<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERCANTILE BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6711 52-0898572
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
MERCANTILE BANK & TRUST BUILDING
TWO HOPKINS PLAZA; P.O. BOX 1477
BALTIMORE, MARYLAND 21203
(410) 237-5900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
------------------------------
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. RAYMOND C. SHOCKLEY, ESQ.
Venable, Baetjer and Howard, LLP Williams, Hammond, Moore, Schockley &
1800 Mercantile Bank & Trust Building Harrison, P.A.
Two Hopkins Plaza 3509 Coastal Highway
Baltimore, Maryland 21201 Ocean City, Maryland 21842
(410)244-7400 (410)289-3553
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If any of the securities being registered on this Form are to be offered
pursuant to Rule 415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box. /X/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $2.00 par value(1) 475,218 $11.77 $5,593,231 $1,694.92
</TABLE>
(1) Includes as to each share of Common Stock a right, not currently exercisable
or separately tradeable, to purchase additional securities in certain future
events, as described in the enclosed Prospectus and Proxy Statement.
(2) Estimated solely for purposes of calculating the registration fee, as
required by Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"), and calculated in accordance with Rule 457(f)(2)
thereunder, on the basis of the book value of Common Stock of Home Bank to
be received by the Registrant in exchange for common stock of the Registrant
pursuant to the Merger described in the enclosed Prospectus and Proxy
Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HOME BANK
January 14, 1997
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Home Bank to be held at [ ], Maryland on February 12, 1997 at 11:30
a.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 October 21, 1996, by and
among Home 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 Home Bank will merge with and into Peninsula,
and stockholders of Home 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
Home Bank, par value $10.00 per share ("Home Bank Common Stock"), on the date of
consummation (other than shares held by Home Bank Stockholders who properly
perfect their dissenters' rights) automatically shall become and be converted
into 2.6 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 would increase from $.75 per share to
approximately $2.24 per share of Home Bank Common Stock now held by you,
although no assurance can be given that current dividend levels will be
maintained by Mercshares. The historical net income per share and the book value
per share of Mercshares Common Stock to be received by you after giving effect
to the exchange ratio represent a substantial increase in historical net income
per share and book value per share of Home Bank Common Stock. The shares of
Mercshares Common Stock you receive pursuant to the Merger should be more
readily marketable than the shares of Home Bank Common Stock you presently hold.
The conversion of Home 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 Home Bank Common Stock.
Your Board of Directors unanimously approved the Affiliation Agreement and
the Merger and believes that they are in the best interest of Home Bank and our
stockholders. Accordingly, the Board of Directors unanimously 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/ RALPH L. MASON, JR. /s/ F. DENNIS PARKER
Chairman of the Board President
</TABLE>
<PAGE>
HOME BANK
NEWARK, MARYLAND
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
A Special Meeting of Stockholders of Home Bank (each a "Home Bank
Stockholder") will be held at [ ], Maryland on February 12, 1997 at 11:30
a.m. for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Affiliation and Merger, dated October 21, 1996, including the
Agreement of Merger attached as an exhibit thereto (the "Affiliation
Agreement") by and among Home 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) Home Bank
shall merge with and into Peninsula and (ii) each share of common stock of
Home Bank, par value $10.00 per share ("Home Bank Common Stock") (other than
shares held by holders of Home Bank Common Stock who properly perfect their
dissenters' rights) automatically shall become and be converted into 2.6
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.
Home 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 B to the accompanying Prospectus and Proxy Statement. Objecting Home Bank
Stockholders will, in any event, be entitled to payment of the fair value of
only those shares of Home Bank Common Stock that are voted against approval of
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 Home 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/ F. DENNIS PARKER
President
January 14, 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 HOME BANK RECOMMENDS THAT HOME BANK
STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE MERGER.
