<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-19623
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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)
------------------------------
ALAN D. YARBRO, ESQ.
General Counsel 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:
<TABLE>
<S> <C>
FRANCIS X. GALLAGHER, JR., ESQ. JOHN B. ROBINS, IV, ESQ.
Venable, Baetjer and Howard, LLP Robins, Johnson & Wade
1800 Mercantile Bank & Trust Building 128 East Main Street
Two Hopkins Plaza Salisbury, Maryland 21801
Baltimore, Maryland 21201 (410)749-3791
(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/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
January 17, 1997
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Farmers Bank of Mardela Springs to be held at The Mardela Springs Volunteer Fire
Department, Station Street, Mardela Springs, Maryland on February 25, 1997 at
2:00 p.m.
At the Meeting, you will be asked to consider and vote on the Agreement and
Plan of Affiliation and Merger, including the Agreement of Merger attached as an
exhibit thereto (the "Affiliation Agreement"), dated December 10, 1996, by and
among Farmers Bank of Mardela Springs ("Farmers Bank"), Mercantile Bankshares
Corporation, a bank holding company organized under the laws of Maryland
("Mercshares"), and Peninsula Bank, a Maryland commercial bank and a wholly
owned subsidiary of Mercshares ("Peninsula"), pursuant to which Farmers Bank
will merge with and into Peninsula, and stockholders of Farmers Bank will
receive Common Stock of Mercshares (the "Merger"), all as more fully described
in the enclosed Prospectus and Proxy Statement. Based in Baltimore, Maryland,
Mercshares is a bank holding company with approximately $6.5 billion in total
assets at September 30, 1996 and with its principal operations currently being
conducted through 21 affiliated banks in Maryland, Virginia and Delaware.
Under the terms of the Affiliation Agreement, each share of common stock of
Farmers Bank, par value $12.50 per share ("Farmers Bank Common Stock"), on the
date of consummation (other than shares held by Farmers Bank Stockholders who
properly perfect their dissenters' rights) automatically shall become and be
converted into 1.25 shares of the common stock of Mercshares, par value $2.00
per share ("Mercshares Common Stock"). Cash will be paid in lieu of fractional
shares. Based on this exchange ratio, and the current dividend rate of
Mercshares Common Stock, your annual dividend payments after the Merger would be
approximately $1.30 per share of Farmers Bank Common Stock now held by you,
although no assurance can be given that current dividend levels will be
maintained by Mercshares. The Farmers Bank annual dividend for 1996 was $0.34
per share. The historical net income per share of Mercshares Common Stock to be
received by you after giving effect to the exchange ratio represents a
substantial increase in historical net income per share of Farmers Bank Common
Stock. The shares of Mercshares Common Stock you receive pursuant to the Merger
should be more readily marketable than the shares of Farmers Bank Common Stock
you presently hold.
Your Board of Directors has retained the investment banking firm of Scott &
Stringfellow, Inc. to act as its financial advisor in connection with the
Merger. Scott & Stringfellow has delivered to the Board of Directors its written
opinion that, as of this date, the terms of the Affiliation Agreement are fair
to Farmers Bank Stockholders from a financial point of view.
The conversion of Farmers Bank Common Stock into 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. Approval of the Merger requires the affirmative vote of at least
two-thirds of the outstanding shares of Farmers Bank Common Stock.
Your Board of Directors approved the Affiliation Agreement and the Merger
and believes that they are in the best interest of Farmers Bank and our
stockholders. Accordingly, the Board of Directors recommends that you vote TO
APPROVE the Affiliation Agreement and the Merger contemplated thereby.
We hope you can attend the Special Meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. Your vote is important regardless of the
number of shares you own.
We look forward to seeing you at the Special Meeting.
<TABLE>
<S> <C>
Sincerely,
/s/ JOHN B. ROBINS, IV /s/ ROGER E. VANDEGRIFT, II
Chairman of the Board President
</TABLE>
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
A Special Meeting of Stockholders of Farmers Bank of Mardela Springs (each a
"Farmers Bank Stockholder") will be held at The Mardela Springs Volunteer Fire
Department, Station Street, Mardela Springs, Maryland on February 25, 1997 at
2:00 p.m. for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Affiliation and Merger, dated December 10, 1996, including the
Agreement of Merger attached as an exhibit thereto (the "Affiliation
Agreement") by and among Farmers Bank of Mardela Springs ("Farmers Bank"),
Mercantile Bankshares Corporation, a Maryland corporation ("Mercshares"), a
bank holding company registered under the Bank Holding Company Act of 1956,
as amended, and Peninsula Bank, a Maryland commercial bank and a wholly
owned subsidiary of Mercshares ("Peninsula"), a copy of which is included as
Annex A attached to the accompanying Prospectus and Proxy Statement,
pursuant to which (i) Farmers Bank shall merge with and into Peninsula and
(ii) each share of common stock of Farmers Bank, par value $12.50 per share
("Farmers Bank Common Stock") (other than shares held by holders of Farmers
Bank Common Stock who properly perfect their dissenters' rights)
automatically shall become and be converted into 1.25 shares of the common
stock of Mercshares, par value $2.00 per share ("Mercshares Common Stock").
Cash will be paid in lieu of fractional shares.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Farmers Bank Stockholders may, if the Affiliation Agreement is approved and
consummated, exercise a right to demand payment in cash of the fair value of
their shares in lieu of receiving Mercshares Common Stock. This right is
contingent upon strict compliance with the procedures set forth in the
applicable statutes. The relevant sections of such statutes are included as
Annex C to the accompanying Prospectus and Proxy Statement. Objecting Farmers
Bank Stockholders will, in any event, be entitled to payment of the fair value
of only those shares of Farmers Bank Common Stock that are voted against the
Affiliation Agreement.
The Board of Directors has fixed January 10, 1997, as the record date for
the Special Meeting and only holders of record of Farmers Bank 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
/s/ ROGER E. VANDEGRIFT, II
President
January 17, 1997
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF FARMERS BANK RECOMMENDS THAT FARMERS BANK
STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE MERGER.
<PAGE>
January 17, 1997
PROSPECTUS RELATING TO 115,035 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
------------------------
PROXY STATEMENT RELATING TO
A SPECIAL MEETING OF STOCKHOLDERS OF
FARMERS BANK
OF MARDELA SPRINGS
TO BE HELD ON FEBRUARY 25, 1997
This prospectus and proxy statement (the "Prospectus and Proxy Statement")
is being furnished to the holders (the "Farmers Bank Stockholders") of common
stock, par value $12.50 per share (the "Farmers Bank Common Stock"), of Farmers
Bank of Mardela Springs ("Farmers Bank"), in connection with the solicitation of
proxies by the Board of Directors of Farmers Bank for use at the Special Meeting
of the Farmers Bank Stockholders to be held at The Mardela Springs Volunteer
Fire Department, Station Street, Mardela Springs, Maryland on February 25, 1997
at 2:00 p.m., and at any and all adjournments or postponements thereof (the
"Farmers Bank 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 merger ("Merger") of Farmers Bank with and into Peninsula
Bank, a Maryland commercial bank and wholly owned subsidiary of Mercshares
("Peninsula"), contemplated by an Agreement and Plan of Affiliation and Merger,
dated December 10, 1996, including the Agreement of Merger attached as an
exhibit thereto (the "Affiliation Agreement"), by and among Mercshares,
Peninsula and Farmers Bank. Upon consummation of the Merger, Farmers Bank
employees will become employees of Peninsula, the operations of Farmers Bank
will be continued by Peninsula, and the separate corporate existence of Farmers
Bank will cease. Upon consummation of the Merger, each share of Farmers Bank
Common Stock (other than shares held by Farmers Bank Stockholders who properly
perfect their dissenters' rights) automatically shall become and be converted
into 1.25 shares of Mercshares 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 Farmers Bank Special Meeting, at which the Farmers Bank Stockholders
will be asked to consider and vote upon a proposal to approve the Affiliation
Agreement and the Merger contemplated thereby and (ii) a prospectus covering the
issuance in connection with the Merger of up to 115,035 shares of Mercshares
Common Stock.
The information presented in this Prospectus and Proxy Statement concerning
Farmers Bank has been supplied by Farmers Bank 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 Farmers Bank Stockholders on or about January 17, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AVAILABLE INFORMATION...................................................................................... 2
DOCUMENTS INCORPORATED BY REFERENCE........................................................................ 3
SUMMARY.................................................................................................... 4
The Parties................................................................................................ 4
The Merger................................................................................................. 4
Certain Federal Income Tax Consequences.................................................................... 6
Comparison Of Stockholder Rights........................................................................... 6
Market Price Data.......................................................................................... 7
SUMMARY HISTORICAL FINANCIAL DATA.......................................................................... 8
COMPARATIVE UNAUDITED PER SHARE DATA....................................................................... 9
THE FARMERS BANK SPECIAL MEETING........................................................................... 10
Date, Place And Time....................................................................................... 10
Purpose of the Farmers Bank Special Meeting................................................................ 10
Record Date................................................................................................ 10
Vote Required.............................................................................................. 10
Solicitation of Proxies.................................................................................... 11
THE MERGER................................................................................................. 12
General.................................................................................................... 12
Background to the Merger................................................................................... 12
Reasons for the Merger; Recommendation of the Farmers Bank Board of Directors.............................. 13
Opinion of Farmers Bank Financial Advisor.................................................................. 15
Effective Date............................................................................................. 17
Procedures for Exchange of Certificates.................................................................... 17
Certain Federal Income Tax Consequences.................................................................... 17
Accounting Treatment....................................................................................... 18
Resale of Mercshares Common Stock After the Merger by Controlling Persons.................................. 18
Conditions to Merger....................................................................................... 19
Treatment of Employee Benefit Plans........................................................................ 19
Exclusive Dealing.......................................................................................... 20
Termination................................................................................................ 20
Appraisal Rights Of Dissenting Stockholders................................................................ 21
CERTAIN OTHER AGREEMENTS................................................................................... 22
The Support Agreement...................................................................................... 22
Affiliate Undertakings..................................................................................... 22
DESCRIPTION OF FARMERS BANK................................................................................ 23
General.................................................................................................... 23
Business................................................................................................... 23
Properties................................................................................................. 26
Dividends.................................................................................................. 26
Price Range of Common Stock................................................................................ 26
Stock Ownership of Directors and Executive Officers........................................................ 26
SELECTED FINANCIAL INFORMATION............................................................................. 28
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 29
Overview................................................................................................... 29
Interest Revenue........................................................................................... 29
Interest Expense........................................................................................... 30
Net Interest Income........................................................................................ 30
Income Taxes............................................................................................... 30
Liquidity.................................................................................................. 30
Interest Rate Sensitivity.................................................................................. 31
Analysis of Investment Securities.......................................................................... 33
Analysis of Loans.......................................................................................... 34
Deposits Analysis.......................................................................................... 37
Other Borrowed Funds....................................................................................... 38
Capital Adequacy........................................................................................... 38
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF MERCSHARES COMMON STOCK AND FARMERS BANK COMMON STOCK....... 40
DESCRIPTION OF MERCSHARES CAPITAL STOCK.................................................................... 40
LEGAL MATTERS.............................................................................................. 41
EXPERTS.................................................................................................... 41
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
ANNEX A--AGREEMENT AND PLAN OF AFFILIATION AND MERGER AND THE AGREEMENT OF MERGER ATTACHED AS AN EXHIBIT
THERETO.................................................................................................. A-1
ANNEX B--OPINION OF SCOTT & STRINGFELLOW, INC.............................................................. B-1
ANNEX C--DISSENTERS' RIGHTS STATUTORY PROVISIONS........................................................... C-1
</TABLE>
ii
<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."
The Commission maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information concerning
Mercshares which files electronically with the Commission.
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 115,035 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.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
AND PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS AND PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROSPECTUS AND PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS AND PROXY STATEMENT NOR THE ISSUANCE OR
SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE DATE HEREOF.
2
<PAGE>
DOCUMENTS 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, 1995;
2. Mercshares' Quarterly Reports on Form 10-Q for the periods ended
March 31, 1996, June 30, 1996 and September 30, 1996; 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 Farmers Bank 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 TO WHOM THIS PROSPECTUS AND PROXY STATEMENT IS
DELIVERED, INCLUDING ANY BENEFICIAL OWNER, 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 FEBRUARY 18, 1997.
3
<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. Farmers Bank
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 17 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 September 30, 1996, Mercshares and the Affiliates had
total assets of approximately $6.5 billion, deposits of approximately $5.3
billion, and loans (net) of approximately $4.4 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 October 31, 1996, there were 47,384,827 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.
FARMERS BANK. Farmers Bank is a Maryland commercial bank which operates
three banking offices. At September 30, 1996, Farmers Bank had total assets of
approximately $28.0 million, deposits of approximately $25.3 million and loans
(net) of approximately $20.0 million. Its principal executive office is located
at 314 Main Street, Mardela Springs, Maryland 21837, telephone number (410)
749-3069.
There are 92,028 shares of Farmers Bank Common Stock outstanding. There is
no established trading market for Farmers Bank Common Stock.
THE MERGER
GENERAL. At the Farmers Bank Special Meeting described in the notice (the
"Notice") accompanying this Prospectus and Proxy Statement, Farmers Bank
Stockholders will be asked to consider and vote upon a proposal to approve the
Affiliation Agreement, including the Agreement of Merger attached as an exhibit
thereto, a copy of which is attached as Annex A to this Prospectus and Proxy
Statement, and the Merger contemplated thereby. Upon consummation of the Merger,
each share of Farmers Bank Common Stock (other than shares held by Farmers Bank
Stockholders who properly perfect their dissenters' rights) automatically shall
become and be converted into 1.25 shares of Mercshares Common Stock (the
"Exchange Ratio"). Cash will be paid in lieu of fractional shares of Mercshares
Common Stock. See "THE MERGER--General," "--Background to the Merger,"
"--Reasons for the Merger; Recommendation of the Farmers Bank 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 Farmers Bank Common Stock entitled to vote thereon will be
required to approve the Affiliation Agreement and the Merger contemplated
thereby. As of December 23, 1996, certain directors and officers of Farmers Bank
and persons related to them owned an aggregate of 20,993 shares constituting
approximately 23% of the Farmers Bank Common Stock. Such persons have executed
agreements with Mercshares pursuant to
4
<PAGE>
which each such person has agreed to support and to vote his shares to approve
the Affiliation Agreement and the Merger contemplated thereby. BECAUSE THE
REQUIRED VOTE OF FARMERS BANK STOCKHOLDERS ON THE AFFILIATION AGREEMENT AND THE
MERGER IS BASED UPON THE TOTAL NUMBER OF OUTSTANDING SHARES OF FARMERS BANK
COMMON STOCK, THE FAILURE TO SUBMIT A PROXY CARD (OR THE FAILURE TO VOTE IN
PERSON AT THE FARMERS BANK SPECIAL MEETING IF A PROXY CARD IS NOT SUBMITTED),
THE ABSTENTION FROM VOTING AND ANY BROKER NON-VOTE WILL (EXCEPT FOR PURPOSES OF
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS) HAVE THE SAME EFFECT AS A VOTE
AGAINST THE AFFILIATION AGREEMENT AND THE MERGER. SEE "THE FARMERS BANK SPECIAL
MEETING" AND "CERTAIN OTHER AGREEMENTS--THE SUPPORT AGREEMENT."
RECOMMENDATION OF THE FARMERS BANK BOARD; REASONS FOR THE MERGER. The
Farmers Bank Board of Directors believes that the terms of the Merger and the
Affiliation Agreement are advisable and are fair to, and in the best interests
of, Farmers Bank and the Farmers Bank Stockholders and has approved the
Affiliation Agreement. These determinations were made by vote of six of the
seven Farmers Bank Directors, with one director dissenting. In considering the
terms and conditions of the Merger, the Farmers Bank Board of Directors
considered, among other things: the financial terms of the Merger; the fact that
the Merger 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 Farmers Bank 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 as to the
fairness, from a financial point of view, of the terms of the Affiliation
Agreement to the Farmers Bank Stockholders; and the operational and competitive
benefits of the Merger.
The Farmers Bank Board of Directors also considered that the historical
dividends per share and net income per share of the Mercshares Common Stock to
be received by the Farmers Bank Stockholders, after giving effect to the
Exchange Ratio, represent a substantial increase in the historical dividends per
share and net income per share of Farmers Bank Common Stock, although there can
be no assurance that pro forma amounts are indicative of future dividends or
income per share of Mercshares. Based upon the $33.50 per share closing market
price of Mercshares Common Stock on December 9, 1996 (the last trading day
preceding the public announcement of the execution of the Affiliation
Agreement), the price to be paid in the Merger as a percentage of Farmers Bank's
September 30, 1996 book value was 157%. THE FARMERS BANK BOARD OF DIRECTORS
RECOMMENDS THAT FARMERS BANK STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION
AGREEMENT AND THE MERGER CONTEMPLATED THEREBY. See "THE MERGER-- Background to
the Merger" and "--Reasons for the Merger; Recommendation of the Farmers Bank
Board of Directors."
OPINION OF FINANCIAL ADVISOR. The Farmers Bank Board of Directors has
received an opinion from Scott & Stringfellow, Inc. ("Scott & Stringfellow")
that the terms of the Affiliation Agreement are fair to the Farmers Bank
Stockholders from a financial point of view. A copy of the opinion, 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. See "THE MERGER--Opinion of Farmers Bank
Financial Advisor."
CONDITIONS TO MERGER. The mutual obligation of Mercshares, Peninsula and
Farmers Bank to consummate the Merger is subject to the requisite approval of
the Affiliation Agreement by the Farmers Bank Stockholders. Additionally, the
obligation of Mercshares and Peninsula to consummate the Merger 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
Farmers Bank Common Stock shall have voted against the Merger, pursuant to Title
3, Subtitle 7, Part II of the Financial Institutions Article of the Annotated
Code of Maryland (the "Financial Institutions Article"). See "THE
MERGER--Conditions to Merger."
5
<PAGE>
GOVERNMENTAL APPROVALS. Certain aspects of the Merger will require
notifications to, and approvals from, certain federal and state authorities,
including approval by the Federal Deposit Insurance Corporation and the Maryland
Commissioner of Financial Regulation and, if necessary, the Virginia State
Corporation Commission. Mercshares expects to submit filings and notifications
for these purposes as soon as practicable. See "THE MERGER--Conditions to
Merger."
ACCOUNTING TREATMENT. The Merger will be accounted for as a purchase. See
"THE MERGER-- Accounting Treatment" and "--COMPARATIVE UNAUDITED PER SHARE DATA"
in this Summary.
APPRAISAL RIGHTS. Under Maryland law, a Farmers Bank Stockholder who votes
against the Merger and follows specified procedures is entitled to appraisal
rights with respect to the Merger. Under the appraisal rights provisions of the
Financial Institutions Article, as augmented by the Maryland General Corporation
Law (the "MGCL") pursuant to Section 1-201 of the Financial Institutions Article
and relevant case law, sections of which are attached to this Prospectus and
Proxy Statement as Annex C, each Farmers Bank Stockholder will be entitled to
demand and receive payment of the "fair value" of his shares in cash, upon the
surrender of his stock certificates, if he (i) votes against the Merger, (ii)
does not accept any offer by Peninsula to pay the fair value of his shares of
Farmers Bank Common Stock and (iii) within 30 days after the Effective Date of
the Merger as set forth in the Certificate of Merger issued by the Commissioner
of Financial Regulation, makes written demand on Peninsula for payment of his
shares and surrenders his share certificates. Upon the determination of the
Effective Date of the Merger in the Certificate of Merger issued by the
Commissioner of Financial Regulation, Peninsula will promptly deliver or send by
certified mail, return receipt requested, to each Farmers Bank Stockholder who
has voted against the Merger, written notice of the Effective Date of the
Merger. See "THE MERGER--Appraisal Rights of Dissenting Stockholders" for a more
complete discussion of Farmers Bank Stockholders' appraisal rights.
A Farmers Bank 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 Merger and
therefore to have waived his dissenters' rights. See "THE MERGER-- Appraisal
Rights of Dissenting Stockholders."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will qualify as a tax-free reorganization for
federal income tax purposes. Accordingly, (i) no gain or loss will be recognized
by the Farmers Bank Stockholders who receive solely shares of Mercshares Common
Stock in exchange for Farmers Bank Common Stock by reason of the Merger, and
(ii) no gain or loss will be recognized by Mercshares, Peninsula or Farmers Bank
in the Merger. The receipt of an opinion of counsel dated the Effective Date as
to (i) and (ii) above and as to certain other matters is a condition to the
parties' obligations to consummate the Merger. Farmers Bank Stockholders are
urged to consult their own tax advisors as to the specific tax consequences to
them of the Merger. See "THE MERGER--Certain Federal Income Tax Consequences."
COMPARISON OF STOCKHOLDER RIGHTS
Upon consummation of the Merger, Farmers Bank 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 Farmers Bank 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 HOLDERS OF MERCSHARES COMMON STOCK AND
FARMERS BANK COMMON STOCK" and "DESCRIPTION OF MERCSHARES CAPITAL STOCK" for a
description of the material differences between the
6
<PAGE>
rights of holders of Mercshares Common Stock and Farmers Bank 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 9, 1996, 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 $33.50 per share. The market value
of Mercshares Common Stock on January 13, 1997, 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 $31.81 per share. Farmers
Bank Common Stock is not traded on any exchange and no established public
trading market exists for Farmers Bank Common Stock. For information concerning
certain repurchases by Mercshares of Mercshares Common Stock, see "DESCRIPTION
OF MERCSHARES COMMON STOCK--Stock Repurchases." BECAUSE THE MARKET PRICE OF
MERCSHARES COMMON STOCK IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE
MERCSHARES COMMON STOCK THAT FARMERS BANK STOCKHOLDERS WILL RECEIVE PURSUANT TO
THE MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE DATE. FARMERS BANK
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR MERCSHARES COMMON
STOCK.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of
Mercshares and Farmers Bank. 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. Farmers Bank's
historical financial data for each of the annual periods presented have been
derived from its audited consolidated financial statements. The selected
historical financial data for Mercshares for the nine-month periods ended
September 30, 1995 and 1996 have been derived from Mercshares' unaudited
Quarterly Report on Form 10-Q previously filed with the Commission. The selected
historical financial data for Farmers Bank for such periods have been derived
from Farmers Bank's unaudited financial statements. In the opinions of the
respective managements of Mercshares and Farmers Bank, such data include all
normal recurring adjustments necessary for a fair presentation of results for
such interim periods. Operating results for the nine months ended September 30,
1996 for each company are not necessarily indicative of the results that may be
obtained for the entire year ended December 31, 1996. THE SUMMARY HISTORICAL
FINANCIAL DATA SET FORTH BELOW DOES NOT PURPORT TO BE COMPLETE. FURTHER
INFORMATION IS CONTAINED IN EACH COMPANY'S AUDITED FINANCIAL STATEMENTS FOR EACH
OF THE ANNUAL PERIODS PRESENTED AND EACH COMPANY'S UNAUDITED FINANCIAL
STATEMENTS FOR EACH OF THE INTERIM PERIODS PRESENTED, ALL OF WHICH ARE
INCORPORATED BY REFERENCE HEREIN OR PRESENTED ELSEWHERE HEREIN. SEE "AVAILABLE
INFORMATION."
