) are funded directly or indirectly by a
party other than the incurring party, such expenses will be within the
guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187.
4. Any representation or statement made "to the best knowledge" or
similarly qualified is correct without such qualification.
In regard to the transfer by the Sparks Stockholders of their Sparks Common
Stock to Mercshares in exchange for Mercshares Common Stock, we have received
representations from the managements of Mercshares or Sparks, as the case may
be, and from certain Sparks Stockholders, that the following matters are true:
(a) The fair market value of the Mercshares Common Stock to be received
by each Sparks Stockholder will be approximately equal to the fair market
value of the Sparks Common Stock surrendered in exchange therefor.
(b) To the best knowledge of the managements of Mercshares and Sparks,
there is no plan or intention on the part of the remaining Sparks
Stockholders to sell or otherwise dispose of in any manner a number of
shares of Mercshares Common Stock received in the Share Exchange that would
reduce the former Sparks Stockholders' ownership of Mercshares Common Stock
to a number of shares having, in the aggregate, a value, as of the date of
the Share Exchange, of less than 50 percent of the fair market value of the
Sparks Common Stock outstanding as of the same date. For purposes of the
preceding sentence, all shares of Sparks Common Stock exchanged for cash
(including shares exchanged for cash in lieu of fractional Shares of
Mercshares Common Stock and shares held by Dissenters) will be considered
outstanding Sparks Common Stock as of the date of the Share Exchange.
Moreover, shares of Sparks Common Stock and Shares of Mercshares Common
Stock held by Sparks Stockholders and otherwise sold, redeemed, or disposed
of prior or subsequent to the Share Exchange are taken into account for
purpose of the first sentence of this paragraph.
(c) Mercshares has no plan or intention to sell or otherwise dispose of
any of the Sparks Common Stock to be acquired by it in the proposed Share
Exchange (other than a transfer of the Sparks Common Stock to a corporation
controlled by Mercshares within the meaning of Section 368(c) of the
Internal Revenue Code of 1986 (the "Code")), to merge Sparks into another
corporation, to liquidate Sparks, or to cause the sale or other disposition
of any of the assets of Sparks except for dispositions made in the ordinary
course of business. Neither Sparks nor Mercshares has any plan or intention
to cause Sparks to issue additional shares of Sparks stock to
3
<PAGE>
persons other than Mercshares in any amounts that would result in Mercshares
no longer being in control of Sparks within the meaning of Section 368(c) of
the Code.
(d) Following the proposed Share Exchange, Sparks will continue the
Business in substantially the same manner as it was conducted by Sparks
prior to the transaction.
(e) No liabilities of Sparks or any Sparks Stockholder will be assumed
by or transferred to Mercshares, nor will any of the Sparks Common Stock be
subject to any liabilities.
(f) Except as set forth in the Affiliation Agreement, supra, Mercshares,
Sparks and the Sparks Stockholders will each pay their own expenses, if any,
incurred in connection with the proposed Share Exchange.
(g) Mercshares has no plan or intention to redeem or otherwise reacquire
any of the shares of Mercshares Common Stock to be issued in the proposed
exchange. Although the Board of Directors of Mercshares has authorized
Mercshares to make periodic repurchases of its stock in the open market for
various corporate purposes, Mercshares has no specific plan or intention to
reacquire its stock from the former Sparks shareholders nor, in the event
that stock acquired by the former Sparks shareholders in the proposed
exchange should enter the open market, to acquire such shares from such
shareholders.
(h) Sparks has no outstanding warrants, options, convertible securities,
or any other type of right pursuant to which any person could acquire any
stock in Sparks.
(i) Except for 17,207 shares of Sparks Common Stock held by two
affiliates of Mercshares representing 1.86% of the outstanding Sparks Common
Stock, Mercshares does not presently own, directly or indirectly, nor has it
owned, directly or indirectly, in the past five years any stock of Sparks.
[All of the 17,207 shares of Sparks Common Stock held by Mercshares
affiliates are held for the account of customers of those affiliates.]