<PAGE>
January 14, 1997
PROSPECTUS RELATING TO 475,218 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
------------------------
PROXY STATEMENT RELATING TO
A SPECIAL MEETING OF STOCKHOLDERS OF HOME BANK
TO BE HELD ON FEBRUARY 12, 1997
This prospectus and proxy statement (the "Prospectus and Proxy Statement")
is being furnished to the holders (the "Home Bank Stockholders") of common
stock, par value $10.00 per share (the "Home Bank Common Stock"), of Home Bank,
in connection with the solicitation of proxies by the Board of Directors of Home
Bank for use at the Special Meeting of the Home Bank Stockholders to be held at
[ ], Maryland on February 12, 1997 at 11:30 a.m., and at any and all
adjournments or postponements thereof (the "Home 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 Home 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 October 21, 1996, including the Agreement of Merger attached as an exhibit
thereto (the "Affiliation Agreement"), by and among Mercshares, Peninsula and
Home Bank. Upon consummation of the Merger, Home Bank employees will become
employees of Peninsula, the operations of Home Bank will be continued by
Peninsula, and the separate corporate existence of Home Bank will cease. Upon
consummation of the Merger, each share of Home Bank Common Stock (other than
shares held by Home Bank Stockholders who properly perfect their dissenters'
rights) automatically shall become and be converted into 2.6 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 Home Bank Special Meeting, at which the Home 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 475,218 shares of Mercshares
Common Stock.
The information presented in this Prospectus and Proxy Statement concerning
Home Bank has been supplied by Home 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 Home Bank Stockholders on or about January 14, 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 HOME BANK SPECIAL MEETING.............................................................................. 10
Date, Place And Time....................................................................................... 10
Purpose of the Home 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 Home Bank Board of Directors................................. 13
Effective Date............................................................................................. 15
Procedures for Exchange of Certificates.................................................................... 15
Certain Federal Income Tax Consequences.................................................................... 16
Accounting Treatment....................................................................................... 17
Resale of Mercshares Common Stock After the Merger by Controlling Persons.................................. 17
Conditions to Merger....................................................................................... 17
Treatment of Employee Benefit Plans........................................................................ 18
Exclusive Dealing.......................................................................................... 19
Interests of Certain Persons in the Affiliation............................................................ 19
Termination................................................................................................ 20
Appraisal Rights Of Dissenting Stockholders................................................................ 20
CERTAIN OTHER AGREEMENTS................................................................................... 22
The Support Agreement...................................................................................... 22
Affiliate Undertakings..................................................................................... 22
DESCRIPTION OF HOME BANK................................................................................... 23
General.................................................................................................... 23
Business................................................................................................... 23
Properties................................................................................................. 25
Dividends.................................................................................................. 25
Price Range of Common Stock................................................................................ 25
Stock Ownership of Directors and Executive Officers........................................................ 26
SELECTED FINANCIAL INFORMATION............................................................................. 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 29
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF MERCSHARES COMMON STOCK AND HOME BANK COMMON STOCK.......... 41
DESCRIPTION OF MERCSHARES CAPITAL STOCK.................................................................... 42
LEGAL MATTERS.............................................................................................. 43
EXPERTS.................................................................................................... 43
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--DISSENTERS' RIGHTS STATUTORY PROVISIONS........................................................... B-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 up to 475,218 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 Home 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 5, 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. Home 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.
HOME BANK. Home Bank is a Maryland commercial bank which operates five
banking offices. At September 30, 1996, Home Bank had total assets of
approximately $46.1 million, deposits of approximately $40.3 million and total
loans of approximately $34.7 million. Its principal executive office is located
at 8305 Langmaid Road, Newark, Maryland 21841, telephone number (410) 632-2151.
As of December 23, 1996, there were 176,889 shares of Home Bank Common Stock
outstanding. There is no established trading market for Home Bank Common Stock.
THE MERGER
GENERAL. At the Home Bank Special Meeting described in the notice (the
"Notice") accompanying this Prospectus and Proxy Statement, Home 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 Home Bank Common Stock (other than shares held by Home Bank
Stockholders who properly perfect their dissenters' rights) automatically shall
become and be converted into 2.6 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 Home 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 Home 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, the directors and certain officers of Home
Bank and certain persons related to them owned an aggregate of 74,273 shares
constituting approximately 42% of the Home Bank Common Stock. Such persons have
executed agreements with Mercshares
4
<PAGE>
pursuant to 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 HOME BANK STOCKHOLDERS ON THE AFFILIATION AGREEMENT
AND THE MERGER IS BASED UPON THE TOTAL NUMBER OF OUTSTANDING SHARES OF HOME BANK
COMMON STOCK, THE FAILURE TO SUBMIT A PROXY CARD (OR THE FAILURE TO VOTE IN
PERSON AT THE HOME 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 HOME BANK SPECIAL
MEETING" AND "CERTAIN OTHER AGREEMENTS--THE SUPPORT AGREEMENT."