<TABLE>
<CAPTION>
AS OF OR FOR
THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
MERCANTILE BANKSHARES
CORPORATION
Net Interest Income........... $ 230,994 $ 213,060
Provision for Loan Losses..... 10,862 5,098
Other Operating Income........ 72,134 65,223
Income before Income Taxes.... 139,142 124,400
Net Income.................... 87,042 77,492
Cash Dividends Declared and
Paid on Common Stock........ 34,253 29,919
Net Income Per Share of
Common Stock (1)(2)......... 1.82 1.63
Per Share Cash Dividends
Declared and Paid on Common
Stock (1)(2)................ .72 .63
Total Assets.................. 6,546,631 6,055,304
Loans, Net.................... 4,413,196 4,032,960
Long-Term Debt................ 49,402 25,776
FARMERS BANK
Net Interest Income........... $ 840 $ 814
Provision for Loan Losses..... 0 0
Other Operating Revenue....... 100 71
Income before Income Taxes and
Cumulative Change in
Accounting.................. 229 92
Net Income (3)................ 154 76
Cash Dividends Declared and
Paid on Common Stock........ 0 0
Net Income Per Share of Common
Stock (4)................... 1.67 .82
Per Share Cash Dividends
Declared and Paid on Common
Stock (4)................... 0 0
Total Assets.................. 28,004 27,147
Loans, Net.................... 19,966 17,690
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
MERCANTILE BANKSHARES
CORPORATION
Net Interest Income........... $ 286,788 $ 262,956 $ 246,482 $ 228,540 $ 208,609
Provision for Loan Losses..... 7,988 7,056 12,969 45,346 20,850
Other Operating Income........ 88,154 92,186 86,313 106,988 76,265
Income before Income Taxes.... 166,009 146,886 135,971 122,776 111,596
Net Income.................... 104,432 90,441 83,468 76,298 70,562
Cash Dividends Declared and
Paid on Common Stock........ 41,013 34,982 30,173 26,454 25,936
Net Income Per Share of
Common Stock (1)(2)......... 2.19 1.88 1.73 1.67 1.56
Per Share Cash Dividends
Declared and Paid on Common
Stock (1)(2)................ .86 .74 .64 .58 .57 1/3
Total Assets.................. 6,349,103 5,938,225 5,789,620 5,459,577 5,216,802
Loans, Net.................... 4,209,872 3,846,838 3,628,780 3,401,213 3,309,005
Long-Term Debt................ 25,623 31,470 32,350 15,108 16,609
FARMERS BANK
Net Interest Income........... $ 1,082 $ 1,091 $ 995 $ 943 $ 862
Provision for Loan Losses..... 0 0 0 20 0
Other Operating Revenue....... 95 55 68 49 67
Income before Income Taxes and
Cumulative Change in
Accounting.................. 156 198 177 208 137
Net Income (3)................ 128 162 137 150 112
Cash Dividends Declared and
Paid on Common Stock........ 31 31 31 23 23
Net Income Per Share of Common
Stock (4)................... 1.39 1.77 1.49 1.63 1.22
Per Share Cash Dividends
Declared and Paid on Common
Stock (4)................... .33 .33 .33 .25 .25
Total Assets.................. 26,865 23,001 22,234 17,606 17,364
Loans, Net.................... 18,131 16,141 13,653 11,515 11,468
</TABLE>
- ------------------------------
(1) Year to date per share amounts are based on the weighted average number of
common shares outstanding during the period of 47,738,396 shares for 1996
and 47,768,479 shares for 1995.
(2) 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 have been
adjusted to give effect to the split.
(3) During 1993 there was a $10,472 cumulative effect of change in accounting
for income taxes.
(4) Per common share data has been adjusted to give retroactive effect to the
100% stock dividend in 1993 and a three for one stock split in 1996.
8
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following unaudited consolidated financial information reflects certain
comparative per share data relating to the Merger. The information shown below
should be read in conjunction with the historical consolidated financial
statements of Mercshares and Farmers Bank, 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
Merger been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of the results of operations in future periods.
The table below presents selected comparative consolidated unaudited per
share information (i) for Mercshares on a historical basis and on a pro forma
combined basis assuming the Merger had been effective during the period
presented and accounted for as a purchase and (ii) for Farmers Bank on a
historical basis and on a pro forma equivalent basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------- -----------------
<S> <C> <C>
PER COMMON SHARE:
NET INCOME:
Farmers Bank-historical (1)......................... $ 1.67 $ 1.39
Farmers Bank pro forma equivalent (2)............... $ 2.28 $ 2.73
Mercshares-historical............................... $ 1.82 $ 2.19
Mercshares pro forma combined (3)................... $ 1.82 $ 2.18
CASH DIVIDENDS DECLARED:
Farmers Bank-historical (1)......................... $ 0.00 $ 0.33
Farmers Bank pro forma equivalent (2)............... $ 0.90 $ 1.08
Mercshares-historical............................... $ 0.72 $ 0.86
Mercshares pro forma combined (4)................... $ 0.72 $ 0.86
BOOK VALUE:
Farmers Bank-historical (1)......................... $ 26.64 $ 25.18
Farmers Bank pro forma equivalent (2)............... $ 21.53 $ 20.60
Mercshares-historical............................... $ 17.18 $ 16.44
Mercshares pro forma combined (3)................... $ 17.22 $ 16.48
</TABLE>
- ------------------------
(1) Farmers Bank historical per common share data has been restated to give
retroactive effect to a three for one stock split in 1996.
(2) Farmers Bank pro forma equivalent amounts represent Mercshares' pro forma
combined information multiplied by the Exchange Ratio of 1.25 shares of
Mercshares Common Stock for each share of Farmers Bank Common Stock. In
December 1996 Farmers Bank declared and paid a dividend of $0.34 per share.
(3) Pro forma combined data represents historical data of Mercshares adjusted
for the impact of a purchase of Farmers Bank.
(4) Pro forma combined dividends per share represents historical dividends per
share paid by Mercshares. Mercshares paid quarterly dividends of $0.23 per
share in March and June, 1996, and $0.26 per share in September and
December, 1996. At the current quarterly rate, the annual dividends would be
$1.04 per share.
9
<PAGE>
PENDING TRANSACTION
On October 21, 1996, Mercshares and Peninsula entered into an agreement
providing for the merger of Home Bank into Peninsula. Home Bank operates five
banking offices on Maryland's Eastern Shore. At September 30, 1996, Home Bank
had total assets of $46.1 million, loans of $34.7 million and stockholders'
equity of $5.6 million. Net income for the years ended December 31, 1993, 1994
and 1995 was $394,000, $484,000 and $681,000, respectively. Net income for the
nine months ended September 30, 1996 was $529,000. The agreement with Home Bank
provides for a tax-free exchange of up to 475,218 shares of Mercshares Common
Stock for the outstanding shares of stock of Home Bank, and is subject to a
number of conditions including regulatory approvals and approval by the Home
Bank stockholders. The transaction with Home Bank will be accounted for as a
purchase. The transaction with Home Bank will not have a material effect upon
the financial position or results of operations of Mercshares or upon the
financial information presented above.
THE FARMERS BANK SPECIAL MEETING
DATE, PLACE AND TIME
The Farmers Bank Special Meeting will be held at The Mardela Springs
Volunteer Fire Department, Station Street, Mardela Springs, Maryland on February
25, 1997 at 2:00 p.m.
PURPOSE OF THE FARMERS BANK SPECIAL MEETING
At the Farmers Bank Special Meeting, Farmers Bank Stockholders will consider
and vote upon (i) the proposal to approve the Affiliation Agreement and the
Merger contemplated thereby pursuant to which each share of Farmers Bank Common
Stock (other than shares held by Farmers Bank Stockholders who properly perfect
their dissenters' rights) automatically shall become and be converted into 1.25
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 Farmers Bank Special Meeting.
The Farmers Bank Board of Directors recommends a vote to approve the
Affiliation Agreement and the Merger contemplated thereby.
RECORD DATE
The Farmers Bank Board of Directors has fixed the close of business on
January 10, 1997 (the "Farmers Bank Record Date") as the record date for
determining holders entitled to notice of and to vote at the Farmers Bank
Special Meeting. Accordingly, only holders of record of Farmers Bank Common
Stock at the close of business on the Farmers Bank Record Date will be entitled
to notice of, and to cast their vote at, the Farmers Bank Special Meeting. There
are 92,028 shares of Farmers Bank Common Stock issued and outstanding held by
approximately 151 holders of record.
VOTE REQUIRED
Each holder of record of shares of Farmers Bank Common Stock on the Farmers
Bank 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 Farmers
Bank Special Meeting. The presence, in person or by properly executed proxy, of
the holders of a majority of the shares of Farmers Bank Common Stock outstanding
on the Farmers Bank Record Date is necessary to constitute a quorum at the
Farmers Bank Special Meeting.
The approval of the Affiliation Agreement and the Merger requires the
affirmative vote of the holders of two-thirds of the outstanding shares of
Farmers Bank Common Stock entitled to vote thereon.
10
<PAGE>
As of December 23, 1996, certain directors and officers of Farmers Bank and
persons related thereto owning an aggregate of 20,993 shares (approximately 23%)
of Farmers Bank Common Stock have executed agreements with Mercshares pursuant
to which such persons have agreed to vote their shares of Farmers Bank Common
Stock to approve the Affiliation Agreement and the Merger. See "CERTAIN OTHER
AGREEMENTS--The Support Agreement" and "DESCRIPTION OF FARMERS BANK-- Stock
Ownership of Directors and Executive Officers."
All shares of Farmers Bank 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 FARMERS BANK COMMON STOCK WILL BE VOTED TO APPROVE
THE AFFILIATION AGREEMENT AND THE MERGER.
Farmers Bank does not know of any matters other than as described in the
Notice that are to come before the Farmers Bank Special Meeting. If any other
matter or matters are properly presented for action at the Farmers Bank Special
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. A Farmers Bank 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 Farmers Bank Special
Meeting to Roger E. Vandegrift, II, President of Farmers Bank, by signing and
returning a later dated proxy, or by voting in person at the Farmers Bank
Special Meeting; however, mere attendance at the Farmers Bank Special Meeting
will not in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the Farmers Bank Special Meeting will be
tabulated to determine whether or not a quorum is present. Where, as to any
matter submitted to the Farmers Bank Stockholders for a vote, proxies are marked
as abstentions (or Farmers Bank 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 (a "broker non-vote"), those
shares are also treated as shares that are present and entitled to vote for
quorum purposes. BECAUSE THE REQUIRED VOTE OF FARMERS BANK STOCKHOLDERS ON THE
AFFILIATION AGREEMENT AND THE MERGER IS BASED UPON THE TOTAL NUMBER OF
OUTSTANDING SHARES OF FARMERS BANK COMMON STOCK, THE FAILURE TO SUBMIT A PROXY
CARD (OR THE FAILURE TO VOTE IN PERSON AT THE FARMERS BANK SPECIAL MEETING IF A
PROXY CARD IS NOT SUBMITTED), THE ABSTENTION FROM VOTING AND ANY BROKER NON-VOTE
WILL (EXCEPT FOR PURPOSES OF APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS) HAVE
THE SAME EFFECT AS A VOTE AGAINST THE AFFILIATION AGREEMENT AND THE MERGER.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Farmers Bank Board of
Directors and Farmers Bank will bear the costs of its solicitation of proxies.
Solicitations may be made by mail, telephone, or personally by directors,
officers and employees of Farmers Bank, none of whom will receive additional
compensation for performing such services. Mercshares will pay all the expenses
of printing and mailing the Prospectus and Proxy Statement.
11
<PAGE>
THE MERGER
THE FOLLOWING DESCRIPTION OF THE MERGER 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.
GENERAL
The Affiliation Agreement provides that, subject to the satisfaction or
waiver of the conditions set forth therein, Farmers Bank will merge with and
into Peninsula and each share of Farmers Bank Common Stock (other than shares
held by Farmers Bank Stockholders who properly perfect their dissenters' rights)
automatically shall become and be converted into 1.25 shares of Mercshares
Common Stock. Upon consummation of the Merger, Farmers Bank employees will
become employees of Peninsula, the operations of Farmers Bank will be continued
by Peninsula and the separate corporate existence of Farmers Bank will cease.
Certificates for Farmers Bank Common Stock shall be exchanged for certificates
of Mercshares Common Stock as described below.
Based upon the capitalization of Mercshares and Farmers Bank as of October
31, 1996, the Farmers Bank Stockholders would own less than 1% of the
outstanding Mercshares Common Stock following consummation of the Merger. Based
upon the financial statements of Mercshares and Farmers Bank at September 30,
1996, upon consummation of the Merger, the percentage of total assets and the
percentage of total liabilities represented by Farmers Bank in Mercshares would
each be less than 1%.
As discussed below in "Reasons for the Merger; Recommendation of the Farmers
Bank Board of Directors," the Farmers Bank Board of Directors has concluded that
the terms of the Merger and the Affiliation Agreement are advisable and are fair
to, and in the best interests of, Farmers Bank and the Farmers Bank
Stockholders. Upon consummation of the Merger, the former Farmers Bank
Stockholders who become holders of Mercshares Common Stock will be stockholders
in a larger entity with equity traded on The Nasdaq National Market. Each
Farmers Bank Stockholder who becomes a holder of Mercshares Common Stock shall
possess the same rights as other such holders, and former Farmers Bank
Stockholders as a group will no longer be taking action at the Farmers Bank
corporate level. See "COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF MERCSHARES
COMMON STOCK AND FARMERS BANK COMMON STOCK" and "DESCRIPTION OF MERCSHARES
CAPITAL STOCK."
BACKGROUND TO THE MERGER
Commencing in the summer of 1995, the Farmers Bank Board and management
engaged in a strategic planning process to consider strategic alternatives and
ways in which stockholder value could be enhanced. In May 1996, the Board
appointed a committee (the "Committee") consisting of Messrs. John B. Robins,
IV, Chairman of the Farmers Bank Board of Directors, Roger E. Vandegrift, II,
President and Chief Executive Officer of Farmers Bank and Robert Holloway, a
Farmers Bank director, to consider further possible strategic alternatives and
to solicit indications of interest from prospective strategic partners. The
Committee contacted seven financial institutions in this regard.
In June 1996, Hugh W. Mohler, Executive Vice President of Mercshares,
indicated to Mr. Robins, that Mercshares would have interest in discussing a
possible affiliation with Farmers Bank. On June 26, 1996, Mr. Mohler and Alan D.
Yarbro, General Counsel of Mercshares, met with Mr. Vandegrift. They exchanged
financial and operational information about their respective institutions and
the history and philosophy of Mercshares' affiliations with other banks. The
discussion was exploratory and involved no specific offer or proposal.
On July 22, 1996, Mr. Mohler met with the Committee. They discussed a
proposed merger of Farmers Bank with Peninsula in which Farmers Bank
Stockholders would receive shares of Mercshares Common
12
<PAGE>
Stock at a ratio of 1.2 to 1.3 times the book value per share of Farmers Bank
Common Stock. The book value per share of Farmers Bank Common Stock at June 30,
1996 was $25.86.
On October 23, 1996, Mr. Mohler and Mr. Yarbro met with the Committee to
review drafts of definitive agreements, details of the merger structure and
procedural steps prior to signing. From that time forward the Farmers Bank Board
of Directors engaged in continuing deliberations concerning the Merger at its
bi-monthly Board meetings and certain special meetings. On November 7, 1996, Mr.
Mohler, Jeffrey F. Turner, President of Peninsula, and three representatives of
Sparks State Bank (a Mercshares Affiliated Bank) met with the Farmers Bank Board
of Directors for further discussion, with emphasis on Mercshares practices in
assisting its Affiliated Banks in providing services to their communities.
During further deliberations, on November 7, 1996 and thereafter, six of the
seven Farmers Bank directors favored the Merger and one director, Richard C.
Wright, opposed it, for reasons set forth in "Reasons for the Merger;
Recommendations of the Farmers Bank Board of Directors." Mr. Wright did not,
however, object to the Farmers Bank Stockholders having an opportunity to vote
on the Affiliation Agreement and the Merger.
On November 15, 1996, Mr. Mohler and Mr. Robins engaged in further
negotiations on the exchange. Ultimately, they agreed on a price-to-book value
ratio of slightly more than 1.4 to be applied to the $27.01 book value per share
of Farmers Bank at October 31, 1996. This formula yielded the exchange ratio of
1.25 shares of Mercshares Common Stock for each share of Farmers Bank Common
Stock.
At a meeting held on November 26, 1996, the Farmers Bank Board of Directors
received a presentation from Scott and Stringfellow indicating that the terms of
the Affiliation Agreement were fair to the Farmers Bank Stockholders from a
financial point of view. The Farmers Bank Board of Directors approved the
Affiliation Agreement and the Merger. Mr. Wright dissented from this vote, but
agreed not to recommend against the Merger. Approvals by the boards of directors
of Peninsula and Mercshares were completed on December 10, 1996 and the terms of
the Affiliation Agreement were publicly announced on that day.
REASONS FOR THE MERGER; RECOMMENDATION OF THE FARMERS BANK BOARD OF DIRECTORS
The Farmers Bank Board of Directors, with one director dissenting, has
approved and recommends that Farmers Bank Stockholders vote to approve the
Affiliation Agreement and the Merger. The dissenting director, Richard C.
Wright, did not dissent for economic reasons, but did so because of his
preference that Farmers Bank continue as an independent institution. He did not
oppose giving the Farmers Bank Stockholders an opportunity to vote on the
Affiliation Agreement and the Merger, and he has agreed not to recommend against
the transaction. References in this Prospectus and Proxy Statement to actions,
opinions and recommendations of the Farmers Bank Board of Directors are
references to the Board action adopted by a six-to-one vote and are not intended
to reflect the individual views of the dissenting director.
The Farmers Bank Board of Directors believes that the terms of the Merger
and the Affiliation Agreement are advisable and are fair to, and in the best
interests of, Farmers Bank and the Farmers Bank Stockholders. In considering the
terms and conditions of the Affiliation Agreement, the Farmers Bank Board of
Directors considered a number of factors. The Farmers Bank 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 Farmers
Bank 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 Farmers Bank Stockholders resulting from the
Exchange Ratio represented a fair multiple of Farmers Bank's per share book
value and earnings. The Farmers Bank Board of Directors also considered
that, under the proposed Exchange Ratio and based on the Farmers Bank Board
of Directors' belief that Mercshares would continue to pay dividends at its
13
<PAGE>
current rate, the Merger would result in a substantial increase in dividend
income to Farmers Bank Stockholders, although there can be no assurance that
current dividends are indicative of future dividends. See "COMPARATIVE
UNAUDITED PER SHARE DATA." In this regard, the Farmers Bank Board of
Directors also considered the opinion of its financial advisor, Scott and
Stringfellow, Inc., that the terms of the Affiliation Agreement are fair,
from a financial point of view, to the Farmers Bank Stockholders.
(ii) THE TERMS, OTHER THAN THE FINANCIAL TERMS, AND STRUCTURE OF THE
MERGER. In this respect, the Farmers Bank Board of Directors considered the
benefits to the customers and employees of Farmers Bank and the communities
it serves of operating as branches of Peninsula. As branches of Peninsula,
Farmers Bank's present operations would offer an expanded range of products
and services, would have access to Mercshares' financial and managerial
resources, and would benefit from greater geographical coverage. The Farmers
Bank Board of Directors also considered that the Merger 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 Farmers Bank 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 Farmers Bank Board of Directors also
considered that the historical dividends per share and net income per share
of Mercshares Common Stock to be received by Farmers Bank Stockholders,
after giving effect to the Exchange Ratio, would represent a substantial
increase in the historical dividends per share and net income per share of
Farmers Bank Common Stock, although there can be no assurance that pro forma
amounts are indicative of future dividends or income per share of
Mercshares. The Farmers Bank Board of Directors also considered the
marketability of Mercshares Common Stock, which is publicly traded and
quoted on The Nasdaq National Market. The Farmers Bank Board of Directors
further considered the diversification of risk associated with ownership of
an institution with 21 Affiliated Banks serving a broad geographic area that
encompasses most of Maryland and parts of Virginia and Delaware.
(iv) OTHER STRATEGIC ALTERNATIVES. In recent years, the Farmers Bank
Board of Directors has been concerned about Farmers Bank's future as an
independent institution, perceiving limited growth opportunities in two of
its three branches, high overhead compared with other banks and increasing
costs of technology and product development. Accordingly, in early 1995 and
in 1996, Farmers Bank entertained affiliation discussions with six
institutions in addition to Mercshares. Three of the institutions did not
make offers. Two made offers which did not exceed the Farmers Bank book
value and did not involve the issuance of readily marketable securities to
Farmers Bank Stockholders. The other offer was comparable to the Mercshares
offer in terms of price, but did not involve the issuance of readily
marketable securities. The Farmers Bank Board concluded that the Mercshares
offer was superior because of the various factors described above. The
Farmers Bank Board also concluded that an affiliation with Mercshares
presented a better strategic alternative for the continued operation of the
Farmers Bank business than continued independence.
(v) CERTAIN RELATED CONSIDERATIONS. The Farmers Bank Board of Directors
further determined that the addition of resources resulting from the Merger
will enable Farmers Bank to provide a wider and improved array of financial
services to consumers and businesses and to achieve added flexibility in
dealing with the changing competitive environment in its market area. In
addition, the Farmers Bank Board of Directors concluded that the Merger will
help provide Farmers Bank with the financial resources needed to meet the
competitive challenges arising from recent and anticipated changes in the
banking and financial services industry.
THE FARMERS BANK BOARD OF DIRECTORS BELIEVES THAT THE MERGER AND THE
AFFILIATION AGREEMENT ARE ADVISABLE AND ARE FAIR TO, AND IN THE BEST INTERESTS
OF, FARMERS BANK AND THE FARMERS BANK STOCKHOLDERS.
14
<PAGE>
THE FARMERS BANK BOARD OF DIRECTORS RECOMMENDS THAT FARMERS BANK STOCKHOLDERS
VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE MERGER CONTEMPLATED THEREBY.
OPINION OF FARMERS BANK ADVISOR
Farmers Bank's Board of Directors retained the investment banking firm of
Scott & Stringfellow to evaluate the terms of the Affiliation Agreement and
Scott & Stringfellow has rendered its opinion to the Board of Directors of
Farmers Bank that the terms of the Affiliation Agreement are fair from a
financial point of view to the Farmers Bank Stockholders. In developing its
opinion, Scott & Stringfellow reviewed and analyzed (1) the Affiliation
Agreement; (2) the Registration Statement; (3) Farmers Bank audited financial
statements for the four years ended December 31, 1995; (4) Farmers Bank's
unaudited financial statements for the nine months ended September 30, 1996 and
1995, and other internal information relating to Farmers Bank prepared by
Farmers Bank management; (5) information regarding the trading market for
Farmers Bank Common Stock and Mercshares Common Stock and the price ranges
within which the respective stocks have traded; (6) the relationship of prices
paid to relevant financial data such as net worth, loans, deposits and earnings
in certain bank and bank holding company affiliations and acquisitions in
Maryland in recent years; (7) Mercshares' annual reports to shareholders and its
financial statements for the four years ended December 31, 1995; and (8)
Mercshares' unaudited financial statements for the nine months ended September
30, 1996 and 1995 and other publicly available information relating to
Mercshares prepared by Mercshares management. Scott & Stringfellow has discussed
with members of Farmers Bank management the background of the Affiliation, the
reasons and basis for the Affiliation, and the business and future prospects of
Farmers Bank and Mercshares individually and as a combined entity. No
instruction or limitations were given or imposed in connection with the scope of
or the examination or investigations made by Scott & Stringfellow in arriving at
its findings. Finally, Scott & Stringfellow has conducted such other studies,
analysis and investigations particularly of the banking industry, and considered
such other information as it deemed appropriate, the material portion of which
is described below. A copy of Scott & Stringfellow's opinion, which sets forth
the assumptions made, matters considered and qualifications made on the review
undertaken, is attached as Annex B hereto and should be read in its entirety.
Scott & Stringfellow used the information gathered to evaluate the financial
terms of the Merger using standard valuation methods, including discounted cash
flow analysis, market comparable analysis, comparable acquisition analysis and
dilution analysis.
COMPARABLE ACQUISITION ANALYSIS. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as tangible net
worth, assets, deposits and earnings in 10 bank and bank holding company mergers
and acquisitions in Maryland since June 30, 1994, representing all such
transactions known to Scott & Stringfellow to have occurred during this period
involving bank and bank holding companies, with the proposed Merger and found
the consideration to be received from Mercshares to be within the relevant
pricing ranges acceptable for such recent transactions. Specifically, based upon
the most recent transactions either closed or announced in Maryland since June
30, 1994, other than the Merger, the average price to tangible book value in
these transactions was 2.16 times, compared with 1.51 times for the Merger, the
average price to earnings ratio was 21.62 times, compared to 17.94 times for the
Merger, the average premium to deposits was 23.34% compared with 14.59% for the
Merger, and the average premium to assets was 19.72% compared with 13.20% for
the Merger. For purposes of computing the information with respect to the
Merger, $40.16 per share of consideration for each share of Farmers Bank Common
Stock was used.
MARKET COMPARABLE ANALYSIS. Scott & Stringfellow analyzed the performance
and financial condition of Mercshares relative to the following financial
institutions: F&M Bancorp, F&M National Corporation, FCNB Corp., First Virginia
Banks, Inc., Fulton Financial Corporation, Provident Bankshares Corp., and
Susquehanna Bancshares Inc. (collectively, the "Bank Group"). Among the
financial information compared was information relating to tangible equity to
assets, loans to deposits, net interest margin, non-
15
<PAGE>
performing assets, total assets, non-accrual loans, and efficiency ratio.
Additional information compared for the trailing twelve-month period ended
September 30, 1996, was (i) price to tangible book value ratio which was 1.9x
for Mercshares, compared to an average of 1.8x for the Bank Group (ii) price to
earnings ratio which was 13.5x for Mercshares, compared to an average of 14.5x
for the Bank Group, (iii) return on assets which was 1.79% for Mercshares,
compared to an average of 1.19% for the Bank Group, (iv) return on equity which
was 14.29% for Mercshares, compared to an average of 12.47% for the Bank Group,
and (v) a dividend yield of 3.24% for Mercshares, compared to an average of
3.16% for the Bank Group. Overall, in the opinion of Scott & Stringfellow
Mercshares' operating performance and financial condition were better than the
Bank Group average and Mercshares' market value was reasonable when compared to
the Bank Group. Accordingly, Farmers Bank Stockholders shall receive Mercshares
Common Stock that is reasonably valued when compared to the Bank Group.