[Except as noted in the following sentence, none of the 17,207 shares of
Sparks Common Stock held by Mercshares affiliates was acquired any later
than , 19 . On December 31, 1994, Mercshares affiliates
acquired 2,867 shares of the holdings described in this paragraph as a
result of a 20% stock dividend declared by Sparks on all of its outstanding
Common Stock.]
(j) All amounts paid to each Dissenter will be derived from the assets
of Sparks; no amount paid to any Dissenter will be provided, directly or
indirectly, by Mercshares.
(k) The fair market value of all the assets of Mercshares will exceed
the sum of all of the liabilities of Mercshares at the time of the proposed
exchange.
(l) The payment of cash to Sparks Stockholders in lieu of fractional
shares of Mercshares Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Mercshares of issuing fractional shares and
does not represent separately bargained for consideration. The total cash
consideration paid in the Share Exchange to Sparks Stockholders in lieu of
issuing fractional Shares of Mercshares Common Stock will not exceed one
percent of the total consideration received by Sparks Stockholders in the
Share Exchange. The fractional share interests of each Sparks Stockholder
will be aggregated, and no Sparks Stockholder will receive cash in lieu of
fractional shares in an amount equal to or greater than the value of one
full share of Mercshares stock.
(m) No compensation to be paid by Mercshares to any Sparks
Stockholder-employee of Sparks will be separate consideration for or
allocable to such Stockholder's shares of Sparks Common Stock; none of the
shares of Mercshares Common Stock to be received by any Sparks
Stockholder-employee is separate consideration for or allocable to any
employment agreement; and the compensation paid to any Sparks
Stockholder-employee will be for service actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length
for similar services.
4
<PAGE>
(n) The fair market value of all the assets of Sparks will exceed the
sum of all of the liabilities of Sparks at the time of the proposed
exchange.
(o) Until a Trigger Event occurs, the exercise price of one Protective
Right is expected to exceed the value of one share of Mercshares Common
Stock at all times during the life of the Protective Rights.
(p) Both at the time Mercshares adopted the Shareholder Rights
Protection Plan and on the date of this opinion, the likelihood that the
Protective Rights would be exercised, at any time, was and is both remote
and speculative.
(q) As of the date of this opinion, no Trigger Event has occurred and
management of Mercshares has no reason to believe that any Trigger Event
will occur in the foreseeable future.
Based on the facts and assumptions set forth above, and subject to the
condition noted below, we are of the opinion that:
(1) The acquisition by Mercshares of Sparks Common Stock in exchange for
Mercshares Common Stock will qualify as a reorganization within the meaning
of Section 368(a)(1)(B) of the Code. Mercshares and Sparks will each be a
"party to a reorganization" within the meaning of Section 368(b).
(2) To the extent that a Sparks Stockholder receives Mercshares Common
Stock in exchange for his Sparks Common Stock (including fractional Shares
of Mercshares Common Stock deemed issued as described below), he will not
recognize any gain or loss upon the exchange.
(3) A Sparks Stockholder who receives cash in lieu of a fractional share
of Mercshares Common Stock will be treated as if he received a fractional
share of Mercshares Common Stock pursuant to the Share Exchange and
Mercshares then redeemed such fractional share for the cash. The Sparks
Stockholder will recognize capital gain or loss on the constructive
redemption of the fractional share in an amount equal to the difference
between the cash received and the adjusted basis of the fractional share
provided that he holds his Sparks Common Stock as a capital asset.
(4) A Dissenter who receives solely cash in exchange for his Sparks
Common Stock will recognize gain or loss equal to the difference between the
amount of cash received and the adjusted basis of his shares of Sparks
Common Stock. Such gain or loss will be capital gain or loss provided that
(i) he holds his Sparks Common Stock as a capital asset and (ii) he is not
considered to be the constructive owner of any Shares of Mercshares Common
Stock held by any other person.
(5) The basis of the Mercshares Common Stock to be received by Sparks
Stockholders in exchange for the Sparks Common Stock will be the same as the
basis of the Sparks Common Stock surrendered in exchange therefor.
(6) The holding period of the Mercshares Common Stock to be received by
Sparks Stockholders in the exchange will include the holding period of the
Sparks Common Stock to be surrendered in exchange therefor, provided the
Sparks Common Stock is held as a capital asset in the hands of Sparks
Stockholders on the date of the exchange.