RECOMMENDATION OF THE HOME BANK BOARD; REASONS FOR THE MERGER. The Home
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, Home Bank and the Home Bank Stockholders and has unanimously adopted the
Affiliation Agreement. In considering the terms and conditions of the Merger,
the Home 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 Home 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; a valuation report provided by
Rowles & Company ("Rowles"); and the operational and competitive benefits of the
Merger.
The Home Bank Board of Directors also considered that the historical
dividends per share, net income per share and book value per share of the
Mercshares Common Stock to be received by the Home Bank Stockholders, after
giving effect to the Exchange Ratio, represent a substantial increase in the
historical dividends per share, net income per share and book value per share of
Home Bank Common Stock, although there can be no assurance that pro forma
amounts are indicative of future dividends, income per share or book value per
share of Mercshares. Based upon the $30.25 per share closing market price of
Mercshares Common Stock on October 18, 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 Home Bank's September 30, 1996 book
value was 2.47%. THE HOME BANK BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
HOME 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 Home Bank Board of Directors."
CONDITIONS TO MERGER. The mutual obligation of Mercshares, Peninsula and
Home Bank to consummate the Merger is subject to the requisite approval of the
Affiliation Agreement by the Home 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
Home 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."
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 Home Bank Stockholder who votes
against the Merger and follows specified procedures is entitled to appraisal
rights with respect to the Merger. Under the appraisal
5
<PAGE>
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 B, each Home 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 Home 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 (a
"Payment Demand"). 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 Home 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 Home Bank
Stockholders' appraisal rights.
A Home 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."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. The Affiliation Agreement
provides that following the Effective Date, three directors of Home Bank, as
jointly determined by Mercshares, Peninsula and Home Bank, shall be appointed
directors of Peninsula. Mercshares and Peninsula will employ F. Dennis Parker,
President of Home Bank, as Senior Vice President of Peninsula upon consummation
of the Merger. See "THE MERGER--Interests of Certain Persons in the Merger."
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 Home Bank Stockholders who receive solely shares of Mercshares Common
Stock in exchange for Home Bank Common Stock by reason of the Merger, and (ii)
no gain or loss will be recognized by Mercshares, Peninsula or Home 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. Home 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, Home 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 Home 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 HOME
BANK COMMON STOCK" and "DESCRIPTION OF MERCSHARES CAPITAL STOCK" for a
description of the material differences between the rights of holders of
Mercshares Common Stock and Home Bank Common Stock and a description of
Mercshares capital stock.
6
<PAGE>
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
October 18, 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 $30.25 per share. The market value
of Mercshares Common Stock on January , 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 $ per share. Home Bank
Common Stock is not traded on any exchange and no established public trading
market exists for Home 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 HOME BANK STOCKHOLDERS WILL RECEIVE PURSUANT TO THE
MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE DATE. HOME 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 Home 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. Home 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 Home Bank for such periods have been derived from
Home Bank's unaudited financial statements. In the opinions of the respective
managements of Mercshares and Home 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, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
MERCANTILE BANKSHARES CORPORATION
Net Interest Income................................ $ 230,994 $ 213,060 $ 286,788 $ 262,956 $ 246,482 $ 228,540
Provision for Loan Losses.......................... 10,862 5,098 7,988 7,056 12,969 45,346
Other Operating Income............................. 72,134 65,223 88,154 92,186 86,313 106,988
Income before Income Taxes......................... 139,142 124,400 166,009 146,886 135,971 122,776
Net Income......................................... 87,042 77,492 104,432 90,441 83,468 76,298
Cash Dividends Declared and Paid on Common Stock... 34,253 29,919 41,013 34,982 30,173 26,454
Net Income Per Share of