DILUTION ANALYSIS. Based upon publicly available financial information on
Farmers Bank and Mercshares, Scott & Stringfellow considered the effect of the
transaction on the book value, earnings, and market value of Farmers Bank and
Mercshares. The immediate effect on Mercshares was to increase book value by
$0.01 or 0.06%, with no impact on earnings per share. The effect on Farmers Bank
under the same assumptions is to increase dividends by $0.97 or 293.94% and to
increase the market value of Farmers Bank to $40.00 per share. This dilution
analysis does not take into account the longer term benefits for the combined
companies resulting from the combination. Scott & Stringfellow concluded from
this analysis that the transaction would have a significant positive effect on
Farmers Bank and Farmers Bank Stockholders in that dividends per share and the
market value of Mercshares Common Stock to be received by the Farmers Bank
Stockholders, after giving effect to the Exchange Ratio, would represent a
substantial increase in the historical dividends per share and market value of
Farmers Bank Common Stock, although there can be no assurance that pro forma
amounts are indicative of future results.
The summary set forth above includes the material factors considered, but
does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Board of Directors of Farmers Bank or of the analyses
performed by Scott & Stringfellow. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Accordingly, notwithstanding the
separate factors summarized above, Scott & Stringfellow believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, would create an incomplete view of the process underlying the
preparation of its opinion. As a whole, these various analyses contributed to
Scott and Stringfellow's opinion that the terms of the Merger Agreement are fair
from a financial point of view to Farmers Bank stockholders.
Scott & Stringfellow is a full service investment banking and brokerage firm
headquartered in Richmond, Virginia, that provides a broad array of services to
corporations, financial institutions and state and local governments. The
Financial Institutions Group of Scott & Stringfellow actively works with
community banks in Maryland, Virginia. North Carolina, and West Virginia on
these and other matters. As part of its investment banking practice, it is
continually engaged in the valuation of banks and bank holding companies and
their securities in connection with affiliations and acquisitions, negotiated
underwriting, and secondary distribution of listed and unlisted securities.
Scott & Stringfellow was selected by the Farmers Bank Board of Directors based
upon its expertise and reputation in providing valuation and affiliation and
acquisition and advisory services to banks and bank holding companies.
Pursuant to an engagement letter dated November 19, 1996 between Farmers
Bank and Scott & Stringfellow, in exchange for its services, Scott &
Stringfellow shall receive a fee of $10,000, plus reimbursement for expenses.
16
<PAGE>
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, Peninsula and Farmers
Bank will execute and deliver an Agreement of Merger substantially in the form
attached as Exhibit A to the Affiliation Agreement (the "Agreement of Merger"),
and, after approval by the Maryland Commissioner of Financial Regulation, will
file the Agreement of Merger with the State Department of Assessments and
Taxation of the State of Maryland (the "Maryland SDAT"). The Merger shall become
effective on such date and time (the "Effective Date") as are set forth in the
Certificate of Merger issued by the Maryland Commissioner of Financial
Regulation. Mercshares, Peninsula and Farmers Bank contemplate that the Merger
will be made effective on the last business day of a month, or such other date
as may be determined by Mercshares.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
On and after the Effective Date, certificates for shares of Farmers Bank
Common Stock shall represent the right to receive certificates representing the
number of whole shares of Mercshares Common Stock and cash in lieu of fractional
shares represented thereby, as described herein. Certificates representing
shares of Farmers Bank Common Stock may be exchanged after the Effective Date by
surrendering such certificates to The Bank of New York, acting as exchange
agent, or such other or additional exchange agent as Mercshares may select (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 Farmers Bank 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, Farmers Bank 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 Farmers Bank 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 Farmers Bank 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.
FARMERS BANK STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY
HAVE RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. FARMERS BANK STOCKHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material Federal income tax
consequences of the Merger; it is not intended to be a complete description of
those consequences. The matters set forth in paragraphs (i) through (v) are
based upon the opinion of Venable, Baetjer and Howard, LLP, counsel to
Mercshares:
17
<PAGE>
(i) the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code");
(ii) no gain or loss will be recognized by the Farmers Bank Stockholders
who receive solely Mercshares Common Stock in exchange for Farmers Bank
Common Stock pursuant to the Merger;
(iii) provided that the Farmers Bank Common Stock is held as a capital
asset, the tax basis of the Mercshares Common Stock received by the Farmers
Bank Stockholders will be the same as the tax basis of the Farmers Bank
Common Stock surrendered therefor, decreased by the amount of any cash
received by the Farmers Bank Stockholders in lieu of fractional shares and
increased by the amount of gain, if any, recognized by the Farmers Bank
Stockholders;
(iv) provided that the Farmers Bank Common Stock is held as a capital
asset, the holding period of the Mercshares Common Stock received by the
Farmers Bank Stockholders will include the holding period of the Farmers
Bank Common Stock surrendered therefor; and
(v) no gain or loss will be recognized by Mercshares, Peninsula or
Farmers Bank in the Merger.
The obligation of Farmers Bank to consummate the Merger is subject to the
receipt of an opinion of Venable, Baetjer and Howard, LLP, counsel to
Mercshares, with respect to the federal income tax consequences of the Merger,
substantially to the effect of paragraphs (i) through (v) immediately above.
Such opinion will not address the state, local or foreign tax aspects of the
Merger.
Any cash received by Farmers Bank 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 Farmers Bank 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 Merger. 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 Farmers Bank Stockholder should consult his own tax advisor with
respect to the specific tax consequences of the Merger to him, including the
application and effect of state, local and foreign tax laws.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes. Under the
purchase method of accounting, the amount by which the purchase price paid by
Mercshares exceeds the fair value of the net assets acquired will be recorded as
goodwill. Mercshares currently expects that based on preliminary purchase
accounting estimates the Merger would result in identifiable intangibles and
goodwill approximating $1,500,000, which would be amortized over an estimated
period of not more than 15 years. See "COMPARATIVE UNAUDITED PER SHARE DATA."
RESALE OF MERCSHARES COMMON STOCK AFTER THE MERGER BY CONTROLLING PERSONS
Under Federal securities laws there are certain potential limitations on the
sale of Mercshares Common Stock received in the Merger that will affect certain
Farmers Bank Stockholders who may be controlling persons of Farmers Bank.
Mercshares and Farmers Bank believe that the only Farmers Bank Stockholders who
may be deemed controlling persons subject to these limitations are the directors
and
18
<PAGE>
certain officers of Farmers Bank and certain persons related to them who have
been advised of these restrictions and have agreed in writing to them.
CONDITIONS TO MERGER
Consummation of the Merger is conditioned upon, among other things, approval
of the Affiliation Agreement by an affirmative vote of two-thirds of the
outstanding shares of Farmers Bank Common Stock entitled to vote thereon.
The obligation of Mercshares to consummate the Merger is also subject to the
prior satisfaction of certain further conditions including the following: (1)
stockholders who are affiliates of Farmers Bank for purposes of Rule 145 under
the Securities Act shall have entered into agreements with Mercshares, necessary
or desirable to conform with Rule 145; (2) Farmers Bank shall not have declared
any dividend with respect to its Common Stock other than a dividend for the year
1996 of $0.33 per share; (3) Farmers Bank shall not have changed its authorized,
issued or outstanding capital stock, issued any rights with respect thereto, or
made any distributions of its earnings or assets other than as provided in the
Affiliation Agreement; (4) the absence of any material adverse change in the
balance sheet, income statement, financial position, results of operations or
business of Farmers Bank; (5) compliance by Farmers Bank with certain
conditions, including limits on unapproved increases in compensation of
directors, officers or employees of Farmers Bank or unapproved alterations in
benefits received by such individuals; (6) absence of any change in Farmers
Bank's investment practices and policies; (7) absence of a vote against the
Merger by holders of an aggregate of 10% or more of the outstanding shares of
Farmers Bank Common Stock; (8) 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 Merger; (9) Farmers Bank shall not have
applied for or opened any new, or closed any existing, branch offices unless
approved by Mercshares; (10) receipt of an opinion of counsel confirming certain
of the tax consequences of the Merger for Mercshares, Peninsula and Farmers Bank
as set forth above under the heading "Certain Federal Income Tax Consequences";
(11) the accuracy and satisfaction of various other financial and legal
representations and conditions with respect to Farmers Bank; (12) the granting
or issuance of such consents or approvals, governmental or otherwise (including,
without limitation, lessor consents), which are necessary to permit or enable
Peninsula to conduct after the Effective Date all and every part of the business
and activities conducted by Farmers Bank prior to the Effective Date in the
manner in which such activities and business were then conducted by Farmers Bank
and at the offices at which they were then conducted; (13) the receipt of
certain regulatory approvals; and (14) the effectiveness of the Registration
Statement. Mercshares may in its discretion waive conditions (1) through (12).
The obligation of Farmers Bank to consummate the Merger is subject to the
satisfaction of certain further conditions including the following: (1) receipt
of an opinion of counsel confirming certain of the tax consequences of the
Merger for Farmers Bank Stockholders as set forth above under the heading
"Certain Federal Income Tax Consequences;" (2) the receipt of certain regulatory
approvals; (3) the effectiveness of the Registration Statement and (4) the
accuracy and satisfaction of various financial and legal representations and
conditions with respect to Mercshares. Farmers Bank may in its discretion waive
condition (4).
TREATMENT OF EMPLOYEE BENEFIT PLANS
Pursuant to the Affiliation Agreement and at the option of Mercshares,
Mercshares expects that Farmers Bank's Qualified Plan will be merged with and
into Mercshares' 401(k) plan. If in the judgment of Mercshares it is not
technically feasible or desirable to merge the plans, the Farmers Bank plan will
be terminated, with its assets held for distribution to the participants. In
addition, effective as of the first January 1st following the Effective Date,
employees of Farmers Bank will become eligible to participate in Mercshares'
cash balance plan according to its applicable provisions and will be given
credit for service with Farmers Bank for purposes of eligibility to participate
and vesting. Except with respect to Farmers Bank's profit sharing plan and
Mercshares' cash balance plan, which will be treated as above, and executive
19
<PAGE>
plans, programs and arrangements, eligibility for participation in which is
determined in the discretion of Peninsula or Mercshares, after the Effective
Date, Farmers Bank employees shall be entitled to participate in Peninsula's
employee benefit plans and programs on substantially the same basis as similarly
situated employees of Peninsula. Peninsula has agreed to treat service with
Farmers Bank before the Effective Date as service with Peninsula for purposes of
all such employee benefit and seniority-based plans and programs.
EXCLUSIVE DEALING
Farmers Bank has agreed that while the Affiliation Agreement is in effect,
neither Farmers Bank nor any of its officers, directors, employees, agents or
representatives (including, without limitation, any investment banker) 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 Farmers Bank 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 Farmers Bank Board of Directors shall
conclude, based on a written opinion of counsel, which may be based with respect
to financial matters on the written opinion of a financial advisor to Farmers
Bank, that its fiduciary obligations require consideration of such Acquisition
Proposal because it may be in the best interests of the Farmers Bank
Stockholders and is more favorable to the Farmers Bank Stockholders from a
financial point of view than the Merger.
An "Acquisition Proposal" is defined in the Affiliation Agreement as
including any proposed (A) merger, consolidation, share exchange or similar
transaction involving Farmers Bank, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of Farmers Bank representing 10% or more of the assets of Farmers Bank,
(C) issue, sale or other disposition of securities representing 10% or more of
the voting power of Farmers Bank, or (D) any transaction in which any person or
group shall acquire beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act), or the right to acquire beneficial ownership, of 20% or
more of the outstanding Farmers Bank Common Stock.
Farmers Bank has agreed that it will promptly advise Mercshares of, and
communicate to Mercshares the terms of, any such inquiry or proposal addressed
to Farmers Bank or of which Farmers Bank or its respective officers, directors,
employees, agents, or representatives (including, without limitation, any
investment banker) has knowledge.
TERMINATION
The Affiliation Agreement provides that it may be terminated and the Merger
abandoned at any time prior to the Effective Date: (a) notwithstanding the
approval of the Merger by the Farmers Bank Stockholders, by the mutual consent
of Farmers Bank and Mercshares; (b) by Mercshares and Peninsula if any time
Mercshares receives information from any regulatory authority, which by law is
required to approve the Merger or any other aspect of the transactions provided
for in the Affiliation Agreement, or which has authority to challenge the
validity of the Merger in judicial proceedings or otherwise, that provides a
substantial basis for concluding that the required regulatory approval will not
be granted or such transactions will be so challenged; (c) by Mercshares and
Peninsula if the Farmers Bank Board of Directors recommends to the Farmers Bank
Stockholders, or Farmers Bank accepts, an Acquisition Proposal, or by Farmers
Bank if, in compliance with the provisions of the Affiliation Agreement, the
Farmers Bank Board of Directors recommends to the Farmers Bank Stockholders, or
Farmers Bank accepts, an Acquisition Proposal; and (d) by Mercshares, Peninsula
or Farmers Bank if the Merger is not consummated by December 31, 1997. The
Affiliation Agreement provides that in the case of a termination under (c)
above, Farmers Bank shall pay Mercshares a termination fee of $200,000. The
Affiliation Agreement also
20
<PAGE>
provides that if the Affiliation Agreement is terminated by Mercshares or
Peninsula by reason of a material breach by Farmers Bank, or by Farmers Bank by
reason of a material breach by Mercshares or Peninsula, 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 nonbreaching party.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the appraisal rights provisions of the Financial Institutions Article
of the Maryland Annotated Code, as augmented by the MGCL pursuant to Section
1-201 of the Financial Institutions Article and relevant case law, certain
relevant sections of which are attached to this Prospectus and Proxy Statement
as Annex C, each Farmers Bank Stockholder will be entitled to demand and receive
payment of the "fair value" of his shares in cash, upon the surrender of his
stock certificates, if he (i) votes against the Merger, (ii) does not accept any
offer by Peninsula to pay the fair value of his shares of Farmers Bank Common
Stock and (iii) within 30 days after the Effective Date of the Merger as set
forth in the Certificate of Merger issued by the Commissioner of Financial
Regulation, makes written demand on Peninsula for payment of his shares (a
"Payment Demand"). For these purposes, abstentions and broker non-votes will not
suffice as votes against the Merger; such a vote must be cast by checking the
box marked "Against" on a proxy card properly submitted prior to the Special
Meeting or by personal vote at the Special Meeting. Any Farmers Bank Stockholder
who fails to comply with the requirements described above will be bound by the
terms of the Merger.
Upon the determination of the Effective Date of the Merger in the
Certificate of Merger issued by the Commissioner of Financial Regulation,
Peninsula will promptly deliver or send by certified mail, return receipt
requested, to each Farmers Bank Stockholder who has voted against the Merger,
written notice of the Effective Date of the Merger. Peninsula may offer to pay
in cash to the Farmers Bank Stockholders who have voted against the Merger not
more than what Peninsula considers to be the fair value of the Farmers Bank
Common Stock as of the time of the Special Meeting. The fair value of shares for
which Farmers Bank Stockholders make a Payment Demand (the "Appraisal Shares")
is determined as of the date of the Farmers Bank Special Meeting. The
determination of the fair value is made by a panel of three appraisers, one of
whom is selected by the owners of two-thirds of the Appraisal Shares, one of
whom is selected by the Board of Directors of Peninsula, and one of whom is
selected by the other two appraisers. Upon the determination of the fair value
of the Appraisal Shares, the appraisers must mail notice of the determination to
Peninsula and to each Farmers Bank Stockholder who made a Payment Demand (the
"Demanding Farmers Bank Stockholders"). Within five days after the appraisers
have given notice of their fair value determination, a Demanding Farmers Bank
Stockholder who is dissatisfied with the determination may notify the
Commissioner of Financial Regulation who will have the Appraisal Shares
reappraised. The reappraisal is final and binding as to the value of the
Appraisal Shares of such dissatisfied Demanding Farmers Bank Stockholder. If the
panel of appraisers fails to make a fair value determination within 90 days
after the Effective Date, the Financial Institutions Article provides that the
Commissioner of Financial Regulation shall have an appraisal made. Such
appraisal is final and binding as to the value of all Appraisal Shares.
Peninsula must pay the expenses of each appraisal made.
The foregoing summary of the rights of Farmers Bank 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
Farmers Bank 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 Financial Institutions Article and
the MGCL. Each Farmers Bank Stockholder desiring to exercise appraisal rights
should refer to Title 3, Subtitle 7, Part II, entitled "Rights of Objecting
Stockholders" of the Financial Institutions Article, and relevant sections of
Title 3, Subtitle 2, entitled "Rights of Objecting Stockholders" of the
Corporations and Associations Article of the Annotated Code of Maryland.
For further information relating to the exercise of appraisal rights, see
Annex C to this Prospectus and Proxy Statement.
21
<PAGE>
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
certain directors and officers of Farmers Bank and persons related to them who
owned an aggregate of 20,993 shares as of December 23, 1996 (approximately 23%)
of the outstanding Farmers Bank Common Stock (the "Supporting Farmers Bank
Affiliates") each entered into a Support Agreement (the "Support Agreement")
with Mercshares. Pursuant to the Support Agreement, each of the Supporting
Farmers Bank Affiliates 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 Farmers Bank Common Stock owned or acquired by such Supporting Farmers
Bank Affiliate during the term of the Support Agreement; (b) subject to the
provisions of Section 1.10 of the Affiliation Agreement with respect to the
fiduciary obligations as directors of Farmers Bank, 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 Farmers Bank, and to use his best efforts to
assure that Farmers Bank takes no such steps; (c) to promptly advise Mercshares
of any such inquiry or proposal of which such Supporting Farmers Bank Affiliate
has knowledge; (d) to vote his or her shares of Farmers Bank 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
Merger to be effected. The terms of the Support Agreement expire upon the
termination of the Affiliation Agreement.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the Affiliation Agreement,
the Supporting Farmers Bank Affiliates also executed a memorandum, undertaking
and agreement pursuant to which they have undertaken to comply with certain
provisions of the federal securities laws which restrict the sale of shares of
Mercshares Common Stock by such Supporting Farmers Bank Stockholders. See "THE
MERGER-- Resale of Mercshares Common Stock After the Merger by Controlling
Persons."
22
<PAGE>
DESCRIPTION OF FARMERS BANK OF MARDELA SPRINGS
GENERAL
Farmers Bank was organized in 1912 as a Maryland commercial bank. At
September 30, 1996, Farmers Bank had 151 record holders of its capital stock.
As of September 30, 1996, Farmers Bank had total assets of approximately
$28.0 million, total deposits of approximately $25.0 million, and total
stockholders' equity of approximately $2.5 million.
Farmers Bank is a community-oriented institution and provides deposit, loan
and other general banking services to individuals, businesses, institutions and
local government entities, including demand and time deposit accounts,
commercial and consumer loans, residential mortgages and home equity loans, and
safe deposit boxes.
Farmers Bank 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.
Farmers Bank's main executive office is located in Mardela Springs,
Maryland. The bank operates a total of three locations, including branches in
Sharptown, Maryland and Salisbury, Maryland. All bank facilities are owned by
Farmers Bank.
BUSINESS
SERVICES OF FARMERS BANK OF MARDELA SPRINGS
Farmers Bank 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 Farmers Bank:
COMMERCIAL SERVICES
- Loans, including working capital loans and lines of credit, demand, term
and time loans, and loans for real estate land acquisition, development
and construction, equipment and inventory financing.
RETAIL SERVICES
- Transaction accounts, including checking and NOW accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit
- Individual retirement accounts
- Christmas clubs
- 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-C- and CIRRUS-C-
systems
- Travelers checks and safe deposit boxes
- Wire transfer services
Farmers Bank does not now have general trust powers.
LENDING ACTIVITIES
GENERAL. At September 30, 1996, the Farmers Bank loan portfolio totaled
approximately $20.0 million, representing approximately 71.3% of its total
assets of $28.0 million. The principal categories of
23
<PAGE>
loans in the bank's portfolio are residential real estate mortgage, consumer,
commercial, real estate development and construction, and commercial real
estate.
LOAN PORTFOLIO COMPOSITION. The following table sets forth Farmers Bank's
loans by major categories as of September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
AMOUNT PERCENT
------------- ---------
<S> <C> <C>
Real Estate:
Development and construction....................................... $ 431,371 2.12%
Secured by farmland................................................ 987,693 4.85
Secured by 1-4 family residential properties
Home equity loans................................................ 1,341,815 6.59
Mortgages secured by first liens................................. 12,712,469 62.42
Mortgages secured by junior liens................................ 524,869 2.58
Secured by non-farm, non-residential properties.................... 1,845,975 9.06
Loans to finance agricultural production............................. 86,747 0.43
Commercial and industrial loans...................................... 1,006,485 4.94
Overdraft protection lines of credit................................. 44,943 0.22
Consumer loans....................................................... 1,189,072 5.84
Loans to political subdivisions, including volunteer fire
companies........................................................... 192,811 0.95
------------- ---------
Total loans...................................................... $ 20,364,250 100.00%
------------- ---------
------------- ---------
</TABLE>
COMMERCIAL LOANS. Farmers Bank 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 September 30, 1996, approximately $1.3 million or 6.3% of Farmers
Banks' total loan portfolio consisted of commercial business loans. The
financial condition and cash flows 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 on the size and complexity of the credit and the collateral
which secures the loan.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. Farmers Bank 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 the construction of single family dwellings.
Farmers Bank 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.
Farmers Bank 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, Farmers Bank
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.
24
<PAGE>
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. Farmers Bank originates mortgage
loans with a one- or three-year fixed rate period, after which they convert to a
demand basis. At September 30, 1996, approximately $13.2 million or 65% of the
bank's total loan portfolio consisted of this type of residential mortgage
loans. Farmers Bank has advanced approximately $1.0 million or 4.9% of the
September 30, 1996 total loan portfolio to farmers.
Farmers Bank requires fire and extended coverage casualty insurance
protecting the properties securing its mortgage loans. The bank does not escrow
funds for real estate taxes or hazard insurance. The properties securing all of
the bank's residential mortgage loans are appraised by appraisers approved by
the bank's board of directors.
Home equity loans are originated by Farmers Bank for typically up to 85% of
the appraised value, less the amount of any existing prior liens on the
property. Home equity loans generally consist of a ten-year revolving advance
period, followed by an additional ten-year period for repayment of the balance
with no additional advances allowed. Interest rates are adjusted quarterly and
are tied to the Wall Street Journal's published prime rate on the first day of
each calendar quarter. Farmers Bank secures these loans with mortgages on the
homes (generally a second mortgage). As of September 30, 1996, approximately
$1.3 million, or 6.6% of the bank's total loan portfolio consisted of home
equity loans.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. Farmers Bank also originates
mortgage loans secured by commercial real estate. At September 30, 1996,
approximately $1.8 million or 9.1% of the bank's total loan portfolio consisted
of commercial mortgage loans. Such loans are primarily secured by retail
buildings, warehouses and general purpose business space. Although terms vary,
Farmers Bank's commercial mortgages generally have maturities of three years or
less. Farmers Bank 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. Farmers Bank offers a variety of consumer loans to provide
a full range of financial services to its customers and because such loans
generally have higher interest rates than other loans. At September 30, 1996,
approximately $1.2 million or 6% of Farmers Bank's total loan portfolio
consisted of consumer loans.
COMPETITION. While promotional activities emphasize the many advantages of
dealing with a locally-run institution closely attuned to the needs of its
community, Farmers Bank faces strong competition in all areas of its operations.
Farmers Bank competes principally with approximately eleven other commercial
banks which operate in the vicinity of its offices, many of which have resources
substantially greater than its own. Farmers Bank also encounters competition
from thrift institutions, consumer loan companies, brokerage firms, investment
companies, credit unions and other financial institutions. This competition
comes from institutions operating in the Salisbury/Wicomico County area, which
include several community commercial banks, savings banks, thrifts, and credit
unions as well as branches of large regional banks such as Nationsbank, First
National Bank of Maryland, Crestar, and Signet. Farmers Bank's most direct
competition for deposits comes from these financial institutions as well as
mutual funds and stockbrokers. Farmers Bank competes with banking entities,
mortgage banking companies, and other institutional lenders for loans. The
competition for loans varies from time to time based on such factors as the
general availability of lendable funds, the demand for loans, general and local
economic conditions, current interest rate levels, and other factors which are
not readily predictable.
EMPLOYEES. As of September 30, 1996, Farmers Bank had 20 employees of whom
3 were officers, 16 were full-time employees and one was a part-time employee.