In addition to the assumptions set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and the Internal Revenue Service is not precluded from
successfully asserting a contrary position. Furthermore, no assurance can be
given that future legislative, judicial or administrative changes, on either
a prospective or retroactive basis, would not adversely affect the
5
<PAGE>
accuracy of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
2. This opinion addresses only the specific tax opinions set forth
above, and does not address any other federal, state, local or foreign tax
consequences that may result from the Share Exchange or any other
transaction (including any transaction undertaken in connection with the
Share Exchange).
3. No opinion is expressed as to any transaction other than the Share
Exchange as described in the Affiliation Agreement or to any transaction
whatsoever, including the Share Exchange, if all the transactions described
in the Affiliation Agreement are not consummated in accordance with the
terms of such Affiliation Agreement and without waiver (other than a waiver
by Mercshares of the condition set forth in section 1.12(e) of the
Affiliation Agreement) or breach of any material provision thereof or if all
of the representations, warranties, statements and assumptions upon which we
relied are not true and accurate at all relevant times. In the event any one
of the statements, representations, warranties or assumptions upon which we
have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
4. This opinion may not be relied upon for any other purpose or by any
other person or entity and may not be made available to any other person or
entity without our prior written consent. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to the
reference to us under the heading "Certain Federal Income Tax Consequences"
in the Prospectus included in the Registration Statement. In giving our
consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Commission thereunder.
Very truly yours,
6
EXHIBIT 23A
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 20, 1995, on our audit of the consolidated financial
statements of Mercantile Bankshares Corporation and Affiliates as of December
31, 1994 and 1993, and for each of the three years in the period ended December
31, 1994, which report is incorporated by reference in the Annual Report on Form
10-K for the year ended December 31, 1994, of Mercantile Bankshares Corporation.
We also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 26, 1995
EXHIBIT 23B
CONSENT OF INDEPENDENT ACCOUNTANTS
The Sparks State Bank
Sparks, Maryland
We consent to the use in this registration statement on Form S-4 of our
report dated January 31, 1995, on the financial statements of The Sparks State
Bank appearing in the registration statement, and to the reference made to us
under the caption "Experts" in the Prospectus.
ROWLES & COMPANY
Baltimore, Maryland
May 25, 1995
EXHIBIT 23D
Piper & Marbury
L.L.P.
CHARLES CENTER SOUTH
WASHINGTON
36 SOUTH CHARLES STREET
NEW YORK
PHILADELPHIA
Baltimore, Maryland 21205-3018
EASTON
410-530-2530
FAX: 410-820-0459
LONDON
May 31, 1995
The Sparks State Bank
14804 York Road
Sparks, Maryland 21152
Re: U.S. INCOME TAX STATUS OF THE AFFILIATION AND SHARE EXCHANGE
Gentlemen:
We have prepared an opinion relating to certain federal income tax matters
(the "Tax Opinion") to be delivered to you pursuant to Section 1.12(d) of that
certain Agreement and Plan of Affiliation and Share Exchange dated December 15,
1994 (the "Affiliation Agreement"), by and between The Sparks State Bank, a
commercial bank organized under Title 3 of the Financial Institutions Article of
the Annotated Code of Maryland ("Sparks"), and Mercantile Bankshares
Corporation, a corporation organized under the Maryland General Corporation Law
("Mercshares"). In connection with the proposed transaction provided for in the
Affiliation Agreement, a Registration Statement on Form S-4 (the "Registration
Statement"), containing a proxy statement of Sparks and a prospectus of
Mercshares, will be filed with the Securities and Exchange Commission (the
"Commission"). It is intended that the form of the Tax Opinion be filed as an
exhibit to the Registration Statement.
We hereby consent to the filing of the form of the Tax Opinion as an exhibit
to the Registration Statement and to the reference to us under the heading
"Certain Federal Income Tax Consequences" in the Prospectus included in the
Registration Statement. In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ PIPER & MARBURY, L.L.P.
EXHIBIT 23E
CONSENT OF BERWIND FINANCIAL GROUP, L.P.