Common Stock (1)(2).............................. 1.82 1.63 2.19 1.88 1.73 1.67
Per Share Cash Dividends Declared and Paid on
Common Stock (1)(2).............................. .72 .63 .86 .74 .64 .58
Total Assets....................................... 6,546,631 6,055,304 6,349,103 5,938,225 5,789,620 5,459,577
Loans, Net......................................... 4,413,196 4,032,960 4,209,872 3,846,838 3,628,780 3,401,213
Long-Term Debt..................................... 49,402 25,776 25,623 31,470 32,350 15,108
HOME BANK
Net Interest Income................................ $ 1,946 $ 1,927 $ 2,600 $ 2,252 $ 2,017 $ 1,864
Provision for Loan Losses.......................... 89 52 82 91 121 252
Other Operating Income............................. 291 318 419 361 395 290
Income before Income Taxes (3)..................... 834 862 1,082 785 639 267
Net Income......................................... 529 543 681 484 394 156
Cash Dividends Declared and Paid on Common Stock... -- -- 132 96 68 59
Net Income Per Share of Common Stock (4)........... 3.01 3.11 3.89 2.78 2.27 .90
Per Share Cash Dividends Declared and Paid on
Common Stock (4)................................. -- -- .75 .55 .39 .34
Total Assets....................................... 46,124 46,237 44,316 42,118 38,827 36,090
Loans, Net......................................... 34,653 33,310 34,721 31,736 27,999 27,313
<CAPTION>
<S> <C>
1991
----------
<S> <C>
MERCANTILE BANKSHARES CORPORATION
Net Interest Income................................ $ 208,609
Provision for Loan Losses.......................... 20,850
Other Operating Income............................. 76,265
Income before Income Taxes......................... 111,596
Net Income......................................... 70,562
Cash Dividends Declared and Paid on Common Stock... 25,936
Net Income Per Share of
Common Stock (1)(2).............................. 1.56
Per Share Cash Dividends Declared and Paid on
Common Stock (1)(2).............................. .57 1/3
Total Assets....................................... 5,216,802
Loans, Net......................................... 3,309,005
Long-Term Debt..................................... 16,609
HOME BANK
Net Interest Income................................ $ 1,742
Provision for Loan Losses.......................... 125
Other Operating Income............................. 291
Income before Income Taxes (3)..................... 391
Net Income......................................... 255
Cash Dividends Declared and Paid on Common Stock... 59
Net Income Per Share of Common Stock (4)........... 1.47
Per Share Cash Dividends Declared and Paid on
Common Stock (4)................................. .34
Total Assets....................................... 35,721
Loans, Net......................................... 25,439
</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 47,658,146 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) For the year 1992, this item represents Income before Income Taxes and
Cumulative Effect of Change in Accounting Principles.
(4) Per share data for 1992 and 1991 have been adjusted to reflect the 2.5% and
20% stock dividends declared during 1993 and 1992, respectively.
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 Home 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 Home Bank on a historical
basis and on a pro forma equivalent basis. The table does not give effect to
outstanding options to acquire shares of Home Bank Common Stock.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- -----------------
<S> <C> <C>
PER COMMON SHARE:
NET INCOME:
Home Bank-historical.................................. $ 3.01 $ 3.89
Home Bank pro forma equivalent (1).................... $ 4.73 $ 5.67
Mercshares-historical................................. $ 1.82 $ 2.19
Mercshares pro forma combined (2)..................... $ 1.82 $ 2.18
CASH DIVIDENDS DECLARED:
Home Bank-historical.................................. -- $ 0.75
Home Bank pro forma equivalent (1).................... $ 1.87 $ 2.24
Mercshares-historical................................. $ 0.72 $ 0.86
Mercshares pro forma combined (3)..................... $ 0.72 $ 0.86
BOOK VALUE:
Home Bank-historical (4).............................. $ 31.79 $ 28.87
Home Bank pro forma equivalent (1).................... $ 44.95 $ 43.45
Mercshares-historical (4)............................. $ 17.18 $ 16.44
Mercshares pro forma combined......................... $ 17.29 $ 16.71
</TABLE>
- ------------------------
(1) Home Bank pro forma equivalent amounts represent Mercshares' pro forma
combined information multiplied by the Exchange Ratio of two and six-tenths
shares of Mercshares Common Stock for each share of Home Bank Common Stock.
In December 1996, Home Bank declared a dividend of $0.75 per share, payable
in January 1997.
(2) Pro forma combined net income per share represents historical net income per
share of Mercshares adjusted for the impact of a purchase of Home Bank.
(3) 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.
(4) Generally accepted accounting principles require adjustment to equity for
net unrealized gains and losses on securities available for sale for fiscal
years beginning after December 31, 1993.