25
<PAGE>
PROPERTIES
Farmers Bank's main banking office is located on Main Street in Mardela
Springs, Maryland. The other branches are located at Main & Church Streets,
Sharptown, Maryland, and the corner of Beaglin Park Drive and Snow Hill Road in
Salisbury, Maryland. The bank owns all three of these locations. The bank also
owns a vacant lot on Main Street in Mardela Springs which is used for employee
parking, and an empty building on Church Street in Sharptown.
DIVIDENDS
After giving retroactive effect to a three-for-one stock split in 1996,
Farmers Bank has declared and paid an annual cash dividend on Farmers Bank
Common Stock of $0.33 per share for 1994, $0.33 per share for 1995, and a $0.34
per share dividend for 1996. Any future determination as to payment of cash
dividends will be at the discretion of Farmers Banks' Board of Directors and
will, subject to the Affiliation Agreement, depend on Farmers Banks' results of
operations, financial condition, capital and regulatory requirements and other
factors deemed relevant by the Farmers Bank Board of Directors. Since the
execution of the Affiliation Agreement, Farmers Bank has also been subject to
certain restrictions on the declaration and payment of dividends.
As a depository institution whose deposits are insured by the FDIC, Farmers
Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. Farmers Bank 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
institutions such as Farmers Bank. As a commercial bank under the Maryland
Financial Institutions Law, Farmers Bank may declare cash dividends from
undivided profits or, with the prior approval of the Maryland Commissioner of
Financial Regulation, 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 Farmers Bank to Farmers Bank Stockholders will be
taxable to Farmers Bank Stockholders as dividends, to the extent of Farmers Bank
of Mardela Springs' accumulated or current earnings and profits.
PRICE RANGE OF COMMON STOCK
There is no established public trading market for Farmers Bank Common Stock,
which is traded lightly in privately negotiated transactions. Management does
not have a history of the stock sale prices from these private trades.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the number of shares of Farmers Bank Common Stock
beneficially owned by directors and executive officers of Farmers Bank, and each
person known by Farmers Bank to beneficially own more than five per cent of
Farmers Bank Common Stock, as of November 30, 1996. Unless otherwise
26
<PAGE>
indicated, the individuals named below have sole voting and investment power
over all shares beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF FARMERS BANK
COMMON STOCK BENEFICIALLY
OWNED
----------------------------
PERCENT OF
NAME AND ADDRESS(1) NUMBER CLASS
- ---------------------------------------------------- ----------- ---------------
<S> <C> <C>
Margaret T. Bennett (2)............................. 7,716 8.38%
Margaret C. Bounds (3).............................. 11,796 12.82%
Marvin O. Tilghman (4).............................. 7,994 8.69%
Anna M. Ulm (5)..................................... 6,840 7.43%
Thomas L. Bounds, Director (6)...................... 3,000 3.26%
Milton G. Catlin, Director (7)...................... 1,668 1.81%
Robert E. Holloway, Director........................ 144 *
John B. Robins, IV, Director (8).................... 9,972 10.84%
Donald C. Sewell, Director (9)...................... 3,816 4.15%
William R. Webster, Director........................ 905 *
Richard W. Wright, Director (10).................... 2,124 2.31%
All directors and executive officers as a group (10
persons)(11)...................................... 24,497 26.62%
</TABLE>
- ------------------------
* Indicates holdings of less then one per cent.
(1) Each stockholder's address is at Farmers Bank's principal executive offices
unless otherwise noted.
(2) Ms. Bennett's address is P.O. Box 236, Mardela Springs, Maryland 21837.
(3) Ms. Bounds' address is 13054 St. Patrick's Court, Highland, Maryland 20777.
(4) Mr. Tilghman's address is 25452 Ocean Gateweay, Mardela Springs, Maryland
21837.
(5) Ms. Ulm's address is 6775 Levin Dashiell Road, Hebron, Maryland 21830.
(6) Includes 2,664 shares owned jointly with spouse.
(7) Includes 60 shares owned jointly with spouse and 1,152 shares owned by a
trust of which Mr. Catlin serves as trustee.
(8) Includes 3,228 shares owned by John B. Robins, IV, P.A., of which Mr. Robins
is a principal.
(9) Includes 816 shares owned jointly with children.
(10) Includes 1,752 shares owned jointly with spouse and child.
(11) Includes shares owned as described in notes (6) through (10) and 2,868
additional shares owned jointly by executive officers and their spouses or
children.
27
<PAGE>
SELECTED FINANCIAL INFORMATION
This selected financial information for Farmers Bank 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 Farmers Bank for the periods ended September 30, 1996 and 1995
have been derived from Farmers Bank's unaudited financial statements. In the
opinion of Farmers Bank's management, such data include all normal recurring
adjustments necessary for a fair presentation of results for such interim
periods. Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be obtained for the entire year
ended December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
----------------------
9/30/96 9/30/95
---------- ----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA
Interest and dividend
revenue................... $1,611 $1,442
Interest expense............ 770 628
Net interest income......... 841 814
Provision for credit
losses.................... 0 0
Other operating revenue..... 100 71
Other operating expense..... 712 793
Income taxes................ 75 16
Cumulative effect of change
in accounting for income
taxes..................... 0 0
Net income.................. $154 $76
BALANCE SHEET DATA, AT PERIOD
END
Total assets................ $28,004 $27,147
Total loans, net of deferred
fees & costs and allowance
for credit losses......... 19,966 17,690
Total deposits.............. 25,336 24,725
Total stockholders'
equity.................... $2,451 $2,284
PER COMMON SHARE DATA (a)
Net income.................. $1.67 $0.82
Cash dividends declared..... 0.00 0.00
Book value.................. 26.64 24.81
RATIOS
Return on average assets.... 0.75% 0.41%
Return on average equity.... 7.94 4.12
Average equity to average
assets.................... 8.67 9.09
Cash dividends declared to
net income................ 0.00 0.00
Period-end capital to
period-end risk-weighted
assets:
Tier 1.................... 12.99 14.61
Total..................... 14.08 15.83
Period-end Tier 1 leverage
ratio (b)................. 8.81 8.44
<CAPTION>
YEARS ENDED
----------------------------------------------------------
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest and dividend
revenue................... $1,962 $1,737 $1,609 $1,590 $1,687
Interest expense............ 880 646 614 647 825
Net interest income......... 1,082 1,091 995 943 862
Provision for credit
losses.................... 0 0 0 20 0
Other operating revenue..... 95 55 68 50 67
Other operating expense..... 1,021 948 886 765 792
Income taxes................ 28 36 50 58 25
Cumulative effect of change
in accounting for income
taxes..................... 0 0 10 0 0
Net income.................. $128 $162 $137 $150 $112
BALANCE SHEET DATA, AT PERIOD
END
Total assets................ $26,865 $23,001 $22,234 $17,606 $17,364
Total loans, net of deferred
fees & costs and allowance
for credit losses......... 18,131 16,141 13,653 11,515 11,468
Total deposits.............. 24,433 20,758 20,076 15,505 15,354
Total stockholders'
equity.................... $2,317 $2,185 $2,084 $1,978 $1,851
PER COMMON SHARE DATA (a)
Net income.................. $1.39 $1.77 $1.49 $1.63 $1.22
Cash dividends declared..... 0.33 0.33 0.33 0.25 0.25
Book value.................. 25.18 23.74 22.65 21.49 20.11
RATIOS
Return on average assets.... 0.51% 0.69% 0.67% 0.86% 0.65%
Return on average equity.... 5.68 7.44 6.70 8.11 6.15
Average equity to average
assets.................... 8.93 9.28 10.07 10.57 10.57
Cash dividends declared to
net income................ 24.04 18.88 22.36 15.02 20.30
Period-end capital to
period-end risk-weighted
assets:
Tier 1.................... 14.49 16.70 17.47 22.15 19.98
Total..................... 15.72 17.95 18.73 23.41 21.49
Period-end Tier 1 leverage
ratio (b)................. 9.12 9.42 10.21 11.29 10.72
</TABLE>
- ------------------------------
(a) Per share data for 1991 through 1996 have been adjusted to reflect the 100%
stock dividend in December 1993 and a three-for-one stock split in March
1996.
(b) The FDIC capital guidelines for banks require minimum ratios of capital to
risk-based assets of 4% for Tier 1 capital and 8% for total capital. Farmers
Bank must also maintain a minimum capital leverage ratio of 3% to 5% of Tier
1 capital to total assets.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Farmers Bank's net income for 1995 was $127,617, approximately $35,000 (21%)
lower than 1994. Net income for 1994 was $162,478, which was $25,000 (18%)
higher than 1993. On a per-share basis, net income was $1.39 in 1995, $1.77 in
1994, and $1.49 in 1993, after giving retroactive effect to the 3-for-1 stock
split recorded in 1996. The decline in net income from 1994 to 1995 was due
mainly to losses related to two OREO properties. These losses and OREO-related
expenses totaled $85,505, or approximately 8% of net interest income.
Additionally, Farmers Bank adopted a strategy of somewhat decreased interest
rate spread in order to attract deposits and thereby grow Farmers Bank's assets
in 1995. Farmers Bank opened its Salisbury branch in February 1993, which
somewhat depressed earnings. Net income increased from $75,575 for the first
nine months of 1995 to $153,919 during the same period in 1996, a 104% increase.
Farmers Banks' loan portfolio increased $2.5 million (18.2%) from 1993 to
1994, and a further $2 million (12.3%) in 1995. During the first three quarters
of 1996, the loan portfolio increased $1.8 million (10.1%) to approximately $20
million. Farmers Bank's loan growth can be attributed to (a) the opening of the
Salisbury branch in 1993; (b) the relocation of the President, Roger E.
Vandegrift, II, to the Salisbury market, with his strength in lending and his
familiarity with the Salisbury market; and (c) Farmers Bank's new Home Equity
Loan product, introduced in June of 1995.
Farmers Bank's assets increased by $767,000 in 1994, a 3.4% increase.
However, in 1995 Farmers Bank enjoyed a growth rate of 16.8%, or nearly $4
million in assets. For the first nine months of 1996, Farmers Bank's assets have
grown by $1.1 million, or 4.2%.
The following sections provide a detailed analysis regarding Farmers Bank's
financial condition and results of operations.
INTEREST REVENUE
Farmers Bank's loan interest revenue increased by approximately 5.6% from
1993 to 1994. This increase was due to an 18.2% increase in loan balances which
was partially offset by a 100 basis-point decrease in mortgage loan rates during
that period. Loan revenues increased another 15.4% in 1995, as Farmers Bank
enjoyed a continued 12.3% increase in loan balances and a 75 basis-point
increase in mortgage loan rates. During the twelve-month period from September
30, 1995 to September 30, 1996, loan revenues increased 10.19%, most of which is
due to increased loan volume, with only a slight decrease in mortgage rates.
Farmers Bank's investment securities interest revenues increased from 1993
to 1994 principally because of Farmers Bank's rapid deposit growth during that
period. In 1995, Farmers Bank's loan demand caught up with the deposit growth,
and some securities were sold and others were allowed to mature without
replacement in order to fund the increased loan demand. This reduced level of
investment securities resulted in decreased revenue for 1995. Comparing the
first three quarters of 1996 with the same period during 1995, investment
securities revenues increased because both the balances and the prevailing
interest rates rose.
Farmers Bank's revenues from Federal Funds sold showed a decrease from 1993
to 1994, because the Bank decreased its Federal Funds balances in order to fund
loan growth. During 1995, Federal Funds revenues increased because Farmers Bank
was aggressively attracting deposits.
Further details as to the yields earned on loans and other earning assets
are quantified in the financial statements of Farmers Bank presented elsewhere
herein.
29
<PAGE>
INTEREST EXPENSE
Farmers Bank experienced an approximate 5.2% increase in interest expense
from 1993 to 1994. This increase was due to a 3.4% increase in deposit growth,
mostly in certificates of deposit. Additionally, there was an approximate 80
basis point increase in Farmers Bank's certificate of deposit rates during 1994.
In 1995, Farmers Bank experienced 17.7% deposit growth rate in deposits. Farmers
Bank's strategy was to price certificates of deposit aggressively, which is
reflected in the 36.3% increase in interest expense in 1995. The increase in
interest expense in the first three quarters of 1996 is a reflection of the
continued growth of Farmers Bank's certificate of deposit portfolio.
NET INTEREST INCOME
The following table provides further analysis of the change in net interest
income during 1995 and the first three quarters of 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30
1996 COMPARED TO 1995 YEAR ENDED DECEMBER 31, 1995
(UNAUDITED) COMPARED TO 1994
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
------------------------------- -------------------------------
INCREASE/ INCREASE/
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Revenue
Loans.............................. $ 123,466 $ 157,654 $ (34,188) $ 219,133 $ 220,958 $ (1,825)
Investment securities
Fully taxable.................... 54,571 38,509 16,062 (44,331) (57,018) 12,687
Tax-advantaged................... (9,331) (8,409) (922) (317) (469) 152
Federal funds sold................. (1,057) 4,930 (5,987) 59,165 27,605 31,560
Interest-bearing deposits in other
banks............................ 560 341 219 (8,534) (8,277) (257)
--------- --------- --------- --------- --------- ---------
168,209 193,025 (24,816) 225,116 182,799 42,317
--------- --------- --------- --------- --------- ---------
Interest Expense
Checking accounts.................. 1,030 1,030 0 (1,362) (2,130) 768
Savings deposits................... (1,804) (2,014) 210 4,187 (24,505) 28,692
Time deposits...................... 145,397 98,932 46,465 230,198 122,742 107,456
Short-term borrowings.............. (2,863) (2,863) 0 1,517 1,669 (152)
--------- --------- --------- --------- --------- ---------
Total interest expense......... 141,760 95,085 46,675 234,540 97,776 136,764
--------- --------- --------- --------- --------- ---------
NET INTEREST INCOME................ $ 26,449 $ 97,940 $ (71,491) $ (9,424) $ 85,023 $ (94,447)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INCOME TAXES
In 1994 and 1995 Farmers Bank's effective tax rate on earnings was 18.0% and
18.2% respectively. These effective rates differ from statutory rates due
primarily to tax-exempt income, the surtax exemption, and non-deductibility of
some interest and other expenses.
LIQUIDITY
Liquidity describes the ability of Farmers Bank to meet financial
obligations that arise during the normal course of business. Liquidity is
primarily needed to meet the borrowing and deposit withdrawal requirements of
the customers of Farmers Bank, as well as for meeting current and planned
expenditures. Farmers Bank derives liquidity through customer deposits,
available lines of credit with other banks, the maturity distribution and
classification status (held to maturity vs. available for sale) of the
investment portfolio, loan repayments and income. Farmers Bank maintains a
portfolio of readily marketable
30
<PAGE>
investments that could be converted to cash on an immediate basis except for
those securities pledged to secure deposits of public funds and those designated
"Held to Maturity."
At September 30, 1996, Farmers Bank had available lines of credit of
$250,000 in overnight federal funds and $1,000,000 in reverse repurchase
agreements from other banks. Management of Farmers Bank believes that its
current capital, short-term investments, and lines of credit will satisfy
Farmers Bank's 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 Farmers Bank's 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 Farmers Bank's 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
Farmers Bank's interest-earning assets and interest-bearing liabilities as of
September 30, 1996, and Farmers Bank's interest sensitivity gap (i.e.,
interest-earning assets less interest-bearing liabilities). A positive
sensitivity gap for any time period means that 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 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.
31
<PAGE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
(IN THOUSANDS)
-----------------------------------------------------------------------------------
SEPTEMBER 30, 1996
NON- DEMAND & 3 TO 6 TO 1 TO 2 2 TO 3 OVER
EARNING 3 MONTHS 6 MONTHS 12 MONTHS YEARS YEARS 3 YEARS TOTAL
----------- ----------- ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash & Cash Items............. $ 937 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 937
Other non-interest-earning
assets...................... 1,115 0 0 0 0 0 0 1,115
----------- ----------- ----------- ----------- --------- --------- --------- ---------
TOTAL NON-INTEREST-EARNING
ASSETS...................... 2,052 0 0 0 0 0 0 2,052
Investment securities(1)...... 287 250 407 1,480 562 2,610 5,596
Federal Funds Sold............ 390 0 0 0 0 0 390
Loans(2)...................... 10,518 1,104 3,064 2,803 1,881 596 19,966
----------- ----------- ----------- --------- --------- --------- ---------
TOTAL INTEREST-EARNING
ASSETS...................... 11,195 1,354 3,471 4,283 2,443 3,206 25,952
----------- ----------- ----------- ----------- --------- --------- --------- ---------
TOTAL ASSETS.................. $ 2,052 $ 11,195 $ 1,354 $ 3,471 $ 4,283 $ 2,443 $ 3,206 $ 28,004
----------- ----------- ----------- ----------- --------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- --------- ---------
LIABILITIES & STOCKHOLDERS'
EQUITY
Non-interest-bearing
deposits.................... $ 3,816 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 3,816
Other non-interest-bearing
liabilities................. 301 0 0 0 0 0 0 301
----------- ----------- ----------- ----------- --------- --------- --------- ---------
TOTAL NON-INTEREST-BEARING
LIABILITIES................. 4,117 0 0 0 0 0 0 4,117
Savings Accounts.............. 4,536 0 0 0 0 0 4,536
MMDA Accounts................. 3,350 0 0 0 0 0 3,350
NOW Accounts.................. 691 0 0 0 0 0 691
Fed Funds Purchased........... 0 0 0 0 0 0 0
CD's & Other Time Accounts.... 1,574 2,267 2,433 2,513 1,175 2,898 12,859
----------- ----------- ----------- --------- --------- --------- ---------
TOTAL INTEREST-BEARING
LIABILITIES................. 10,151 2,267 2,433 2,513 1,175 2,898 21,437
STOCKHOLDERS' EQUITY.......... 2,451 0 0 0 0 0 0 2,451
----------- ----------- ----------- ----------- --------- --------- --------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY........ $ 6,568 $ 10,151 $ 2,267 $ 2,433 $ 2,513 $ 1,175 $ 2,898 $ 28,004
----------- ----------- ----------- ----------- --------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Interest Sensitivity Gap...... $ 1,044 $ (913) $ 1,038 $ 1,770 $ 1,268 $ 308
Cumulative Interest
Sensitivity Gap............. $ 1,044 $ 132 $ 1,169 $ 2,939 $ 4,207 $ 4,515
Cumulative Interest
Sensitivity Gap Ratio....... 40.2% 0.51% 4.51% 11.33% 16.21% 17.40%
</TABLE>
- ------------------------
(1) Securities are stated at book value for held-to-maturity and fair market
value for available-for-sale.
(2) Loans are stated net of deferred fees and costs and net of allowance for
credit losses.
The analysis provided in the table above includes the following assumptions:
Fixed-rate loans are scheduled by anticipated principal repayment streams, and
variable-rate loans are scheduled by repricing date. Investment securities are
scheduled by most-likely call date (where applicable) or by maturity date. Due
to their liquid nature, the entire balance of SuperNOW, savings and money market
accounts is assumed to be sensitive within three months. Farmers Bank's goal is
generally to maintain a balanced
32
<PAGE>
cumulative gap position (within a range of plus or minus 20%) over the time
periods shown in order to mitigate the impact of changes in interest rates on
liquidity, interest margins and operating results.
ANALYSIS OF INVESTMENT SECURITIES
The composition of the Farmers Bank's investment portfolio as of December
31, 1993, 1994, 1995, and September 30, 1996, valued at amortized cost, is as
follows:
<TABLE>
<CAPTION>
09/30/96 12/31/95 12/31/94 12/31/93
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities............. $ 600,271 $ 600,381 $ 950,517 $ 800,827
Federal Agency Securities............ 3,119,795 2,519,723 2,070,883 2,779,064
Mortgage-backed Securities........... 707,916 487,671 272,043 200,087
Equity Securities.................... 0 0 0 0
State and Municipal Securities....... 1,191,508 1,401,809 1,462,898 1,317,748
------------ ------------ ------------ ------------
$ 5,619,490 $ 5,009,584 $ 4,756,341 $ 5,097,726
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Farmers Bank adopted Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES in January 1994
and, accordingly, segregated the portfolio between securities held to maturity
and securities available for sale. The increase in the total of investment
securities of approximately $863,000 since December 31, 1994, is the result of
general deposit growth.
At September 30, 1996, the estimated weighted average life of investments in
debt securities was 4.29 years. The amortized cost and estimated fair values and
tax equivalent yield of debt securities at September 30, 1996, by contractual
maturities, are shown below:
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
-----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U. S. Treasury Securities
Due in one year or less..... $ 600,271 $ 0 $(5,941) $ 594,330
Federal Agency Securities
Due in one year or less..... 98,547 1,239 0 99,786
Due after one year through
five years................ 1,147,454 0 (21,766) 1,125,688
Due over five years through
ten years................. 200,000 0 (5,874) 194,126
State and Municipal Securities
(1)
Due in one year or less..... 351,190 454 (63) 351,581
Due after one year through
five years................ 673,554 6,962 (2,311) 678,205
Mortgage-Backed Securities
Due after one year through
five years................ 7,643 280 0 7,923
Due over five years through
ten years................. 77,602 302 0 77,904
Due after ten years......... 212,269 0 (5,683) 206,586
--------- ---------- ---------- ----------
Total................... $3,368,530 $9,237 $(41,638) $3,336,129
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U. S. Treasury Securities
Due in one year or less..... $ 0 $ 0 $ 0 $ 0
Federal Agency Securities
Due in one year or less..... 375,000 157 (1,118) 374,039
Due after one year through
five years................ 1,298,793 469 (20,983) 1,278,279
Due over five years through
ten years................. 0 0 0 0
State and Municipal Securities
(1)
Due in one year or less..... 166,764 0 (437) 166,327
Due after one year through
five years................ 0 0 0 0
Mortgage-Backed Securities
Due after one year through
five years................ 86,752 0 (1,104) 85,648
Due over five years through
ten years................. 0 0 0 0
Due after ten years......... 323,651 647 (2,074) 322,224
--------- ---------- ---------- ----------
Total................... $2,250,960 $ 1,273 $ (25,716) $2,226,517
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) All of the obligations of states and political subdivisions are rated "A" or
higher by either Moody's Investors Services or Standard & Poor's
Corporation.
33
<PAGE>
ANALYSIS OF LOANS
The table below represents a breakdown of loan balances of Farmers Bank.
Farmers Bank has no foreign loans.
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand and time...................................... $ 649 $ 291 $ 309 $ 450
Installment.......................................... 1,904 1,889 1,871 1,420
Mortgage and home equity............................. 17,619 16,146 14,180 12,022
----------- --------- --------- ---------
Total loans, net of deferred fees and costs.... $ 20,172 $ 18,326 $ 16,360 $ 13,892
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
Loan concentrations: Farmers Bank lends to customers primarily located in
the Delmarva region. Although the loan portfolio is diversified, its performance
will be influenced by the economy of the region.
The following table shows the contractual final maturities and interest rate
sensitivities of loans of Farmers Bank at September 30, 1996. Some loans may
include contractual installment payments which are not reflected in the tables
until final maturity. In addition, Farmers Bank's 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>
SEPTEMBER 30,
1996
IN ONE YEAR OR AFTER 1 THROUGH
LESS 5 YEARS AFTER 5 YEARS
--------------- --------------- ----------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
----- -------- ----- -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.................... $ 587 $ 0 $ 37 $ 0 $ 25 $0
Real estate-mortgage.......... 1,262 1,271 3,518 0 11,759 0
Consumer...................... 166 0 1,651 0 87 0
----- -------- ----- -------- ------ ---
$2,015 $1,271 $5,206 $ 0 $11,871 $0
----- -------- ----- -------- ------ ---
----- -------- ----- -------- ------ ---
</TABLE>
34
<PAGE>
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,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Non-Performing Loans:
Nonaccrual Loans (1)....................................... $ 0 $ 0 $ 0 $ 0
Restructured Loans (2)..................................... 0 0 0 0
------ --------- --------- ---------
Total Non-Performing Loans............................. 0 0 0 0
Other Real Estate Owned & Property in Liquidation (3)........ 269 269 219 10
------ --------- --------- ---------
Total Non-Performing Assets............................ 269 269 219 10
Loans Past Due 90 Days or More (4)........................... 4 34 122 30
------ --------- --------- ---------
Total Non Performing Assets and Past Due Loans......... $ 273 $ 303 $ 341 $ 40
------ --------- --------- ---------
------ --------- --------- ---------
Non-Performing Assets to Total Loans......................... 1.33% 1.47% 1.34% 0.07%
Non-Performing Assets and Past Due Loans to Total Loans, Net
of Deferred Fees and Costs................................. 1.35% 1.65% 2.09% 0.29%
</TABLE>
- ------------------------
(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 accrual 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 Farmers Bank 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.
As of September 30, 1996, there were no interest-bearing assets, other than
loans, classifiable as nonaccrual, 90 days past due, restructured or problem
assets.