We hereby consent to the references in the Proxy Statement/Prospectus
forming a part of this Registration Statement on Form S-4 to our opinion with
respect to the merger of The Sparks State Bank and Mercantile Bankshares
Corporation, and to our firm, respectively, and to the inclusion of such opinion
as exhibits to such Proxy Statement/Prospectus. By giving such consent, we do
not thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
BERWIND FINANCIAL GROUP, L.P.
Philadelphia, Pennsylvania
May 31, 1995
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 The Sparks State
Bank, 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: March 14, 1995
SIGNATURE TITLE
- ----------------------------------- --------
/s/ DOUGLAS W. DODGE Director
...................................
/s/ ROBERT D. KUNISCH Director
...................................
/s/ CHRISTIAN H. POINDEXTER Director
...................................
/s/ WILLIAM C. RICHARDSON Director
...................................
/s/ MORRIS W. OFFIT Director
...................................
/s/ BRIAN B. TOPPING Director
...................................
/s/ GEORGE L. BUNTING, JR. Director
...................................
/s/ DONALD J. SHEPARD Director
...................................
/s/ JAMES A. BLOCK, M.D. Director
...................................
/s/ CALMAN J. ZAMOISKI, JR. Director
...................................
/s/ BISHOP L. ROBINSON Director
...................................
/s/ THOMAS M. BANCROFT, JR. Director
...................................
/s/ B. LARRY JENKINS Director
...................................
/s/ RICHARD O. BERNDT Director
...................................
/s/ WILLIAM J. MCCARTHY Director
...................................
................................... Director
EXHIBIT 99
THE SPARKS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
STATE BANK
The undersigned stockholder of The Sparks State Bank
("Sparks") hereby appoints Bradley G. Moore, and Janet
M. Miller, or either of them, the lawful attorneys and
proxies of the undersigned with full power of
substitution to vote, as designated on the reverse side,
PROXY all shares of Common Stock of Sparks which the undersigned is
entitled to vote at the Special Meeting of Stockholders
called to convene on July 11, 1995, and at any and all
adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL (1):
(1) To approve the Agreement and Plan of Affiliation and Share Exchange, dated
December 15, 1994 (the "Agreement") by and between Sparks 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, and the
share exchange and affiliation contemplated thereby (the "Affiliation"),
pursuant to which (i) Sparks shall become a wholly-owned subsidiary of
Mercshares and (ii) each holder (a "Sparks Stockholder") of common stock of
Sparks, par value $10.00 per share ("Sparks Common Stock") (other than a
Sparks Stockholder who follows the procedures with regard to dissenting
stockholders set forth in Title 3, Subtitle 2 of the Maryland General
Corporation Law, as amended), will be deemed, without further act, to have
automatically exchanged his shares of Sparks Common Stock for common stock
of Mercshares, par value $2.00 per share ("Mercshares Common Stock") on the
basis of two and one-third shares of Mercshares Common Stock for each share
of Sparks Common Stock. Cash will be paid in lieu of fractional shares of
Mercshares Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) In their discretion on such other matters as may properly come before the
meeting.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
<PAGE>
SHARES REPRESENTED BY ALL PROPERLY EXECUTED PROXIES WILL BE VOTED IN
ACCORDANCE WITH INSTRUCTIONS APPEARING ON THE PROXY. IN THE ABSENCE OF SPECIFIC
INSTRUCTIONS, PROXIES WILL BE VOTED TO APPROVE THE AGREEMENT AND THE AFFILIATION
AND IN THE BEST DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTERS.
IF YOU PLAN TO ATTEND THE MEETING, PLEASE SO INDICATE BY CHECKING THE BOX SO
THAT WE MAY MAKE APPROPRIATE ARRANGEMENTS FOR THE MEETING.
If you plan to attend the meeting, please
so indicate by checking the box so that we
may make appropriate arrangements for the Change of Address and/or
meeting / / Comments Mark Here / /
(Please sign as name(s) appears on
stock certificate. If joint account,
both owners must sign. Executors,
administrators, trustees or persons
signing in a similar capacity should
so indicate.)
Date _________, 1995
____________________________________
Signature
____________________________________
Signature
Votes must be indicated
(x) in Black or Blue ink.