9
<PAGE>
PENDING TRANSACTION
On December 10, 1996, Mercshares and Peninsula entered into an agreement
providing for the merger of Farmers Bank of Mardela Springs ("Farmers Bank")
into Peninsula. Farmers Bank operates three banking offices on Maryland's
Eastern Shore. At September 30, 1996, Farmers Bank had total assets of $28
million, loans (net) of $20 million and stockholders' equity of $2.45 million.
Net income for the years ended December 31, 1993, 1994 and 1995 was $137,170,
$162,478 and $127,617, respectively. Net income for the nine months ended
September 30, 1996 was $153,919. The agreement with Farmers Bank provides for a
tax-free exchange of 115,035 shares of Mercshares Common Stock for the 92,028
outstanding shares of stock of Farmers Bank, and is subject to a number of
conditions including regulatory approvals and approval by the Farmers Bank
stockholders. The transaction with Farmers Bank will be accounted for as a
purchase. The transaction with Farmers 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 HOME BANK SPECIAL MEETING
DATE, PLACE AND TIME
The Home Bank Special Meeting will be held at [ ], Maryland on
February 12, 1997 at 11:30 a.m.
PURPOSE OF THE HOME BANK SPECIAL MEETING
At the Home Bank Special Meeting, Home 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 Home Bank Common Stock
(other than shares held by Home Bank Stockholders who properly perfect their
dissenters' rights) automatically shall become and be converted into 2.6 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
Home Bank Special Meeting.
The Home Bank Board of Directors recommends a vote to approve the
Affiliation Agreement and the Merger contemplated thereby.
RECORD DATE
The Home Bank Board of Directors has fixed the close of business on January
10, 1997 (the "Home Bank Record Date") as the record date for determining
holders entitled to notice of and to vote at the Home Bank Special Meeting.
Accordingly, only holders of record of Home Bank Common Stock at the close of
business on the Home Bank Record Date will be entitled to notice of, and to cast
their vote at, the Home Bank Special Meeting. At the close of business on
December 23, 1996, there were 176,889 shares of Home Bank Common Stock issued
and outstanding held by approximately 306 holders of record.
VOTE REQUIRED
Each holder of record of shares of Home Bank Common Stock on the Home 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 Home Bank
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the shares of Home Bank Common Stock outstanding on the
Home Bank Record Date is necessary to constitute a quorum at the Home 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 Home
Bank Common Stock entitled to vote thereon.
10
<PAGE>
As of December 23, 1996, the directors and certain officers of Home Bank and
certain persons related thereto owned an aggregate of 74,273 shares
(approximately 42%) of Home Bank Common Stock. Such persons have executed
agreements with Mercshares pursuant to which such persons have agreed to vote
their shares of Home Bank Common Stock to approve the Affiliation Agreement and
the Merger. Such agreements extend to shares of Home Bank Common Stock which
such persons may receive upon exercise of outstanding options. See "CERTAIN
OTHER AGREEMENTS--The Support Agreement" and "DESCRIPTION OF HOME BANK--Stock
Ownership of Directors and Executive Officers."
All shares of Home 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 HOME BANK COMMON STOCK WILL BE VOTED TO APPROVE
THE AFFILIATION AGREEMENT AND THE MERGER.
Home Bank does not know of any matters other than as described in the Notice
that are to come before the Home Bank Special Meeting. If any other matter or
matters are properly presented for action at the Home 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 Home 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 Home Bank Special Meeting to F. Dennis
Parker, President of Home Bank, by signing and returning a later dated proxy, or
by voting in person at the Home Bank Special Meeting; however, mere attendance
at the Home 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 Home Bank Special Meeting will be
tabulated to determine whether or not a quorum is present. Where, as to any
matter submitted to the Home Bank Stockholders for a vote, proxies are marked as
abstentions (or Home 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 HOME BANK STOCKHOLDERS ON THE
AFFILIATION AGREEMENT AND THE MERGER IS BASED UPON THE TOTAL NUMBER OF
OUTSTANDING SHARES OF HOME BANK COMMON STOCK, THE FAILURE TO SUBMIT A PROXY CARD
(OR THE FAILURE TO VOTE IN PERSON AT THE HOME 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 Home Bank Board of
Directors and Home 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 Home 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, Home Bank will merge with and into
Peninsula and each share of Home Bank Common Stock (other than shares held by
Home Bank Stockholders who properly perfect their dissenters' rights)
automatically shall become and be converted into 2.6 shares of Mercshares Common
Stock. Upon consummation of the Merger, Home Bank employees will become
employees of Peninsula, the operations of Home Bank will be continued by
Peninsula and the separate corporate existence of Home Bank will cease.