Farmers Bank 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 monthly by
management and the Farmers Bank Board of Directors to determine its adequacy to
absorb potential future charge-offs of existing loans. The factors used by
management and Farmers Bank Board 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 Farmers Bank's loan officers and a committee
of Directors. In addition, bank regulatory agencies and independent accountants
periodically review the loan portfolio. At September 30, 1996, the Allowance was
1.02% of total loans, net of deferred fees and costs. The Allowance at September
30, 1996 is considered by Farmers Bank's management and Board of Directors to be
sufficient to address the risks in the current loan portfolio. If
35
<PAGE>
charges against the Allowance 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.
The following table presents certain information regarding loan loss
experience and the Allowance for Loan Losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Allowance at Beginning of Period..................................... $195 $219 $239 $220
Less Losses Charged Off:
Installment...................................................... 1 12 70 23
Mortgage......................................................... 0 26 0 0
Commercial and Other Loans....................................... 0 2 0 4
------------- --------- --------- ---------
Total Losses Charged Off........................................... 1 40 70 27
Recoveries of Losses Previously Charged Off:
Installment...................................................... 4 13 48 40
Mortgage......................................................... 8 1 1 1
Commercial and Other Loans....................................... 0 1 5 0
------------- --------- --------- ---------
Total Recoveries................................................... 12 16 50 46
Net Losses Charged Off (Recoveries).................................. (11) 24 20 (19)
Provisions to Allowance Charged to Operating Expenses................ 0 0 0 0
------------- --------- --------- ---------
Allowance at End of Period (1)....................................... $206 $195 $219 $239
------------- --------- --------- ---------
------------- --------- --------- ---------
Ratio of Net Charge-Offs (Recoveries) to Average Total Loans (1)..... (0.05%) 0.14% 0.13% (0.15%)
Ratio of Allowance to Non-Performing and Past Due Loans (1).......... 75.40% 64.35% 64.17% 593.48%
Ratio of Allowance to Loans, Net of Deferred Fees and Costs.......... 1.02% 1.06% 1.34% 1.72%
</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 $206,000 at September 30, 1996 represented 1.02% of gross
loans at September 30, 1996. At December 31, 1995, the Allowance was 1.06% of
gross loans. There was no provision for credit losses made during the first
three quarters of 1996 because of minimal credit losses and adequate funding of
the Allowance based on the risk categorization of loans. Farmers Bank's
management and Directors plan to make a provision of $10,000 during the last
quarter of 1996 to ensure that the Allowance remains above the 1% level. As of
September 30, 1996, there were approximately $4,000 in loans past due 90 days,
and there were no non-accrual loans.
A breakdown of the Allowance is provided in the table below; however,
Farmers Bank's management and Directors do 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
36
<PAGE>
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>
YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Demand and time............................................................. $ 7 $ 3 $ 4 N/A
Installment................................................................. 21 22 25 N/A
Mortgage and home equity.................................................... 178 170 190 N/A
----- --------- --------- ---
206 195 219 239
----- --------- --------- ---
----- --------- --------- ---
</TABLE>
The table below provides a percentage breakdown of the loan portfolio by
category to total loans less unearned income:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Demand and time...................................................... 3.22% 1.59% 1.89% 3.24%
Installment.......................................................... 9.44 10.31 11.44 10.22
Mortgage and home equity............................................. 87.34 88.10 86.67 86.54
------ --------- --------- ---------
Total loans, net of deferred fees and costs.................... 100.00% 100.00% 100.00% 100.00%
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
DEPOSITS ANALYSIS
The following table sets forth the average deposit balances and average
rates paid on deposits during the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
09/30/96
---------------------------
(IN THOUSANDS)
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE
------- ------- -------
<S> <C> <C> <C>
Total Noninterest-Bearing
Demand Deposits............. $4,022 $3,435
Interest-Bearing Deposits:
Checking Accounts........... 477 2.75% 430
Savings Accounts............ 4,419 3.06 4,003
Money Market Accounts....... 3,689 3.54 4,269
Certificates of Deposit,
$100,000 or More.......... 1,707 5.90 1,604
Other Time Deposits......... 10,976 5.89 8,998
------- ------- -------
Total Interest-Bearing
Deposits.................... 21,268 4.82% 19,304
------- ------- -------
------- ------- -------
Total Deposits................ $25,290 2$2,739
------- -------
------- -------
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
------- --------------------------- -------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Noninterest-Bearing
Demand Deposits............. $3,696 $2,830
Interest-Bearing Deposits:
Checking Accounts........... 2.75% 513 2.57% 345 3.10%
Savings Accounts............ 3.27 4,333 2.95 3,499 3.37
Money Market Accounts....... 3.28 4,752 2.93 5,278 3.33
Certificates of Deposit,
$100,000 or More.......... 5.53 1,212 4.47 688 4.46
Other Time Deposits......... 5.62 6,708 4.62 5,560 4.92
------- ------- ------- ------- -------
Total Interest-Bearing
Deposits.................... 4.55% 17,518 3.68% 15,370 3.98
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total Deposits................ $21,214 $18,200
------- -------
------- -------
</TABLE>
37
<PAGE>
The following table provides the maturities of certificates of deposit of
Farmers Bank in amounts of $100,000 or more. Farmers Bank had no brokered
deposits as of September 30, 1996.
<TABLE>
<CAPTION>
DECEMBER 30,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Maturing or Repricing in:
3 Months or Less................................................... $ 209 $ 100 $ 200 $ 202
Over 3 Months Through 12 Months.................................... 720 309 504 300
Over 12 Months..................................................... 821 1,132 620 710
------ --------- --------- ---------
Total.......................................................... $ 1,750 $ 1,541 $ 1,324 $ 1,212
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
OTHER BORROWED FUNDS
Farmers Bank had no other borrowed funds at September 30, 1996, or as of
December 31, 1993, 1994, or 1995.
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 Farmers Bank 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 Farmers Bank is
categorized and weighted appropriately, and the capital of Farmers Bank is then
compared to the aggregate value of such risk-weighted assets or commitments to
determine if additional capital is required. At September 30, 1996, Farmers
Bank's ratio of qualifying total capital to risk-weighted assets was 14.08% 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 represent Farmers Bank's capital position relative to its
various minimum statutory and regulatory capital requirements at September 30,
1996.
LEVERAGE CAPITAL RATIO
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PERCENT OF AVERAGE
AMOUNT TOTAL ASSETS
------------- -------------------
<S> <C> <C>
(IN
THOUSANDS)
Tier 1 Capital (1)......................................... $ 2,467 8.90%
Leverage Capital Ratio Requirement......................... 831 3.00
------------- ---
Excess................................................... 1,636 5.90%
------------- ---
------------- ---
Average Total Assets....................................... $ 27,712
-------------
-------------
</TABLE>
38
<PAGE>
RISK-BASED CAPITAL RATIO
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PERCENT OF RISK-BASED
AMOUNT CAPITAL
------------- ---------------------
<S> <C> <C>
(IN
THOUSANDS)
Tier 1 (1)........................................... $ 2,467 12.99%
Risk-Based Tier 1 Capital Requirement................ 760 4.00
------------- -----
Excess............................................. 1,707 8.99%
------------- -----
------------- -----
Tier 1 Capital (1)................................... 2,467 12.99%
Tier 2 Capital....................................... 206 1.08
------------- -----
Total Risk-Based Capital (3)....................... 2,673 14.08%
Fully Phased-In Risk-Based Capital Requirement....... 1,519 8.00
------------- -----
Excess............................................. $ 1,154 6.08%
------------- -----
------------- -----
Risk-Weighted Assets................................. $ 18,988
-------------
-------------
</TABLE>
- ------------------------
(1) Tier 1 Capital consists of capital stock, surplus, and undivided profits
(2) Tier 2 Capital consists of the allowable portion of the Allowance for Loan
Loss
(3) Total Risk-Based Capital represents the sum of Tier 1 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 that 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.
Farmers Bank does not believe that the proposed revisions, if adopted, would
have a material adverse effect on Farmers Bank.
39
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF
MERCSHARES COMMON STOCK AND FARMERS BANK COMMON STOCK
The rights of Farmers Bank Stockholders currently are governed by the MGCL,
the Financial Institutions Article, Farmers Bank's Charter and its By-laws. Upon
consummation of the Merger, Farmers Bank 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 Farmers Bank
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
Farmers Bank and Mercshares.
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 Farmers Bank Stockholders will be receiving
Mercshares Common Stock pursuant to the Merger, 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
Farmers Bank's Articles of Incorporation do not authorize the issuance of
preferred stock. Mercshares' Articles of Incorporation authorize the issuance of
two million shares of preferred stock, 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.
QUALIFICATION, NOMINATION AND NUMBER OF DIRECTORS
Under the Financial Institutions Article, a director must be a Farmers Bank
Stockholder owning shares of unencumbered Farmers Bank Common Stock worth at
least $500 and a majority of Farmers Bank directors must be resident in
Maryland. The Farmers Bank By-laws provide that the number of Farmers Bank
directors must be between five and 11, and currently Farmers Bank has seven
directors. 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 19 and may be decreased or increased to not less than seven nor more
than 30 by amendment to the By-laws.
DESCRIPTION OF MERCSHARES CAPITAL STOCK
GENERAL
Mercshares is authorized to issue up to 67,000,000 shares of Mercshares
Common Stock. On October 31, 1996, 47,384,827 shares of Mercshares Common Stock
were issued and outstanding. Mercshares is also authorized to issue 2,000,000
shares of 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
40
<PAGE>
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."
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 Farmers
Bank Stockholders in exchange for Farmers Bank 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.
STOCK REPURCHASES
Pursuant to authorization by its Board of Directors, Mercshares repurchased
567,500 shares of Mercshares Common Stock in 1994, 1,830,864 shares in 1995 and
1,066,045 shares in 1996. Repurchases have been made under the safe harbor
provisions of Rule 10b-18 promulgated under the Exchange Act, which limits the
manner and price of issuer repurchases. At any given time, a repurchase may not
be made at a price exceeding the greater of the highest current independent
published bid price or the last independent sale price. Repurchases have been
made to provide shares for general corporate purposes, including issuance under
Mercshares dividend reinvestment plans and employee stock purchase and stock
option plans. Mercshares is currently authorized by its Board to repurchase
2,535,591 additional shares, which may be purchased from time to time depending
on the price of Mercshares Common Stock, market conditions, regulatory
considerations and other factors. No repurchases have been made in the two
business days prior to the date of this Prospectus and Proxy Statement and it is
expected that none will be made until after the Farmers Bank Special Meeting.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered hereby and the Merger 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
Merger will be passed upon for Farmers Bank by Robins, Johnson & Wade,
Salisbury, Maryland. John B. Robins, IV, a principal of John B. Robins, IV,
P.A., which is a partner in Robins, Johnson & Wade, is Chairman of the Farmers
Bank Board of Directors.
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,
1995 and 1994 and for each of the three
41
<PAGE>
years in the period ended December 31, 1995 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 Farmers Bank included in this Prospectus and
Proxy Statement for the three years ended December 31, 1995 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
Farmers Bank 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.
42
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
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, 1995, 1994 and 1993.................................................... F-3
Statements of income for the three years ended December 31, 1995......................................... F-4
Statements of changes in stockholders' equity for the three years ended December 31, 1995................ F-5
Statements of cash flows for the three years ended December 31, 1995..................................... F-6-7
Notes to financial statements............................................................................ F-8-17
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance sheets as of September 30, 1996 and September 30, 1995........................................... F-18
Statements of income for the nine months ended September 30, 1996 and 1995............................... F-19
Statements of changes in stockholders' equity for the nine months ended September 30, 1996 and 1995...... F-20
Statements of cash flows for the nine months ended September 30, 1996 and 1995........................... F-21
Note to unaudited financial statements................................................................... F-22
Supplementary Information--Average Balances, Interest and Yields......................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Stockholders
Farmers Bank of Mardela Springs
Mardela Springs, Maryland
We have audited the accompanying balance sheets of Farmers Bank of Mardela
Springs as of December 31, 1995, 1994, and 1993, and the related statements of
income, changes in 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 Farmers Bank of Mardela
Springs as of December 31, 1995, 1994, and 1993, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/S/ ROWLES & COMPANY
Salisbury, Maryland
January 16, 1996
F-2
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................................. $ 1,172,614 $ 905,058 $ 1,188,421
Federal funds sold.................................................. 1,425,000 200,000 1,025,000
Interest-bearing deposits with banks................................ -- -- 349,079
Securities available for sale....................................... 2,152,997 880,594 --
Securities held to maturity (approximate market value of $2,868,714,
$3,626,313, and $5,140,000)....................................... 2,862,481 3,826,178 5,097,726
Loans, less allowance for credit losses of $194,963, $219,150, and
$239,032.......................................................... 18,131,390 16,140,889 13,652,786
Bank premises and equipment......................................... 535,446 532,864 602,419
Accrued interest receivable......................................... 183,328 146,772 146,034
Deferred income taxes............................................... 26,636 58,858 68,420
Other real estate owned............................................. 268,641 218,906 10,000
Other assets........................................................ 106,278 90,500 93,847
------------- ------------- -------------
$ 26,864,811 $ 23,000,619 $ 22,233,732
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing............................................... $ 3,781,817 $ 3,271,474 $ 2,897,151
Interest-bearing.................................................. 20,651,569 17,486,303 17,178,545
------------- ------------- -------------
Total deposits................................................ 24,433,386 20,757,777 20,075,696
Accrued interest payable............................................ 102,767 38,973 36,118
Severance benefit payable........................................... -- 6,463 23,586
Other liabilities................................................... 11,800 12,786 13,968
------------- ------------- -------------
24,547,953 20,815,999 20,149,368
------------- ------------- -------------
Stockholders' equity
Common stock, par value $12.50 per share; authorized 200,000
shares; issued and outstanding 92,028 shares.................... 383,450 383,450 383,450
Surplus........................................................... 1,115,000 1,115,000 1,115,000
Undivided profits................................................. 814,657 717,716 585,914
------------- ------------- -------------
2,313,107 2,216,166 2,084,364
Net unrealized gain (loss) on securities available for sale......... 3,751 (31,546) --
------------- ------------- -------------
2,316,858 2,184,620 2,084,364
------------- ------------- -------------
$ 26,864,811 $ 23,000,619 $ 22,233,732
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest revenue
Loans, including fees.................................. $1,643,109 $1,423,976 $1,348,127
U.S. Treasury and Government agency securities......... 172,962 217,293 160,209
State and municipal securities......................... 64,337 64,654 47,595
Bank balances.......................................... 197 8,731 13,022
Federal funds sold..................................... 81,269 22,104 40,000
--------- --------- ---------
Total interest revenue............................... 1,961,874 1,736,758 1,608,953
--------- --------- ---------
Interest expense
Deposits............................................... 877,487 644,464 611,341
Other.................................................. 2,863 1,346 2,498
--------- --------- ---------
Total interest expense............................... 880,350 645,810 613,839
--------- --------- ---------
Net interest income.................................. 1,081,524 1,090,948 995,114
Provision for credit losses.............................. -- -- --
--------- --------- ---------
Net interest income after provision for credit
losses............................................. 1,081,524 1,090,948 995,114
--------- --------- ---------
Other operating revenue.................................. 94,986 55,081 68,427
--------- --------- ---------
Other expenses
Salaries............................................... 420,410 402,499 380,803
Employee benefits...................................... 96,849 105,589 96,690
Occupancy.............................................. 64,199 73,213 64,520
Furniture and equipment................................ 84,296 97,792 101,036
Other operating........................................ 354,838 268,766 243,487
--------- --------- ---------
Total other expenses................................. 1,020,592 947,859 886,536
--------- --------- ---------
Income before income taxes and cumulative effect of
change in accounting principle......................... 155,918 198,170 177,005
Income taxes............................................. 28,301 35,692 50,307
--------- --------- ---------
Income before cumulative effect of change in accounting
principle.............................................. 127,617 162,478 126,698
Cumulative effect on prior years of change in accounting
for income taxes....................................... -- -- 10,472
--------- --------- ---------
Net income........................................... $ 127,617 $ 162,478 $ 137,170
--------- --------- ---------
--------- --------- ---------
Earnings per common share
Income before cumulative effect of change in accounting
principle............................................ $ 1.39 $ 1.77 $ 1.38
Cumulative effect on prior years of change in
accounting for income taxes.......................... -- -- .11
--------- --------- ---------
Net income........................................... $ 1.39 $ 1.77 $ 1.49
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
UNDIVIDED (LOSSES) ON
SHARES PAR VALUE SURPLUS PROFITS SECURITIES
--------- ---------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.......................... 15,338 $ 191,725 $ 1,105,000 $ 681,145 $ --
Transfers........................................... -- -- 10,000 (10,000) --
Net income.......................................... -- -- -- 137,170 --
Cash dividend, $0.33 per share...................... -- -- -- (30,676) --
Stock split in the form of a 100% stock dividend.... 15,338 191,725 -- (191,725) --
--------- ---------- ------------ ----------- ---------------
Balance, December 31, 1993.......................... 30,676 383,450 1,115,000 585,914 --
Unrealized gains on securities at January 1, 1994... -- -- -- -- 10,353
Net income.......................................... -- -- -- 162,478 --
Cash dividend, $0.33 per share...................... -- -- -- (30,676) --
Change in unrealized gains (losses) on securities... -- -- -- -- (41,899)
--------- ---------- ------------ ----------- ---------------
Balance, December 31, 1994.......................... 30,676 383,450 1,115,000 717,716 (31,546)
Net income.......................................... -- -- -- 127,617 --
Cash dividend, $0.33 per share...................... -- -- -- (30,676) --
Change in unrealized gains (losses) on securities... -- -- -- -- 35,297
--------- ---------- ------------ ----------- ---------------
Balance, December 31, 1995.......................... 30,676 $ 383,450 $ 1,115,000 $ 814,657 $ 3,751
--------- ---------- ------------ ----------- ---------------
--------- ---------- ------------ ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received.................................... $1,909,586 $1,809,352 $1,591,264
Fees and commissions received........................ 94,986 55,082 68,427
Interest paid........................................ (816,556) (642,955) (606,827)
Cash paid to suppliers and employees................. (870,181) (852,792) (829,787)
Income taxes (paid) refunded......................... (24,767) 21,635 (113,457)
---------- ---------- ----------
293,068 390,322 109,620
---------- ---------- ----------
Cash flows from investing activities
Proceeds from sales and maturities of investment
securities
Held to maturity................................... 834,122 929,899 1,131,569
Available for sale................................. 121,874 918,992 --
Purchase of investment securities and
interest-bearing deposits
Held to maturity................................... (50,519) (725,395) (3,180,720)
Available for sale................................. (1,170,927) (525,000) --
Loans advanced, net of principal collected........... (1,962,561) (2,734,471) (2,172,871)
Purchases of premises and equipment.................. (70,126) (29,740) (98,031)
Proceeds from sale of equipment...................... -- -- 150
Purchase of computer software........................ (24,511) (40,472) (4,105)
Proceeds from sale of other real estate.............. 155,844 10,000 20,097
Purchase of other real estate........................ (278,641) -- (20,097)
---------- ---------- ----------
(2,445,445) (2,196,187) (4,324,008)
---------- ---------- ----------
Cash flows from financing activities
Net increase in deposits............................. 3,675,609 682,081 4,571,040
Dividends paid....................................... (30,676) (30,676) (30,676)
---------- ---------- ----------
3,644,933 651,405 4,540,364
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents... 1,492,556 (1,154,460) 325,976
Cash and cash equivalents at beginning of year......... 1,105,058 2,259,518 1,933,542
---------- ---------- ----------
Cash and cash equivalents at end of year............... $2,597,614 $1,105,058 $2,259,518
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities
Net income........................................... $ 127,617 $ 162,478 $ 137,170
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation......................................... 67,544 76,254 79,097
Amortization of intangibles.......................... 15,815 8,508 5,624
Write down of other real estate...................... 10,000 -- --
Deferred income taxes................................ 12,056 27,585 (961)
Amortization of premiums, net of accretion of
discounts 12,208 14,582 5,546
Interest added to interest-bearing deposits.......... -- -- (10,494)
Cost of donated land................................. -- 23,041 --
Loss (gain) on
Disposal of premises and equipment................. -- -- 523
Sale of securities................................. -- 31,288 (500)
Sale of other real estate.......................... 63,062 -- --
Increase (decrease) in
Deferred loan origination fees, net................ (27,940) 27,462 34,655
Accrued interest payable........................... 63,794 2,855 7,012
Accrued income taxes, net of refunds............... (8,522) 29,742 (72,661)
Other liabilities.................................. (986) (1,183) (4,708)
Severance benefit payable.......................... (6,463) (17,123) (15,846)
Decrease (increase) in
Accrued interest receivable........................ (36,556) (738) (46,896)
Prepaid expenses................................... 1,439 5,571 (7,941)
---------- ---------- ----------
$ 293,068 $ 390,322 $ 109,620
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
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.
Farmers Bank of Mardela Springs is a financial institution operating
primarily in Wicomico County. The Bank offers deposit services and loans to
individuals, small businesses, associations and government entities. Other
services include direct deposit of payroll and social security checks, automatic
drafts from accounts, automated teller machine services, safe deposit boxes, and
travelers cheques.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions may affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
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, the Bank 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
adjusted for amortization of premiums and accretion of discounts to maturity, or
over the expected life of mortgage-backed securities. Securities 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.
During 1995, the FASB permitted a single transfer from the held-to-maturity
classification to the available-for-sale portfolio. The Bank transferred
municipal securities with amortized cost of $168,329 to available-for-sale.
Gains and losses on disposal are determined using the
specific-identification method.
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.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line and accelerated
methods over the estimated useful lives of the assets.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans are stated at face value, 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. The accrual of interest
is discontinued when circumstances indicate that collection is questionable.
F-8
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan origination fees, net of origination costs, are recognized as income
over the estimated lives of the loans.
The Bank maintains an allowance for credit losses that is adequate to
provide for potential loan losses based on management's review and analysis of
the loan portfolio as well as prevailing and anticipated economic conditions. If
the current economy or real estate market were to suffer a severe downturn, the
estimate for uncollectible accounts would need to be increased. Credit losses
are charged to the allowance when management believes that collectibility is
unlikely. Collections of loans previously charged off are added to the allowance
at the time of recovery.
Management classifies loans as impaired when the collection of contractual
obligations, including principal and interest, is doubtful.
OTHER REAL ESTATE OWNED
Real estate obtained through foreclosure, or in the process of foreclosure,
is recorded at the lower of cost or net realizable value on the date acquired.
Losses incurred at the time of acquisition of the property are charged to the
allowance for credit losses. Subsequent reductions in the estimated carrying
value of the property and other expenses of owning the property are included in
other operating expense.
INCOME TAXES
The provision for income taxes includes taxes payable for the current year
and deferred income taxes. Deferred income taxes are provided to account for
temporary differences between financial and taxable income.
In 1993, the Bank adopted Statement No. 109 of the FASB, ACCOUNTING FOR
INCOME TAXES, which requires recognition of 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.
PER SHARE DATA
Earnings per share data are determined by dividing net income by the 92,028
shares outstanding, giving retroactive effect to the stock dividends. Cash
dividends per share and book value per share are calculated similarly.
2. CORRESPONDENT BANK RELATIONSHIPS
The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the limit,
including unsecured federal funds sold to the same banks, were approximately
$1,370,130 and $1,162,600 for 1995 and 1994, respectively.
Banks are required to carry noninterest-bearing cash reserves at specified
percentages of deposit balances. The Bank's normal amount of cash on hand and on
deposit with other banks is sufficient to satisfy the reserve requirements.
F-9
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROFIT SHARING PLAN
The Bank maintains a profit sharing plan covering substantially all
employees with one year of service. Plan contributions are determined annually
by the Board of Directors. Contributions of $13,000, $20,000, and $15,000 to the
profit sharing plan are included in expenses for 1995, 1994, and 1993,
respectively.
4. RELATED PARTY TRANSACTIONS
The officers and directors of the Bank enter into loan transactions with the
Bank in the ordinary course of business. The terms of these transactions are
similar to the terms provided to other borrowers entering into similar loan
transactions. At December 31, 1995, 1994, and 1993, the total amounts of such
loans outstanding were $99,085, $181,179, and $244,355, respectively.
5. LINES OF CREDIT
The Bank has available lines of credit of $1,250,000 in overnight federal
funds and reverse repurchase agreements from other banks.
6. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1995 COST GAINS LOSSES MARKET VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government agency..................................... $ 1,573,588 $ 4,058 $ 2,034 $1,575,612
State and municipal........................................ 323,185 194 641 322,738
Mortgage-backed............................................ 250,330 4,317 -- 254,647
------------ ----------- ----------- ------------
$ 2,147,103 $ 8,569 $ 2,675 $2,152,997
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Held to maturity
U.S. Treasury.............................................. $ 600,381 $ -- $ 2,022 $ 598,359
U.S. Government agency..................................... 946,135 4,687 7,165 943,657
State and municipal........................................ 1,078,624 12,586 1,605 1,089,605
Mortgage-backed............................................ 237,341 2,275 2,523 237,093
------------ ----------- ----------- ------------
$ 2,862,481 $ 19,548 $ 13,315 $2,868,714
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government agency..................................... $ 775,000 $ 953 $ 52,212 $ 723,741
State and municipal........................................ 155,163 1,690 -- 156,853
------------ ----------- ----------- ------------
$ 930,163 $ 2,643 $ 52,212 $ 880,594
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Held to maturity
U.S. Treasury.............................................. $ 950,517 $ -- $ 45,830 $ 904,687
U.S. Government agency..................................... 1,295,883 -- 83,932 1,211,951
State and municipal........................................ 1,307,735 5,875 54,436 1,259,174
Mortgage-backed............................................ 272,043 -- 21,542 250,501
------------ ----------- ----------- ------------
$ 3,826,178 $ 5,875 $ 205,740 $3,626,313
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-10
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1993 COST GAINS LOSSES MARKET VALUE
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury............................................ $ 800,827 $ 4,173 $ -- $ 805,000
U.S. Government agency................................... 2,779,064 22,809 8,873 2,793,000
State and municipal...................................... 1,317,748 29,500 8,248 1,339,000
Mortgage-backed.......................................... 200,087 2,913 -- 203,000
------------ ------------ ------------ ------------
$ 5,097,726 $ 59,395 $ 17,121 $5,140,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The book value and estimated market value of securities, by contractual
maturity, and the amount of pledged securities, are shown below. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------- --------------------------
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1995 COST GAINS LOSSES MARKET VALUE
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Maturing................................................. $ 155,013 $ 155,207 $ 336,339 $ 338,669
Within one year........................................ 1,543,171 1,542,831 2,214,455 2,219,204
Over one to five years................................. 198,589 200,312 74,346 73,748
Over five years........................................ 250,330 254,647 237,341 237,093
------------ ------------ ------------ ------------
Mortgage-backed securities............................... $ 2,147,103 $ 2,152,997 $ 2,862,481 $2,868,714
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pledged securities....................................... $ -- $ -- $ 150,000 $ 149,250
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing................................................. $ 100,000 $ 100,953 $ 649,972 $ 645,999
Within one year........................................ 830,163 779,641 2,726,674 2,563,238
Over one to five years................................. -- -- 177,489 166,5757
Over five years........................................ -- -- 272,043 250,501
------------ ------------ ------------ ------------
Mortgage-backed securities............................. $ 930,163 $ 880,594 $ 3,826,178 $3,626,313
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pledged securities....................................... $ -- $ -- $ 50,000 $ 48,484
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Maturing
Within one year.................................................... $ 425,750 $ 431,000
Over one to five years............................................. 4,364,788 4,399,000
Over five years.................................................... 107,101 107,000
Mortgage-backed securities......................................... 200,087 203,000
--------- ---------
$5,097,726 $5,140,000
--------- ---------
--------- ---------
Pledged securities................................................... $ 250,000 $ 251,500
--------- ---------
--------- ---------
</TABLE>
Investment securities are pledged to secure the deposits of local
governments.
F-11
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Demand and time................................. $ 291,180 $ 309,001 $ 449,652
Installment..................................... 1,888,976 1,871,503 1,419,893
Mortgage and home equity........................ 16,146,197 14,179,535 12,022,273
------------- ------------- -------------
$ 18,326,353 $ 16,360,039 $ 13,891,818
194,963 219,150 239,032
------------- ------------- -------------
Loans, net...................................... $ 18,131,390 $ 16,140,889 $ 13,652,786
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The following commitments and letters of credit were outstanding as of
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Construction loans....................................... $ 467,623 $ 238,629 $ 484,637
Unfunded loan commitments................................ 568,800 390,200 586,500
Overdraft lines of credit................................ 72,564 51,309 36,733
Lines of credit.......................................... 722,928 286,156 112,316
Standby letters of credit................................ 25,500 -- --
</TABLE>
Loan commitments and lines of credit are agreements to lend to customers as
long as there is no violation of any conditions of the contracts. Loan
commitments generally have interest 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.
Loan commitments, lines of credit, and letters of credit are made on the
same terms, including collateral, as outstanding loans. No amount has been
recognized by the Bank as of December 31, 1995, as an allowance for credit
losses related to these financial instruments with off-balance sheet risk.
The Bank lends to customers primarily located in the Delmarva region.
Although the loan portfolio is diversified, its performance will be influenced
by the economy of the region.
Loan maturities as of December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Immediately..................................... $ 624,315 $ 323,492 $ 23,883
Within one year................................. 1,511,604 1,422,515 1,043,636
Over one to five years.......................... 5,081,410 3,824,198 2,821,685
Over five years................................. 11,329,900 11,038,650 10,223,968
------------- ------------- -------------
$ 18,547,229 $ 16,608,855 $ 14,113,172
220,876 248,816 221,354
------------- ------------- -------------
Loans, net...................................... $ 18,326,353 $ 16,360,039 $ 13,891,818
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LOANS (CONTINUED)
Transactions in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Beginning of year............................... $ 219,150 $ 239,032 $ 219,946
Provision charged to operations................. -- -- --
Recoveries...................................... 16,043 49,763 45,597
------------- ------------- -------------
$ 235,193 $ 288,795 $ 265,543
Loans charged off............................... 40,230 69,645 26,511
------------- ------------- -------------
End of year..................................... $ 194,963 $ 219,150 $ 239,032
------------- ------------- -------------
------------- ------------- -------------
Loans past due 90 days or more.................. $ 33,731 $ 122,248 $ 30,271
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
There were no loans in nonaccrual status at December 31, 1995, 1994, or
1993. No loans are considered impaired.
8. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment and the related depreciation is as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1995 1994 1993
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Land...................................................... $ 135,332 $ 135,332 $ 158,373
Bank premises............................................. 8-32 years 576,944 541,855 535,642
Furniture and equipment................................... 5-20 years 500,880 454,142 577,330
------------ ------------ ------------
$ 1,204,156 $ 1,131,329 $ 1,271,345
Accumulated depreciation.................................. 668,710 598,465 668,926
------------ ------------ ------------
Net bank premises and equipment........................... $ 535,446 $ 532,864 $ 602,419
------------ ------------ ------------
------------ ------------ ------------
Depreciation expense...................................... $ 67,544 $ 76,254 $ 79,097
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. DEPOSITS
A summary of interest-bearing deposits is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Money market.................................... $ 3,726,063 $ 4,362,616 $ 5,421,996
Super NOW....................................... 437,800 456,215 409,251
Savings......................................... 4,371,804 4,278,787 3,975,298
Other time...................................... 12,115,902 8,388,685 7,372,000
------------- ------------- -------------
$ 20,651,569 $ 17,486,303 $ 17,178,545
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-13
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEPOSITS (CONTINUED)
Included in other time deposits are certificates of deposit of $100,000 or
more with the following maturities:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Three months or less................................ $ 100,000 $ 200,000 $ 201,860
Over three through six months....................... -- 100,001 200,000
Over six through twelve months...................... 308,731 403,800 100,000
Over one to five years.............................. 1,131,885 619,701 710,395
------------ ------------ ------------
$ 1,540,616 $ 1,323,502 $ 1,212,255
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
10. OTHER OPERATING REVENUE
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Fees and service charges............................ $ 89,709 $ 69,603 $ 64,185
Security gains (losses)............................. -- (31,288) 500
Other income........................................ 5,277 16,766 3,742
--------- --------- ---------
$ 94,986 $ 55,081 $ 68,427
--------- --------- ---------
--------- --------- ---------
</TABLE>
11. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal........................................... $ 8,882 $ 526 $ 27,970
State............................................. 7,363 7,581 12,826
--------- --------- ---------
16,245 8,107 40,796
Deferred............................................ 12,056 27,585 9,511
--------- --------- ---------
$ 28,301 $ 35,692 $ 50,307
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of deferred tax are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Provision for credit losses......................... $ 6,936 $ 10,164 $ --
Deferred origination fees........................... 15,787 34,336 (11,690)
Deferred severance benefit.......................... 1,654 6,922 5,761
Depreciation........................................ 3,245 (556) (2,069)
Cash method accounting.............................. (9,204) (17,254) 19,372
Charitable contributions............................ 229 (6,431) --
Discount accretion.................................. 331 404 (1,863)
Provision for other real estate losses.............. (6,922) -- --
--------- --------- ---------
$ 12,056 $ 27,585 $ 9,511
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
As of January 1, 1993, the Bank recorded a tax credit of $10,472 or $.34 per
share resulting from the adoption of FASB Statement No. 109, ACCOUNTING FOR
INCOME TAXES. This amount represents the net increase in the deferred tax asset
as of that date, and is included in the statement of income as the cumulative
effect of an accounting change.
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets
Provision for credit losses............................... $ 17,244 $ 24,180 $ 34,344
Provision for other real estate losses.................... 6,922 -- --
Deferred origination fees................................. 30,361 46,148 80,484
Excess contributions...................................... 6,202 6,431 --
Deferred pension benefit.................................. -- 1,654 8,576
Unrealized loss on securities available for sale.......... -- 18,023 --
--------- --------- ----------
60,729 96,436 123,404
--------- --------- ----------
Deferred tax liabilities
Depreciation.............................................. 11,051 7,806 8,362
Cash method accounting.................................... 20,028 29,232 46,486
Discount accretion........................................ 871 540 136
Unrealized gain on securities available for sale.......... 2,143 -- --
--------- --------- ----------
34,093 37,578 54,984
--------- --------- ----------
$ 26,636 $ 58,858 $ 68,420
--------- --------- ----------
--------- --------- ----------
</TABLE>
The reconciliation of statutory federal income tax rates to the effective
income tax rates follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate..................................... 34.0% 34.0% 34.0%
Tax effect of
Tax-exempt income................................................... (14.9) (12.5) (8.8)
State income taxes, net of federal benefit.......................... 4.7 4.5 4.6
Appreciation on donated land........................................ -- (1.4) --
Surtax exemption.................................................... (7.5) (5.8) (0.7)
Other............................................................... 1.9 (0.8) (0.7)
--------- --------- ---
18.2% 18.0% 28.4%
--------- --------- ---
--------- --------- ---
</TABLE>
12. STOCKHOLDERS' EQUITY
Banks make voluntary transfers from undivided profits to surplus for various
regulatory reasons. These voluntary transfers can be considered when recording
stock dividends until such time as the amount of fair market value in excess of
par value of stock dividends equals the voluntary transfers. At that time, an
amount equal to the fair market value of the stock issued in connection with a
stock dividend must be transferred from undivided profits to capital stock and
surplus.
F-15
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1995, the surplus account of the Bank includes earned
surplus of $1,110,000 which is available for recording of future stock
dividends.
13. CAPITAL STANDARDS
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 less certain intangible
assets, and 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.
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>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital ratio..................... 14.49% 16.70% 17.47%
Total capital ratio...................... 15.72% 17.95% 18.73%
Leverage ratio (using annual average
assets).................................. 9.12% 9.42% 10.21%
Tier 1 capital............................. $ 2,313,107 $ 2,216,166 $ 2,084,364
Total capital.............................. $ 2,508,070 $ 2,382,716 $ 2,234,396
Total risk-weighted assets................. $ 15,959,000 $ 13,272,000 $ 11,932,000
</TABLE>
F-16
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are summarized
below. The fair values of a significant portion of these financial instruments
are estimates derived using present value techniques prescribed by the FASB and
may not be indicative of the net realizable or liquidation values. Also, the
calculation of estimated fair values is based on market conditions at a specific
point in time and may not reflect current or future fair values.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 CARRYING AMOUNT FAIR VALUE
- ------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Financial assets
Cash and due from banks.................................... $ 1,172,614 $ 1,172,614
Federal funds sold......................................... 1,425,000 1,425,000
Investment securities (total).............................. 5,015,478 5,021,711
Loans, net................................................. 18,131,390 17,827,677
Accrued interest receivable................................ 183,328 183,328
Financial liabilities
Noninterest-bearing deposits............................... $ 3,781,817 $ 3,781,817
Interest-bearing deposits.................................. 20,651,581 20,766,833
Accrued interest payable................................... 102,767 102,767
</TABLE>
The fair values of U.S. Treasury and Government agency securities are
determined using market quotations. For state and municipal securities, the fair
values are estimated using a matrix that considers yield to maturity, credit
quality, and marketability.
The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect for loans
of the same class and term. The fair value of variable-rate loans is estimated
to equal the carrying amount. The valuation of loans is adjusted for possible
loan losses.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
F-17
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................................ $ 938,496 $1,223,770
Federal funds sold................................................. 390,000 2,575,000
Securities available for sale...................................... 2,226,517 1,278,064
Securities held to maturity (approximate market value of $3,336,129
and $3,215,124).................................................. 3,368,530 3,243,040
Loans, less allowance for credit losses of $205,579 and $193,830... 19,966,266 17,689,548
Bank premises and equipment........................................ 526,085 548,689
Accrued interest receivable........................................ 194,104 183,013
Deferred income taxes.............................................. 37,667 50,580
Other real estate owned............................................ 268,641 268,641
Other assets....................................................... 88,163 87,128
---------- ----------
$28,004,469 $27,147,473
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing.............................................. $3,899,487 $3,833,060
Interest bearing................................................. 21,436,884 20,891,804
---------- ----------
Total deposits................................................. 25,336,371 24,724,864
Accrued interest payable........................................... 118,451 112,684
Other liabilities.................................................. 98,176 26,388
---------- ----------
25,552,998 24,863,936
---------- ----------
Stockholders' equity
Common stock, par value $12.50 per share; authorized 200,000
shares; issued and outstanding 92,028 shares in 1996 and 30,676
shares in 1995 1,150,350 383,450
Surplus.......................................................... 1,150,350 1,115,000
Undivided profits................................................ 166,326 793,291
---------- ----------
2,467,026 2,291,741
Net unrealized gain (loss) on securities available for sale...... (15,555) (8,204)
---------- ----------
2,451,471 2,283,537
$28,004,469 $27,147,473
---------- ----------
---------- ----------
</TABLE>
See Note to Unaudited Financial Statements
F-18
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF INCOME (UNAUDITED)
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
INTEREST REVENUE
Loans, including fees............................................................... $ 1,341,308 $ 1,217,842
US Treasury and government agency securities........................................ 177,404 122,833
State and municipal securities...................................................... 39,097 48,428
Bank balances....................................................................... 653 93
Federal funds sold.................................................................. 52,200 53,257
------------ ------------
Total interest revenue............................................................ 1,610,662 1,442,453
------------ ------------
INTEREST EXPENSE
Deposits............................................................................ 770,169 625,546
Other............................................................................... 0 2,863
------------ ------------
Total interest expense............................................................ 770,169 628,409
------------ ------------
Net interest income............................................................... 840,493 814,044
PROVISION FOR CREDIT LOSSES........................................................... 0 0
------------ ------------
Net interest income after provision for credit losses............................. 840,493 814,044
------------ ------------
OTHER OPERATING REVENUE............................................................... 99,994 70,684
------------ ------------
OTHER EXPENSES
Salaries............................................................................ 308,098 312,836
Employee benefits................................................................... 77,569 79,769
Occupancy........................................................................... 48,854 51,462
Furniture and equipment............................................................. 76,785 75,657
Other operating..................................................................... 200,229 273,370
------------ ------------
Total other expenses.............................................................. 711,535 793,094
------------ ------------
INCOME BEFORE INCOME TAXES............................................................ 228,952 91,634
INCOME TAXES.......................................................................... 75,033 16,059
------------ ------------
NET INCOME............................................................................ $ 153,919 $ 75,575
------------ ------------
------------ ------------
EARNINGS PER COMMON SHARE(1).......................................................... $1.67 $0.82
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Earnings per share for 1995 are adjusted to reflect the 1996 three-for-one
stock split.
See Note to Unaudited Financial Statements
F-19
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS)
COMMON STOCK UNDIVIDED ON
SHARES PAR VALUE SURPLUS PROFITS SECURITIES
--------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.................... 30,676 $ 383,450 $ 1,115,000 $ 717,716 $ (31,546)
Net Income Through September 30, 1995......... -- -- -- 75,575 --
Change in unrealized gain/(loss) on
securities.................................. -- -- -- -- 23,342
--------- -------------- ------------ ----------- ------------
Balance, September 30, 1995................... 30,676 383,450 1,115,000 793,291 (8,204)
Net Income, October 1-December 31, 1995....... -- -- -- 52,042 --
Cash Dividend, $0.33 per share (Dec 1995)..... -- -- -- (30,676) --
Change in unrealized gain/(loss) on
securities.................................. -- -- -- -- 11,955
--------- -------------- ------------ ----------- ------------
Balance, December 31, 1995.................... 30,676 383,450 1,115,000 814,657 3,751
Stock split, three-for-one (1996)............. 61,352 766,900 35,350 (802,250) --
Net Income Through September 30, 1996......... -- -- -- 153,919 --
Change in unrealized gain/(loss) on
securities.................................. -- -- -- -- (19,306)
--------- -------------- ------------ ----------- ------------
Balance, September 30, 1996................... 92,028 $ 1,150,350 $ 1,150,350 $ 166,326 $ (15,555)
--------- -------------- ------------ ----------- ------------
--------- -------------- ------------ ----------- ------------
</TABLE>
See Note to Unaudited Financial Statements
F-20
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Interest received................................................................... $ 1,574,405 $ 1,393,336
Fees and commissions received....................................................... 101,820 73,202
Interest paid....................................................................... (754,484) (554,697)
Cash paid to suppliers and employees................................................ (557,567) (639,376)
Income taxes (paid) refunded........................................................ (72,167) (16,246)
------------ ------------
292,007 256,219
------------ ------------
Cash Flows from Investing Activities
Proceeds from sales and maturities of investment securities
Held to maturity.................................................................. 298,507 574,016
Available for sale................................................................ 1,099,401 109,891
Purchase of investment securities and interest-bearing deposits
Held to maturity.................................................................. (809,844) 0
Available for sale................................................................ (1,203,276) (470,927)
Loans advanced, net of principal collected.......................................... (1,806,404) (1,529,377)
Purchases of premises and equipment................................................. (31,623) (65,889)
Proceeds from sale of equipment..................................................... 0 0
Purchase of computer software....................................................... (10,869) (24,511)
Proceeds from sale of other real estate............................................. 0 155,844
Purchase of other real estate....................................................... 0 (278,641)
------------ ------------
(2,464,108) (1,529,594)
------------ ------------
Cash Flows from Financing Activities
Net increase in deposits............................................................ 902,983 3,967,087
Dividends paid...................................................................... 0 0
------------ ------------
902,983 3,967,087
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents.................................. (1,269,118) 2,693,712
Cash and Cash Equivalents at Beginning of Period...................................... 2,597,614 1,105,058
------------ ------------
Cash and Cash Equivalents at End of Period............................................ $ 1,328,496 $ 3,798,770
------------ ------------
------------ ------------
Reconciliation of net income to net cash provided by operating activities
Net Income.......................................................................... $ 153,919 $ 75,575
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation........................................................................ 40,984 50,064
Amortization of Intangibles......................................................... 12,480 11,435
Write-down of other real estate..................................................... 0 10,000
Deferred income taxes............................................................... (0) (5,058)
Amortization of premiums, net of accretion of discounts............................. 5,306 9,367
Interest added to interest-bearing deposits......................................... 0
Sale of other real estate........................................................... 0 63,061
Increase/(decrease) in
Deferred loan origination fees, net............................................... (28,472) (19,282)
Accrued interest payable.......................................................... 15,684 73,712
Accrued income taxes, net of refunds.............................................. 2,866 4,871
Other liabilities................................................................. 86,378 13,602
Severance benefit payable......................................................... 0 (6,463)
Decrease/(increase) in
Accrued interest receivable....................................................... (10,776) (36,241)
Prepaid expenses.................................................................. 13,638 11,576
------------ ------------
$ 292,007 $ 256,219
------------ ------------
------------ ------------
</TABLE>
See Note to Unaudited Financial Statements
F-21
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
NOTE TO UNAUDITED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Farmers Bank's management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been made. Operating results for the nine month periods
ended September 30, 1996 and 1995, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996 or for future
periods.
F-22
<PAGE>
FARMERS BANK OF MARDELA SPRINGS
SUPPLEMENTARY INFORMATION
AVERAGE BALANCES, INTEREST AND YIELDS
THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------- -------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST
---------- --------- --------- ---------- --------- --------- ---------- ---------
ASSETS
Federal funds sold........... $1,416,500 $ 81,269 5.74% $ 609,247 $ 22,104 3.63% $1,351,849 $ 40,000
Interest-bearing deposits.... 12,284 197 1.60 221,626 8,731 3.94 328,901 13,022
Investment securities
U.S. Treasury.............. 721,280 35,371 4.90 931,670 44,933 4.82 602,692 28,598
U.S. Government agency..... 2,400,608 137,591 5.73 3,300,829 172,360 5.22 2,414,438 131,611
State and municipal........ 1,451,233 64,337 4.43 1,461,836 93,458 6.39 946,821 69,213
---------- --------- ---------- ---------
4,573,121 237,299 5.19 5,694,335 310,751 5.46 3,963,951 229,422
---------- --------- ---------- ---------
Loans
Demand and time............ 320,526 34,674 10.82 321,937 34,605 10.75 423,580 47,266
Mortgage and
construction............. 15,128,177 1,411,145 9.33 13,298,755 1,212,133 9.11 11,257,879 1,124,664
Installment................ 1,923,641 197,290 10.26 1,524,200 177,238 11.63 1,334,938 176,197
---------- --------- ---------- ---------
17,372,344 1,643,109 9.46 15,144,892 1,423,976 9.40 13,016,397 1,348,127
Allowance for loan losses.... 197,578 224,517 230,380
---------- --------- ---------- ---------
17,174,766 1,643,109 9.57 14,920,375 1,423,976 9.54 12,786,017 1,348,127
---------- --------- ---------- ---------
Total interest-earning
assets..................... 23,176,671 1,961,874 8.46 21,445,583 1,765,562 8.23 18,430,718 1,630,571
Noninterest-bearing cash..... 901,712 1,058,829 1,108,985
Bank premises and equipment.. 532,999 585,347 644,163
Other assets................. 549,484 444,053 239,873
---------- --------- ---------- ---------
Total assets............. $25,160,866 $1,961,874 7.80% $23,533,812 $1,765,562 7.50% $20,423,739 $1,630,571
---------- --------- --------- ---------- --------- --------- ---------- ---------
---------- --------- --------- ---------- --------- --------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits..................... $4,432,749 $ 134,092 3.03% $4,332,544 $ 130,489 3.01% $3,571,817 $ 120,904
Savings.................... 4,288,735 140,067 3.28 5,265,200 152,208 2.89 5,621,251 186,179
Money market and now....... 10,602,560 603,328 5.69 7,920,519 361,767 4.57 6,175,537 304,258
---------- --------- ---------- ---------
Other time................. 19,304,044 877,487 4.55 17,518,263 644,464 3.68 15,368,605 611,341
Total interest-bearing... 3,435,249 3,695,644 2,831,973
---------- --------- ---------- ---------
Noninterest-bearing
deposits................. 22,739,293 877,487 3.86 21,213,907 644,464 3.04 18,200,578 611,341
Federal Funds Purchased.... 46,370 2,753 5.94
Severance benefit
payable.................. 1,419 110 7.74 17,368 1,346 7.75 32,232 2,498
Other liabilities.......... 126,424 119,758 144,259
Stockholders' equity....... 2,247,360 2,182,779 2,046,670
---------- --------- ---------- ---------
Total liabilities and
equity................. $25,160,866 $ 880,350 3.50% $23,533,812 $ 645,810 2.74% $20,423,739 $ 613,839
---------- --------- --------- ---------- --------- --------- ---------- ---------
---------- --------- --------- ---------- --------- --------- ---------- ---------
NET MARGIN ON
INTEREST-EARNING ASSETS.... $23,176,671 $1,081,524 4.67% $21,445,583 $1,119,752 5.22% $18,430,718 $1,016,732
---------- --------- --------- ---------- --------- --------- ---------- ---------
---------- --------- --------- ---------- --------- --------- ---------- ---------
<CAPTION>
<S> <C>
YIELD
---------
ASSETS
Federal funds sold........... 2.96%
Interest-bearing deposits.... 3.96
Investment securities
U.S. Treasury.............. 4.75
U.S. Government agency..... 5.45
State and municipal........ 7.31
5.79
Loans
Demand and time............ 11.16
Mortgage and
construction............. 9.99
Installment................ 13.20
10.36
Allowance for loan losses....
10.54
Total interest-earning
assets..................... 8.85
Noninterest-bearing cash.....
Bank premises and equipment..
Other assets.................
Total assets............. 7.98%
---------
---------
LIABILITIES AND STOCKHOLDERS' E
Deposits..................... 3.38%
Savings.................... 3.31
Money market and now....... 4.93
Other time................. 3.98
Total interest-bearing...
Noninterest-bearing
deposits................. 3.36
Federal Funds Purchased....
Severance benefit
payable.................. 7.75
Other liabilities..........
Stockholders' equity.......
Total liabilities and
equity................. 3.01%
---------
---------
NET MARGIN ON
INTEREST-EARNING ASSETS.... 5.51%
---------
---------
</TABLE>
Interest on investments is presented on a fully taxable equivalent basis.
F-23
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF AFFILIATION AND MERGER
AMONG
MERCANTILE BANKSHARES CORPORATION,
PENINSULA BANK
AND
FARMERS BANK OF MARDELA SPRINGS
A-1
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF
AFFILIATION AND MERGER
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 10th day of December, 1996, by and among Mercantile Bankshares Corporation,
a body corporate of the State of Maryland (the "Corporation"), Peninsula Bank, a
Maryland commercial bank ("Peninsula"), and Farmers Bank of Mardela Springs, 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 AND MERGER. Subject to the terms, provisions, and
conditions of this Agreement, the Bank shall become affiliated with the
Corporation by merger into Peninsula, pursuant to the procedures described in
Article II of this Agreement (the "Merger" or the "Affiliation") and the form of
Agreement of Merger attached as Exhibit A hereto (the "Agreement of Merger").
1.2. CONVERSION RATE; STOCK OPTIONS. The Merger shall be accomplished on
the basis of one and twenty-five hundredths (1.25) 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 that is outstanding on the Effective Date, hereinafter
defined, immediately prior to the Merger becoming effective (the "Conversion
Rate"). Fractional shares shall be treated as provided elsewhere herein. The
Conversion Rate may be adjusted pursuant to Section 1.5(b);
1.3. COMMERCIALLY REASONABLE EFFORTS REQUIREMENT. The Corporation,
Peninsula and the Bank shall each use all commercially reasonable efforts to
consummate the transactions contemplated in this Agreement.
1.4 STOCKHOLDER LIST. Within five days after the date of this Agreement,
the Bank shall furnish to the Corporation a list containing the names and
addresses of the current holders of its common stock as the same appear in the
stock registration books of the Bank and the number of shares held by each.
1.5. 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. Peninsula is a Maryland commercial
bank, the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and is not a member of the Federal Reserve System.
(2) The Corporation will cause the filing of an application with FDIC
for approval of the Merger and prosecute such application in good faith and
with diligence.
(3) The Corporation and Peninsula are each corporations duly organized,
validly existing, and in good standing under the laws of the State of
Maryland and have the corporate power and authority to carry on their
respective businesses as they are now conducted.
A-2
<PAGE>
(4) As of September 30, 1996, 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 October
31, 1996, no shares of Mercantile Preferred were outstanding, 47,384,827
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 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"), 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
Merger 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 of the Bank 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 the information provided by the
Bank pursuant to Section 1.4, 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 or other jurisdiction applicable to 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, 1995
containing the following consolidated financial statements of the
Corporation (collectively, the "Corporation's Audited Financial
Statements"): consolidated balance sheets as of December 31, 1995 and 1994
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, 1995, together with the notes thereto,
certified by Coopers & Lybrand, LLP, independent certified public
accountants, and (ii) copies of its unaudited consolidated financial
statements for the nine months ended September 30, 1996 containing a
consolidated balance sheet as of September 30, 1996 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, 1996 Financial Statements"). All of the Corporation's Audited
Financial Statements and the Corporation's September 30, 1996 Financial
Statements have been prepared in accordance with generally accepted
accounting principles and applicable SEC requirements and present fairly the
information presented therein.
(7) Since September 30, 1996, 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 Audited Financial
Statements or in the Corporation's September 30, 1996 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 or Peninsula's Charter or Bylaws, or any
contract or other instrument to which the Corporation or Peninsula is a
party, or of any judgment, decree, or order applicable to the Corporation or
Peninsula, or result in the creation of any material lien, charge, or
encumbrance upon any of the properties or assets of the Corporation or
Peninsula.
A-3
<PAGE>
(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.
(10) The execution, delivery, and performance of this Agreement by the
Corporation and Peninsula have been duly authorized by their respective
Boards 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 and Peninsula, enforceable against the Corporation and
Peninsula 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 converted
in the Merger into 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 Conversion Rate shall be adjusted
accordingly. The Bank hereby agrees to any revision in the Conversion Rate and
payment arrangements pursuant to the foregoing provisions of Section 1.5(b).
1.6. REPRESENTATIONS OF THE BANK. The obligations of the Corporation and
Peninsula 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 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 owns
three banking offices, with its main office in Mardela Springs, Maryland,
and branch offices located in Salisbury, Maryland, and Sharptown, Maryland.
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 200,000 shares
of a single class of common stock, par value of $12.50 per share, of which
92,028 shares were issued and outstanding as of October 31, 1996. All of
such issued and outstanding shares are validly issued, fully paid and
nonassessable. 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.
(c) The Bank does not have more than 500 stockholders of record and its
securities are not subject to registration under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(d) 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.
(e) 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.
A-4
<PAGE>
(f) 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 banking and other offices, copies or descriptions of all
other material contracts and leases, a list of all securities held by the
Bank on September 30, 1996, 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. Section345.5(a)),
copies of the Bank's year-end Consolidated Reports of Condition and Income
("Call Reports") filed with the FDIC for all years subsequent to 1990,
copies of all interim Call Reports filed with the FDIC in 1995 and 1996 (the
Bank's September 30, 1996 Call Reports being hereinafter referred to as the
"Bank's September 30, 1996 Call Reports"), copies of the Bank's audited
financial statements for the years ended December 31, 1991, 1992, 1993, 1994
and 1995, together with the notes thereto, certified by Rowles & Company,
independent certified public accountants (the said financial statements for
the year ended December 31, 1995 being hereinafter referred to as the
"Bank's December 31, 1995 Financial Statements"), a copy of the most recent
management letter rendered by the Bank's independent certified public
accountants, and copies of the Bank's Federal and Maryland income and
franchise tax returns for the years 1993, 1994, and 1995. Since September
30, 1996, 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 asset included in the Bank's December 31, 1995 Financial
Statements or the Bank's September 30, 1996 Call Reports (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, 1995 Financial Statements or the Bank's September
30, 1996 Call Reports 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.
(g) All of the financial statements previously provided to the
Corporation pursuant to subparagraph (f) of this Section 1.6 are accurate
and complete in all material respects, have been prepared in accordance with
generally accepted accounting principles consistently followed throughout
the periods covered by such financial statements, and present fairly the
financial position, cash flows (with respect to those financial statements
containing statements of cash flows), results of operations, and changes in
stockholders' equity (with respect to those financial statements containing
statements of changes in stockholders' equity) of the Bank at the close of
business at the dates thereof and for the periods covered thereby.
(h) Since September 30, 1996, 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.
(i) 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.
(j) The Bank has timely 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, 1995
Financial Statements and September 30, 1996 Call Reports, and there is no
reason to believe that any
A-5
<PAGE>
such liability will be asserted in connection with such returns except as
noted in the Bank's December 31, 1995 Financial Statements and September 30,
1996 Call Reports. 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 for the
years 1991 through 1995 have been timely filed.
(k) 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 Scott & Stringfellow, Inc. as its
financial advisor pursuant to a retainer agreement, a copy of which has been
provided to the Corporation.
(l) 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 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 its fiduciaries and 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 Employee 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; 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.
A-6
<PAGE>
(3) The only Employee Plan currently maintained or contributed to by
the Bank which is intended to be qualified under Section 401(a) of the
Code is the Farmers Bank of Mardela Springs Retirement Plan and Trust, a
profit sharing plan (the "Qualified Plan"); the Qualified Plan, as
amended 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), 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; 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
the Qualified Plan.
(4) Except as disclosed in the Benefit Plan Schedule, 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.
(m) The Bank has good and marketable title to all of its material
property and assets, including those reflected on the Bank's September 30,
1996 Call Reports, 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 1.6(q) 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).
(n) 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,
including Peninsula. 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.
(o) The tangible personal property of the Bank is in good operating
condition and repair, subject to ordinary wear and tear.
(p) 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.
(q) The Bank has good and merchantable fee simple title to the real
estate for the offices owned by the Bank, 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
A-7
<PAGE>
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.
(r) 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 banking and other
offices are in good working order, subject to ordinary wear and tear and the
roofs of the office buildings are waterproof and their basements, if any,
are not subject to water seepage.
(s) (1) (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 and (iii) there has been no release of
hazardous substances or petroleum products on the Real Estate.
(2) (i) all property in which the Bank holds a security interest is
in compliance with applicable environmental laws and regulations, (ii) there
are no underground tanks on any such property, and (iii) there has been no
release of hazardous substances or petroleum products on any such property.
1.7. 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 1.8 hereof, to obtain all
required approvals of the Merger by the FDIC, the Maryland Commissioner of
Financial Regulation (the "Maryland Commissioner"), the Virginia State
Corporation Commission (if required), the Delaware Bank Commissioner (if
required), and any other regulatory authorities, to prepare any registration
statement, proxy statement or other documents required to be filed with the SEC
or other authorities, and to meet any of the other conditions set forth in 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 its corporate existence in full force and effect;
(2) operate its business only in the usual, regular and ordinary manner
and consistently with past operations and practices, including, without
limitation, lending practices with regard to the setting of rates, credit
standards and collection procedures; and use all commercially reasonable
efforts to preserve its present relationships with persons having business
dealings with it;
(3) make no material increase in levels of staffing, no material changes
in duties or responsibilities of senior management, and no changes in or
appointments of senior management (provided that the Corporation's consent
to matters covered in this item (3) shall not be unreasonably withheld);
(4) 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;
(5) not enter into any material agreement or incur any material
obligation other than in the ordinary course of its business;
(6) not make or commit to make any capital expenditures aggregating in
excess of $50,000;
A-8
<PAGE>
(7) not pledge, sell, lease, transfer, dispose or otherwise encumber any
of its property or assets other than in the ordinary course of business;
(8) 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;
(9) not amend its Charter or Bylaws;
(10) 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;
(11) not create any subsidiary, affiliate or other related business
entity; and
(12) not take any other action or enter into any agreement which would
have the effect of defeating the purposes of this Agreement or the Merger
except as provided in Section 1.10.
1.8. 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, 1993, 1994 and 1995, 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, 1995 was less than $127,617, or for the nine month period ended
September 30, 1996 was less than $153,919, or for the year ending December 31,
1996 is less than $200,000, or if the Effective Date is after March 31, 1997,
for the three month period ending March 31, 1997 is less than $60,000, or if the
Effective Date is after June 30, 1997, for the six month period ending June 30,
1997 is less than $120,000, or if the Effective Date is after September 30,
1997, for the nine month period ending September 30, 1997 is less than $180,000
or (2) that the stockholders' equity of the Bank, determined in accordance with
generally accepted accounting principles, consistently applied, at December 31,
1995 aggregated less than $2,316,858, or at September 30, 1996 aggregated less
than $2,451,471, or at December 31, 1996 aggregates less than $2,470,000, or if
the effective date is after March 31, 1997, at March 31, 1997 aggregates less
than $2,530,000, or if the Effective Date is after June 30, 1997, at June 30,
1997 aggregates less than $2,590,000, or if the Effective Date is after
September 30, 1997, at September 30, 1997 aggregates less than $2,650,000; 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 1.6 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, 1996 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, 1996 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 1.6(f) hereof is
A-9
<PAGE>
inaccurate, as of its date, in any material respect, then the Corporation and
Peninsula 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 no 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.
1.9 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 Merger by
all appropriate State and Federal regulatory agencies.
1.10 EXCLUSIVE DEALING. The Board of Directors of the Bank has carefully
considered and deliberated upon the terms and conditions of the Merger and has
concluded that the Merger 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 Scott & Stringfellow, Inc., its financial
advisor, that the consideration to be received in the Merger is fair to the
stockholders of the Bank from a financial viewpoint. 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 other than the Corporation, Peninsula or their
affiliates and agents 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 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 FDIC shall have given all
required approvals to permit the Merger and such approvals shall have become
effective and all required waiting times with respect thereto shall have
expired.
A-10
<PAGE>
(b) That all appropriate State regulatory agencies (including, without
limitation, the Maryland Commissioner, the Virginia State Corporation
Commission, (if required by law), and the Delaware Bank Commissioner (if
required by law), and any appropriate Federal regulatory agencies in
addition to the FDIC) shall have approved the Merger 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.
(d) That stockholders who are affiliates of the Bank for the purposes of
SEC Rule 145 shall have entered into agreements with the Corporation, in
form and substance satisfactory to the Corporation, necessary or desirable
to conform with SEC Rule 145.
(e) 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 Merger, shall have been granted or issued and shall
have become effective.
(f) 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 Merger.
(g) That since September 30, 1996, the Bank shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except a dividend of thirty-three cents ($0.33) per share
declared and payable in December 1996.
(h) That since September 30, 1996, 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(g) above, or as otherwise agreed in writing by
the Corporation.
(i) 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, stock purchase,
employee stock ownership, profit sharing, pension, retirement, bonus, group
life or health insurance or other benefit plan, agreement or arrangement.
(j) That between September 30, 1996, and the Effective Date, no change
shall have been made in the Bank's existing investment practices and
policies.
(k) 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 Peninsula, as successor in the
Merger, to conduct after the Effective Date all and every part of the
business and activities conducted by the Bank prior to the Effective Date in
the manner in which such activities and business were then conducted by the
Bank and at the offices at which they were then conducted.
A-11
<PAGE>
(l) That the holders of no more than 10% of the Bank's common stock
shall have voted against the Merger, pursuant to Title 3 Subtitle 7, Part II
of the Financial Institutions Articles of the Annotated Code of Maryland.
(m) 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.
(n) That the Corporation and Peninsula shall have received from Venable,
Baetjer and Howard, LLP (or such other qualified law firm as the Corporation
shall select) an opinion with respect to the federal income tax consequences
of the Merger substantially to the effect that the Merger will qualify as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code, that the Corporation, Peninsula and the Bank will each be a
party thereto, and that no gain or loss will be recognized by the
Corporation, Peninsula or the Bank as a result of the Merger.
(o) That the representations of the Bank contained in Section 1.6 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 Merger under this Agreement is subject to the following
conditions:
(a) That pursuant to applicable statutes, the FDIC shall have given all
required approvals to permit the Merger 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 Maryland Commissioner, the Virginia State Corporation
Commission (if required by law), and the Delaware Bank Commissioner (if
required by law), and any appropriate Federal regulatory agencies in
addition to the FDIC) shall have approved the Merger 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.
(d) That the Bank shall have received an opinion of Venable, Baetjer and
Howard, LLP (or such other qualified law firm as the Bank shall select) with
respect to the federal income tax consequences of the Merger, substantially
to the effect that, upon completion of the Merger (except as to the
disposition of fractional shares):
(1) the Merger will qualify as a reorganization within the meaning of
Section 368(a)(2)(D) of the Internal Revenue Code;
(2) the Corporation, Peninsula and the Bank will each be a party
thereto;
(3) no gain or loss will be recognized by the Corporation, Peninsula
or the Bank as a result of the Merger;
(4) 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;
A-12
<PAGE>
(5) 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;
(6) 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
Scott & Stringfellow, 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 Merger
is fair to the stockholders of the Bank from a financial point of view.
(f) That the representations of the Corporation contained in Section
1.5(a) of this Agreement (other than Section 1.5(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, information and belief, the representations of
the Corporation set forth in this Agreement (other than in Section
1.5(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 CONFIDENTIALITY
Between the date of this Agreement and the Effective Date, the Corporation,
Peninsula 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 Merger 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.
1.14 EMPLOYEE BENEFIT MATTERS
(a) PROFIT SHARING PLAN. It is the current intention of the Corporation and
expectation of the parties that effective as of the Effective Date (or as soon
thereafter as is practicable in the judgment of the Corporation, the Bank's
Qualified Plan will be merged with and into the Corporation's 401(k) plan. If
the plans are merged, the terms of the merger will comply with applicable
requirements of the Internal Revenue Code, including Sections 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. In the event that, in the judgment of
the Corporation, it is not technically feasible or desirable to merge the plans,
the Bank's profit sharing plan will be terminated.
(b) CORPORATION'S CASH BALANCE PLAN. Effective as of the first January 1st
following the Effective Date, employees of the Bank will become eligible to
participate in the Corporation's cash balance plan according to its applicable
provisions. Employees of the Bank will be given credit under the Corporation's
cash balance plan for service with the Bank for purposes of eligibility to
participate and vesting.
A-13
<PAGE>
(c) OTHER BENEFITS. Except with respect to (i) the Bank's profit sharing
plan described in Section 1.14(a) above (the disposition of which shall be
governed by Section 1.14(a) above), (ii) the Corporation's cash balance plan
described in Section 1.14(b) above (eligibility for participation in and vesting
under which shall be governed by Section 1.14(b) above), and (iii) executive
plans, programs and arrangements, eligibility for participation in which is
determined in the discretion of Peninsula and/or the Corporation, after the
Effective Date, employees of the Bank shall be entitled to participate in
Peninsula's employee benefit plans and programs on substantially the same basis
as similarly situated employees of Peninsula (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.) Peninsula
agrees to treat service with the Bank before the Effective Date as service with
Peninsula for purposes of all such employee benefit and seniority based plans
and programs.
ARTICLE II
MERGER
The following terms, provisions and conditions are in addition to those
contained in Articles I and III of this Agreement:
2.1. EFFECTIVE DATE. The effective date of the Merger (the "Effective
Date") shall be the effective date set forth in the Certificate of Merger issued
by the Maryland Commissioner pursuant to applicable provisions of Maryland law.
The Merger shall be made effective on the earliest practical date, as determined
by the Corporation, that is the last business day of a month, or such other date
determined by the Corporation, after all of the conditions set forth in this
Agreement have been satisfied (except such as may have been waived by the
Corporation, Peninsula or the Bank, as the case may be).
2.2. CORPORATION'S OBLIGATIONS IN ACCOMPLISHING MERGER. In order to effect
the Merger, the Corporation and Peninsula will (i) approve through all necessary
corporate action, execute and deliver an Agreement of Merger substantially in
the form attached as Exhibit A hereto; (ii) prepare and file with the FDIC an
application for approval of the Merger of the Bank and Peninsula described
herein and in the Agreement of Merger pursuant to the provisions of Section
18(c) of the Federal Deposit Insurance Act (Section1828(c) of Title 12 of the
United States Code); (iii) submit the Agreement of Merger to the Maryland
Commissioner for his approval pursuant to the applicable bank merger provisions
of the Financial Institutions Article of the Annotated Code of Maryland; (iv)
publish any newspaper notices required by law with respect to the Merger; (v) if
required by law, as determined by the Corporation, cause the Corporation's
existing bank affiliates to file an application with the Maryland Commissioner
under Title 5 Subtitle 4 of the Financial Institutions Article of the Annotated
Code of Maryland for his approval of their affiliation with the Bank
contemplated herein; (vi) if required by law, as determined by the Corporation,
file any application with the Maryland Commissioner required by the provisions
of Section 3-314 of the Financial Institution Article of the Annotated Code of
Maryland relating to the acquisition of the Bank contemplated herein; (vii)
prepare and file, if necessary, any application required by Virginia corporation
and bank regulatory officials; (viii) prepare and file any other required
regulatory applications and (ix) use their best efforts to secure favorable
action on all such applications.
2.3. BANK'S OBLIGATIONS IN ACCOMPLISHING MERGER. At such times as shall be
requested by the Corporation, the Board of Directors of the Bank, (i) shall
approve an Agreement of Merger substantially in the form of Exhibit A hereto,
(ii) shall cause the execution and delivery of the Agreement of Merger by the
Bank, (iii) through counsel for the Corporation, shall submit the Agreement of
Merger (x) to the Maryland Commissioner for his approval pursuant to the
applicable bank merger provisions of the Financial Institutions Article of
Annotated Code of Maryland and (y) to the FDIC for its approval pursuant to the
provisions of Section 18(c) of the Federal Deposit Insurance Act (Section1828(c)
of Title 12 of the United States Code), (iv) shall cause the publication of any
newspaper notices required by law with respect to the Merger, and (v) shall duly
call and convene a meeting of the Bank's stockholders to act upon
A-14
<PAGE>
the Agreement of Merger and the Merger provided for therein and in connection
therewith shall recommend approval of the Agreement of Merger and the Merger
provided for therein to the Bank's stockholders and use all of their
commercially reasonable efforts to obtain a favorable vote thereon, subject to
the provisions of Section 1.10 hereof.
2.4. STOCKHOLDER APPROVAL. The Merger is subject to the additional
nonwaivable condition that the Agreement of Merger and the Merger provided for
therein shall have been approved by the holders of two-thirds of the votes
entitled to be cast with respect to each of Peninsula and the Bank at
stockholder meetings duly called for that purpose (or with respect to Peninsula,
if permitted by law, by stockholder consent action). The Corporation will vote
all of the outstanding Common Stock shares of Peninsula in favor of the
Agreement of Merger and the Merger provided for therein.
2.5. EFFECT OF MERGER. Upon the Effective Date, the Bank shall be merged
with and into Peninsula in accordance with the Agreement of Merger and pursuant
to the applicable provisions of the Annotated Code of Maryland and with the
effect provided in said provisions. As a result of the Merger and as of the
Effective Date:
(a) Peninsula shall be the Successor.
(b) The charter and bylaws of Peninsula in effect immediately prior to
the Effective Date shall be the charter and bylaws of the Successor.
(c) The offices of the Bank and the offices of Peninsula as of the date
of this Agreement and any additional offices opened prior to the Effective
Date by Peninsula, or, in accordance with this Agreement, by the Bank shall
be and become the offices of the Successor.
2.6. TERMS OF MERGER; OBJECTING STOCKHOLDERS. On the Effective Date and
immediately upon the Merger provided for in the Agreement of Merger becoming
effective with the effects set forth in Section 2.5 above and in Section 3-712
of the Financial Institutions Article of the Annotated Code of Maryland, or any
successor statute thereto, and in consideration thereof, the terms of the Merger
shall be as follows:
(a) Each share of capital stock of Peninsula shall remain issued and
outstanding as one share of capital stock of the Successor, without any
action on the part of the holder thereof.
(b) Each share of issued and outstanding common stock of the Bank (other
than the shares held by any objecting stockholder of the Bank pursuant to
paragraph (d) of this Section 2.6) shall for all corporate purposes, and
without any action on the part of the holder thereof, automatically become
and be converted into one and twenty-five hundredths (1.25) shares (subject
to adjustment pursuant to Section 1.5(b)) of Common Stock of the Corporation
and the right to receive cash in lieu of fractional shares of Common Stock,
as provided in paragraph (c) of this Section 2.6. Each certificate
representing shares of the common stock of the Bank (other than certificates
for shares held by any objecting 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
conversion ratio set forth above. Such certificates may at any time
thereafter be surrendered to The Bank of New York, acting as exchange agent,
or such other or additional exchange agent as the Corporation may select
(the "Exchange Agent") (together with any transmittal materials or
endorsements required by the Exchange Agent) for new certificates for the
appropriate number of whole shares of Common Stock (and cash in lieu of
fractional shares). 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 theretofore outstanding common
stock of the Bank as evidencing the ownership of the number of whole shares
of
A-15
<PAGE>
Common Stock into which the common stock of the Bank, previously represented
by such certificates, shall have been converted, notwithstanding the failure
to surrender such certificates. All certificates for common stock of the
Bank surrendered to the Exchange Agent for new certificates representing
shares of Common Stock pursuant to this Section 2.6(b) will be cancelled.
(c) 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 the
right to receive such cash in lieu of fractional shares of Common Stock. No
such holder shall be entitled to dividends, voting rights or any other
rights of stockholders in respect of any fractional share.
(d) Any holder of shares of the common stock of the Bank whose shares
are voted against the approval of the Merger at the meeting of stockholders
at which the Merger is approved, and who, within thirty (30) days after the
Effective Date (which shall be set forth in a notice provided to any such
stockholder by the Corporation and Peninsula by certified mail, return
receipt requested pursuant to Section 3-207(b) of the MGCL), makes a written
demand upon Peninsula for payment for such shares, accompanied by a
surrender of the certificates for such shares, all pursuant to the
provisions of Title 3, Subtitle 7, Part II of the Financial Institutions
Articles of the Annotated Code of Maryland, or any successor statute thereto
and any applicable provisions of Title 3, Subtitle 2 of the MGCL, shall be
entitled to receive from Peninsula in cash the fair value of such shares of
the common stock of the Bank determined in accordance with the aforesaid
provisions of the Annotated Code of Maryland, or any successor statute
thereto. The amount paid to any such objecting stockholder shall be debited
against the capital accounts of Peninsula. If the holders of any of the
shares of the Bank object to the Merger and demand payment in cash for their
shares as aforesaid, the Corporation shall pay to Peninsula, as a
contribution to its capital, cash at a price per share equal to the price
per share paid by Peninsula to the objecting shareholder.
2.7. CONFIRMATORY DEEDS. When and as requested by the Corporation or
Peninsula, the Bank shall execute and deliver or cause to be executed and
delivered, all such deeds and other instruments, and take or cause to be taken
all such further or other actions, as the Corporation or Peninsula may deem
necessary or desirable in order to vest or perfect in or confirm of record or
otherwise to Peninsula as Successor in the Merger, title to and possession of
all real estate and other property of the Bank, and otherwise to carry out the
intent and purposes of this Agreement and the Agreement of Merger.
2.8 PROCEDURAL MATTERS. The Corporation, at its option, may revise the
sequence of events or other matters relating to the accomplishment of the Merger
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 Merger or any other aspect of the transactions provided for herein
or which has authority to challenge the validity of the Merger 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 Merger or such transactions will be so challenged, the Corporation
and Peninsula 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
A-16
<PAGE>
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 Merger by the
stockholders of the Bank, this Agreement may be terminated by mutual consent of
the Bank and the Corporation. Moreover, the Corporation and Peninsula on the one
hand, and the Bank on the other, shall be entitled to terminate this Agreement
after December 31, 1997, by written notice to the other party 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 and Peninsula if the Directors of the Bank
recommend to its stockholders or the Bank accepts an Acquisition Proposal and
may be terminated by the Bank if, in compliance with Section 1.10 hereof, its
Directors recommend to its stockholders or it accepts an Acquisition Proposal.
In any such case, the Bank shall pay the Corporation a termination fee in the
amount of $200,000 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, the Corporation and Peninsula, 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
Merger, no amendment shall be made that alters the conversion rate set forth in
Section 1.2 (except pursuant to Section 1.5(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 any
party, except as set forth in Section 3.3, or on the part of any 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 and Peninsula by reason of a material breach by the Bank, or
by the Bank by reason of a material breach by the Corporation or Peninsula, 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 and Peninsula 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 Agreement of Merger and the Merger
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 notice delivered by the Corporation by the end of the third
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 hand delivered or if
sent by registered or certified mail, postage prepaid, or
A-17
<PAGE>
with respect to any notice of termination under Section 3.6, if hand delivered
or sent by telecopy, addressed as follows:
If to the Corporation or Peninsula:
Mercantile Bankshares Corporation
Attention: Alan D. Yarbro, Esq.
General Counsel and Secretary
Two Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-237-5347
Copy to:
Venable, Baetjer and Howard, LLP
Attention: Lee M. Miller, Esq.
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-244-7742
If to the Bank:
Farmers Bank of Mardela Springs
Attention: Roger E. Vandegrift, II
President and Chief Executive Officer
835 Snow Hill Road
Salisbury, Maryland 21804
Fax No. 410-742-5990
Copy to:
Robins, Johnson & Wade
Attention: John B. Robins, IV
128 East Main Street
Salisbury, Maryland 21801
Fax No. 410-548-2408
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.
3.10. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Maryland, without regard to conflict of law principles.
A-18
<PAGE>
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
FARMERS BANK OF MARDELA SPRINGS
By: _/s/_John B. Robins, IV_(SEAL)_
John B. Robins, IV
Chairman of the Board
PENINSULA BANK
By: _/s/_Jeffrey F. Turner_(SEAL)_
Jeffrey F. Turner
President
A-19
<PAGE>
EXHIBIT A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER made between Farmers Bank of Mardela Springs, a
Maryland commercial bank (hereinafter called "Mardela"), and Peninsula Bank, a
Maryland commercial bank (hereinafter called "Peninsula"), and joined in by
Mercantile Bankshares Corporation, a Maryland corporation (hereinafter called
"Mercshares").
In consideration of the mutual covenants and agreements herein contained and
the mutual benefits to be derived therefrom, the parties do hereby agree as
follows:
Section 1. As of the effective date and time provided for in Section 9
hereof (the "Effective Date"), Mardela shall be merged into Peninsula under
the charter of Peninsula and Peninsula shall be the Successor (hereinafter
called the "Successor") under the name "Peninsula Bank". The bylaws of
Peninsula shall be the bylaws of the Successor.
Section 2. The business, objects and purposes of the Successor shall be
to carry on in all of its aspects the business of a commercial bank, and to
that end the Successor shall have and may exercise all rights and powers
conferred upon commercial banks under the laws of the State of Maryland, as
now in force or as the same may hereafter be amended, and shall have and may
exercise all rights, powers and duties of Mardela and of Peninsula under
their respective charters.
Section 3. The address of the principal banking office of Mardela is
Main Street, Mardela Springs, Maryland 21837. The address of the principal
banking office of Peninsula is 11738 Somerset Avenue, Princess Anne,
Maryland 21853.
Section 4. The address of the principal banking office of the Successor
will be 11738 Somerset Avenue, Princess Anne, Maryland 21853.
Section 5. The authorized capital stock of Mardela is two million five
hundred thousand dollars ($2,500,000), consisting of two hundred thousand
(200,000) shares of capital stock with a par value of twelve dollars and
fifty cents ($12.50) per share. The authorized capital stock of Peninsula is
nine hundred thirty thousand dollars ($930,000), consisting of thirty-one
thousand (31,000) shares of capital stock with a par value of thirty dollars
($30.00) per share. The authorized capital stock of Peninsula as Successor
is nine hundred thirty thousand dollars ($930,000), consisting of thirty-one
thousand (31,000) shares of capital stock with a par value of thirty dollars
($30) per share. Each share of capital stock shall be entitled to one vote.
No preferred stock will be issued in the Merger.
Section 6. All assets and all rights, franchises and interests of
Peninsula and Mardela in and to every species of property, real, personal
and mixed, and choses in action thereto belonging, shall be transferred to
and vest in the Successor without any deed, conveyance or other transfer.
The Successor by virtue of this Merger and without any order or other action
on the part of any court or otherwise shall hold and enjoy the same, and all
rights of property, franchises and interests in the same manner and to the
same extent as such rights, franchises and interests were held or enjoyed by
either Peninsula or Mardela immediately prior to the Effective Date.
Section 7. On the Effective Date and immediately upon the Merger
provided for in this Agreement of Merger becoming effective and in
consideration thereof, the terms of the Merger shall be as follows:
(a) Each share of capital stock of Peninsula shall remain issued and
outstanding as one share of capital stock of the Successor, without any
action on the part of the holder thereof.
(b) Each share of issued and outstanding capital stock of Mardela
(other than the shares held by any objecting stockholder of Mardela as
provided in paragraph (d) of this Section 7) shall
A-20
<PAGE>
for all corporate purposes, and without any action on the part of the
holder thereof, automatically become and be converted into one and
twenty-five hundredths (1.25) shares of Common Stock, subject to
adjustment pursuant to Section 1.5(b) of the Plan, as hereinafter
defined, $2.00 par value per share, of Mercshares (the "Common Stock")
and the right to receive cash in lieu of fractional shares of Common
Stock, as provided in paragraph (c) of this Section 7. Each certificate
representing shares of the capital stock of Mardela (other than
certificates representing shares held by any objecting 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 conversion ratio set forth above. Such
certificates (together with any required transmittal materials or
endorsements) may at any time thereafter be surrendered to The Bank of
New York, acting as exchange agent, or such other or additional exchange
agent as Mercshares may select (the "Exchange Agent") for new
certificates for the appropriate number of whole shares of Common Stock
(and cash in lieu of fractional shares). 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
capital stock of Mardela have not been surrendered; but whenever a
dividend is declared by Mercshares 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.
Mercshares shall be entitled, however, after the Effective Date, to treat
the certificates of theretofore outstanding capital stock of Mardela as
evidencing the ownership of the number of whole shares of Common Stock
into which the capital stock of Mardela, previously represented by such
certificates, shall have been converted, notwithstanding the failure to
surrender such certificates. All certificates for capital stock of
Mardela surrendered to the Exchange Agent for new certificates
representing shares of Common Stock pursuant to this Section 7 will be
cancelled.
(c) 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, Mercshares 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 capital stock of Mardela
representing the right to receive such cash in lieu of fractional shares
of Common Stock. No such holder shall be entitled to dividends, voting
rights or any other rights of stockholders in respect of any fractional
share.
(d) Any holder of shares of the capital stock of Mardela whose shares
are voted against the approval of the Merger at the meeting of
stockholders at which the Merger is approved, and who, within thirty (30)
days after the Effective Date (which shall be set forth in a notice
provided to any such stockholder by the Corporation and Peninsula by
certified mail, return receipt requested pursuant to Section 3-207(b) of
the Maryland General Corporation Law) makes a written demand upon
Peninsula for payment for such shares, accompanied by a surrender of the
certificates for such shares, all pursuant to the provisions of Title 3,
Subtitle 7, Part II of the Financial Institutions Articles of the
Annotated Code of Maryland, or any successor statute thereto and any
applicable provisions of Title 3, Subtitle 2 of the Maryland General
Corporation Law, shall be entitled to receive from Peninsula in cash the
fair value of such shares of the capital stock of Mardela determined in
accordance with the aforesaid provisions of the Financial Institutions
Article of the Annotated Code of Maryland and of Maryland General
Corporation Law, or any successor statute thereto. The amount paid to any
such objecting stockholder shall be debited against the capital accounts
of Peninsula. If the holders of any of the shares of Mardela object to
the Merger and demand payment in cash for their shares as aforesaid,
Mercshares shall
A-21
<PAGE>
pay to Peninsula, as a contribution to its capital, cash at a price per
share equal to the price per share paid by Peninsula to the objecting
shareholder.
(e) There will be no objecting shareholders of Peninsula, which is a
wholly owned affiliate of Mercshares.
Section 8. This Agreement of Merger is subject to the approval of the
Commissioner of Financial Regulation of Maryland and of the holders of at
least two-thirds (2/3rds) of the issued and outstanding capital stock of
each of Mardela and of Peninsula, respectively, and is subject also to
compliance with all of the conditions set forth in the Agreement and Plan of
Affiliation and Merger dated December 10, 1996, by and among Mardela,
Peninsula, and Mercshares (the "Plan"), pursuant to which this Agreement of
Merger is executed, except such as shall have been waived as provided in the
said Plan. At any time prior to the Effective Date, notwithstanding its
approval by the stockholders of Mardela and/or Peninsula, the parties
hereto, without further action or approval of the stockholders of Mardela or
Peninsula, may amend or abandon the Merger in accordance with Article III of
the Plan.
Section 9. The Merger provided for herein shall be effective on
at [the date and time set forth in the Certificate of
Merger issued by the Commissioner of Financial Regulation of Maryland.]
IN WITNESS WHEREOF, Mardela and Peninsula have caused this Agreement of
Merger to be executed on their respective behalves and their corporate seals to
be hereunto affixed on this day of , 199 .
<TABLE>
<S> <C> <C>
ATTEST: FARMERS BANK OF MARDELA SPRINGS
By:
- ------------------------------------------ ------------------------------------------
, Cashier President
ATTEST: PENINSULA BANK
By:
- ------------------------------------------ ------------------------------------------
, Secretary President
</TABLE>
Mercantile Bankshares Corporation hereby joins in the foregoing Agreement of
Merger, undertakes that it will be bound thereby and that it will issue the
shares of its common stock and make the payments required by the provisions of
Section 7.
IN WITNESS WHEREOF, Mercantile Bankshares Corporation has caused this
undertaking to be executed on its behalf by its proper officers and its
corporate seal to be hereunto affixed on this day of , 199 .
<TABLE>
<S> <C> <C>
ATTEST: MERCANTILE BANKSHARES CORPORATION
By:
- ------------------------------------------ ------------------------------------------
, Secretary , Chairman of the Board
</TABLE>
A-22
<PAGE>
ANNEX B
SCOTT & STRINGFELLOW, INC.
January 17, 1997
Board of Directors
Farmers Bank of Mardela Springs
Salisbury, Maryland
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Farmers Bank of Mardela Springs
("Farmers Bank") of the terms of an Agreement and Plan of Affiliation and Merger
between Mercantile Bankshares Corporation ("Mercantile"), Penninsula Bank
("Penninsula") and Farmers Bank dated December 10, 1996 and a related Agreement
of Merger (the "Agreement"). The Agreement provides for the merger of Farmers
Bank with and into Penninsula (the "Affiliation") and further provide that each
share of Common Stock of Farmers Bank which is issued and outstanding
immediately prior to the Effective Date of the Affiliation may be converted into
and exchanged for 1.25 shares of Mercantile Common Stock (the "Exchange Ratio").
The Exchange Ratio is subject to adjustment in certain events.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Agreement; (2) the Form S-4 Registration Statement filed with
the Securities and Exchange Commission in connection with the Affiliation; (3)
Farmers Bank's financial statements for the three years ended December 31, 1995;
(4) Farmers Bank's unaudited financial statements for the quarter and nine
months ended September 30, 1996 and 1995 and other internal information relating
to Farmers Bank prepared by Farmers Bank's management; (5) information regarding
the trading market for the common stocks of Farmers Bank and Mercantile and the
price ranges within which the respective stocks have traded; (6) the
relationship of prices paid to relevant financial data such as net worth, loans,
deposits and earnings in certain bank and bank holding company mergers and
acquisitions in Maryland in recent years; (7) Mercantile's annual reports to
shareholders and its financial statements for the three years ended December 31,
1995; and (8) Mercantile's unaudited financial statements for the quarter and
nine months ended September 30, 1996 and 1995, and other publicly available
information relating to Mercantile prepared by Mercantile's management. We have
discussed with members of management of Farmers Bank the background to the
Affiliation, reasons and basis for the Affiliation and the business and future
prospects of Farmers Bank and Mercantile individually and as a combined entity.
Finally, we have conducted such other studies, analyses and investigations,
particularly of the banking industry, and considered such other information as
we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the information furnished to us by
or on behalf of Farmers Bank, Peninsula and Mercantile. We have not attempted
independently to verify such information, nor have we made any independent
appraisal of the assets of Farmers Bank, Peninsula or Mercantile. We have taken
into account our assessment of general economic, financial market and industry
conditions as they exist and can be evaluated at the date hereof, as well as our
experience in business valuation in general.
B-1
<PAGE>
On the basis of our analyses and review and in reliance on the accuracy and
completeness of the information furnished to us and subject to the conditions
noted above, it is our opinion that, as of the date hereof the terms of the
Agreement are fair from a financial point of view to the holders of Farmers Bank
Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ GARY S. PENROSE
------------------------------------------
Gary S. Penrose
MANAGING DIRECTOR
FINANCIAL INSTITUTIONS GROUP
B-2
<PAGE>
ANNEX C
APPRAISAL RIGHTS
PROVISIONS OF THE FINANCIAL INSTITUTIONS
ARTICLE OF THE MARYLAND ANNOTATED CODE
SECTION 3-718. SUCCESSOR MAY OFFER FAIR VALUE.
(a) IN GENERAL.--The successor in a consolidation, merger, or transfer of
assets may offer to pay in cash to the objecting stockholders of a constituent
bank not more than what it considers to be the fair value of their shares of
stock as of the time of the stockholders' meeting approving the transaction.
(b) EFFECT OF ACCEPTANCE.--An objecting stockholder who accepts the offer is
barred from receiving the appraised fair value of the shares of stock under
Section 3-719 of this subtitle.
SECTION 3-719. RIGHT TO FAIR VALUE.
(a) GENERAL RULE.--The owner of shares of stock that were voted against a
consolidation, merger, or transfer of assets is entitled to receive the fair
value of those shares, in cash, if the transaction becomes effective.
(b) PROCEDURE BY STOCKHOLDER.--A stockholder who desires to receive payment
of the fair value for shares under this section, within 30 days after the
transaction becomes effective, shall:
(1) Make a written demand on the successor for payment; and
(2) Surrender the stock certificates.
SECTION 3-720. APPRAISAL OF FAIR VALUE.
(a) BASIS OF FAIR VALUE.--The fair value of the shares of stock shall be
determined as of the date of the stockholders' meeting approving the
consolidation, merger, or transfer of assets.
(b) APPRAISERS.--(1) The determination of fair value shall be made by three
appraisers as follows:
(i) One chosen by the owners of two thirds of the shares involved;
(ii) One chosen by the board of directors of the successor; and
(iii) The third chosen by the other two appraisers.
(2) The fair value to which any two appraisers agree shall govern.
(3) The appraisers shall give notice of the fair value determination to
the successor and to each stockholder who has made demand for the
determination under Section 3-719 of this subtitle.
(c) REAPPRAISAL.--(1) Within 5 days after the appraisers give the notice of
the fair value determination, a stockholder who is dissatisfied with that value
may notify the Commissioner.
(2) The Commissioner shall have the shares reappraised.
(3) This reappraisal is final and binding as to the value of the shares
of stock of that stockholder.
(d) APPRAISAL BY COMMISSIONER.--(1) If the appraisal to be made under
subsection (b) of this section is not completed within 90 days after the
consolidation, merger, or transfer of assets becomes effective, the Commissioner
shall have an appraisal made.
(2) This appraisal is final and binding as to the value of the shares of
stock of all objecting stockholders.
(e) EXPENSES OF APPRAISALS.--The successor shall pay the expenses of each
appraisal made under this section.
SECTION 3-721. AMOUNT DUE IS DEBT OF SUCCESSOR.
Any amount due to an objecting stockholder under this Part II is a debt of
the successor.
C-1
<PAGE>
RELEVANT APPRAISAL RIGHTS PROVISIONS
OF THE MARYLAND GENERAL CORPORATION LAW
SECTION 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.
(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.
C-2
<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.
II-1
<PAGE>
(a) Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
A. Agreement and Plan of Affiliation and Merger, dated October 21, 1996 among the Registrant, Peninsula
Bank, and Farmers Bank (included as Annex A to the Prospectus and Proxy Statement)
(3)(i) Articles of Incorporation
A. Articles of Incorporation of the Registrant effective May 27, 1969 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-39545, Exhibit 3-A(1))
B. Articles of Amendment of the Registrant effective June 6, 1969 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-39545, Exhibit 3-A(2))
C. Articles Supplementary of the Registrant effective August 28, 1970 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-39545, Exhibit 3-A(3))
D. Articles of Amendment of the Registrant effective December 14, 1970 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-39545, Exhibit 3-A(4))
E. Articles Supplementary of the Registrant effective May 10, 1971 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-39545, Exhibit 3-A(5))
F. Articles Supplementary of the Registrant effective July 30, 1971 (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 2-41379, Exhibit 3-A(6))
G. Articles of Amendment of the Registrant effective May 8, 1986 (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 3-A(7),
Commission No. 0-5127)
H. Articles of Amendment of the Registrant effective April 27, 1988 (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 3-A(8),
Commission No. 0-5127)
I. Articles Supplementary of the Registrant effective September 13, 1989 (Incorporated by reference to the
Registrant's Form 8-K filed September 27, 1989, Exhibit B attached to Exhibit 4-A, Commission No.
0-5127)
J. Articles Supplementary of the Registrant effective January 3, 1990 (Incorporated by reference to the
Registrant's Form 8-K filed January 9, 1990, Exhibit B attached to Exhibit 4-A, Commission No. 0-5127)
K. Articles of Amendment of the Registrant effective April 26, 1990 (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3-A(11),
Commission No. 0-5127)
(3)(ii) By-laws
A. Bylaws of the Registrant, as amended to date (Incorporated by reference to the Registrant's Registration
Statement on Form S-4, File No. 333-19331)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
(4) Instruments defining the rights of security holders, including indentures:
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 Septem-
ber 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 Septem-
ber 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)
(5) Opinion regarding legality. Opinion of Venable, Baetjer and Howard, LLP*
(8) Opinion regarding tax matters. Form of Tax Opinion of Venable, Baetjer and Howard, LLP*
(23) Consent of experts and counsel.
A. Consent of Coopers & Lybrand L.L.P. as to Registrant
B. Consent of Rowles & Company as to Farmers Bank of Mardela Springs
C. Consent of Venable, Baetjer and Howard, LLP (included in the opinion filed as Exhibit 5)*
(24) Power of Attorney. Power of Attorney dated January 3, 1997 of the Mercshares Board of Directors*
(99) Additional Exhibits. Form of Proxy Card for Farmers Bank Special Meeting
</TABLE>
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.
(c) Report, opinion or appraisal required to be filed herewith pursuant to
Item 4(b) of this Form: (included as Annex C).
- ------------------------
* Previously filed.
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
II-3
<PAGE>
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
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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Baltimore,
State of Maryland on January 16, 1997.
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 Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and January 16, 1997
/s/ H. FURLONG BALDWIN Chief Executive Officer
- ------------------------------ (Principal Executive
H. Furlong Baldwin Officer)
/s/ TERRY L. TROUPE Chief Financial Officer and January 16, 1997
- ------------------------------ Treasurer (Principal
Terry L. Troupe Financial Officer)
/s/ JERRY F. GRAHAM Vice President and January 16, 1997
- ------------------------------ Controller (Principal
Jerry F. Graham Accounting Officer)
A Majority of The Board of Directors:
Thomas M. Bancroft, Jr., Richard O. Berndt, George L. Bunting, Jr., Martin
T. Grass, Freeman A. Hrabowski, III, B. Larry Jenkins, Robert A. Kinsley, Robert
D. Kunisch, William J. McCarthy, Christian H. Poindexter, William C. Richardson,
Bishop L. Robinson, , Calman J. Zamoiski, Jr.
<TABLE>
<S> <C>
By: /s/ H. FURLONG BALDWIN
--------------------------------------------------------------------
Date: January 16, H. Furlong Baldwin
1997 For Himself and as Attorney-in-Fact
</TABLE>
II-5
<PAGE>
Exhibit 23(A)
Coopers & Lybrand L.L.P.
a professional services firm
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.
333-19623) of our report dated January 22, 1996, on our audit of the
consolidated financial statements of Mercantile Bankshares Corporation and
Affiliates as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, which report is incorporated by
reference in the Annual Report on Form 10-K for the year ended December 31,
1995, of Mercantile Bankshares Corporation. We also consent to the reference
to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 15, 1997
<PAGE>
EXHIBIT 23(B)
[LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
Farmers Bank of Mardela Springs
Mardela Springs, Maryland
We consent to the use in this registration statement on Form S-4 of our
report dated January 16, 1996 on the financial statements of Home Bank
appearing in the registration statement and to the reference made to us under
the caption "Experts" in the prospectus.
/s/ Rowles & Company, LLP
Salisbury, Maryland
January 15, 1997
124 East Market Street, Salisbury, Maryland 21801
(410) 546-1855 FAX (410) 548-9668
<PAGE>
EXHIBIT 99
FARMERS BANK OF MARDELA SPRINGS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Farmers Bank of Mardela Springs. ("Farmers
Bank") hereby appoints Thomas L. Bounds, Milton G. Catlin, Donald C. Sewell and
William R. Webster, and any of them, as lawful attorneys and proxies of the
undersigned, with several power of substitution, to vote all shares of the
common stock of Farmers Bank which the undersigned is entitled to vote at the
Special Meeting of the Stockholders of Farmers Bank to be held on February 25,
1997 at 2:00 p.m. at The Mardela Springs Volunteer Fire Department, Station
Street, Mardela Springs, Maryland, or at any adjournment thereof as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
<TABLE>
<S> <C> <C> <C>
To approve the Agreement and Plan of Affiliation and Merger, dated December 10, 1996, including the
1. Agreement of Merger attached as an exhibit thereto (the "Agreement") by and among Farmers Bank, Mercantile
Bankshares Corporation, a Maryland corporation ("Mercshares"), a bank holding company registered under the
Bank Holding Company Act of 1956, and Peninsula Bank, a Maryland commercial bank and a wholly owned
subsidiary of Mercshares ("Peninsula"), pursuant to which (i) Farmers Bank shall merge with and into
Peninsula and (ii) each share of common stock of Farmers Bank, par value $12.50 per share ("Farmers Bank
Common Stock") (other than shares held by holders of Farmers Bank Common Stock who perfect their dissenters'
rights) automatically shall become and be converted into 1.25 shares of the common stock of Mercshares, par
value $2.00 per share.
</TABLE>
/ / FOR / / AGAINST / / ABSTAIN
<TABLE>
<S> <C> <C> <C>
2. In their discretion, to vote upon such other business as may properly come before the meeting.
</TABLE>
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED IN THIS
PROXY. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED "FOR" APPROVAL OF THE AGREEMENT AND IN THE BEST DISCRETION
OF THE PROXY HOLDERS AS TO OTHER MATTERS.
Dated: _____________________, 1997
__________________________________
Signature of Owner
__________________________________
Additional Signature of Joint
Owner
Please sign exactly as your name
appears hereon. If stock is
jointly held, each joint owner
should sign. When signing as
attorney, executor, administrator,
trustee or guardian please give
full title as such.