Certificates for Home Bank Common Stock shall be exchanged for certificates of
Mercshares Common Stock as described below.
Based upon the capitalization of Mercshares and Home Bank as of October 31,
1996, the Home Bank Stockholders would own approximately 1% of the outstanding
Mercshares Common Stock following consummation of the Merger. Based upon the
financial statements of Mercshares and Home Bank at September 30, 1996, upon
consummation of the Merger, the percentage of total assets and the percentage of
total liabilities represented by Home Bank in Mercshares would each be less than
1%. See "-- Treatment of Employee Benefit Plans" for a description of the
treatment of options in the Merger.
As discussed below in "Reasons for the Merger; Recommendation of the Home
Bank Board of Directors," the Home 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, Home Bank and the Home Bank Stockholders. Upon
consummation of the Merger, the former Home 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 Home Bank Stockholder who becomes a
holder of Mercshares Common Stock shall possess the same rights as other such
holders, and former Home Bank Stockholders as a group will no longer be taking
action at the Home Bank corporate level. See "COMPARISON OF STOCKHOLDER RIGHTS
OF HOLDERS OF MERCSHARES COMMON STOCK AND HOME BANK COMMON STOCK" and
"DESCRIPTION OF MERCSHARES CAPITAL STOCK."
BACKGROUND TO THE MERGER
In October 1995, Hugh W. Mohler, Executive Vice President of Mercshares,
contacted Ralph L. Mason, Jr., Chairman of Home Bank, to ask if Home Bank would
be interested in discussing a potential affiliation with Mercshares. There
followed a meeting attended by H. Furlong Baldwin, Chairman of Mercshares, Mr.
Mohler, Mr. Mason, F. Dennis Parker and other Home Bank directors, at which Mr.
Baldwin explained Mercshares' philosophy and policies relating to its Affiliated
Banks. The discussion was exploratory in nature and did not involve any specific
offer or proposal. In late 1995, Home Bank began to provide financial
information to Mercshares.
On March 6, 1996, Mr. Mohler provided Mr. Mason with a financial analysis of
a potential transaction at an exchange ratio of 2.3 shares of Mercshares Common
Stock for each share of Home Bank Common Stock, inviting further discussion. In
May 1996, Home Bank engaged Rowles to provide valuation information on Home Bank
Common Stock.
After further discussion and negotiation, Mr. Mohler, on May 16, 1996,
proposed to Mr. Mason a transaction at an exchange ratio of 2.6 shares of
Mercshares Common Stock for each share of Home Bank Common Stock, in a merger of
Home Bank into Peninsula Bank. On May 20, 1996, Mr. Baldwin and Mr. Mohler met
with Mr. Parker and other Home Bank directors for a more specific discussion of
12
<PAGE>
transaction terms. On June 26, 1996, Mr. Mohler and Alan D. Yarbro, Mercshares
General Counsel, met with Mr. Mason, F. Dennis Parker, several directors of Home
Bank and a representative of Rowles, to discuss various questions concerning
policies of Mercshares and Peninsula in areas such as employee benefit plans and
how these matters would be dealt with in the merger, the conduct of Home Bank's
business following the merger, the composition of the Board of Directors of
Peninsula, the potential content of definitive agreements and the procedures for
obtaining regulatory approvals and completing the merger. Mr. Mohler responded
to these questions on July 9, 1996. On July 16, 1996, Home Bank received the
valuation report of Rowles, which provided valuation information as of March 31,
1996. On July 18, 1996, Mr. Mason advised Mr. Mohler that the Home Bank Board of
Directors had voted to proceed with further exploration of the merger. The
parties then proceeded to prepare and negotiate the terms of the definitive
agreements.
Throughout the period of discussions with Mercshares, the Home Bank Board of
Directors engaged in regular deliberations concerning the merger at its monthly
Board meetings and certain special meetings, which were generally attended by
Home Bank financial and legal advisors. At a meeting of the Home Bank Board of
Directors held on July 16, 1996, there was a detailed review of all of the
information referred to above. Full agreement among the Home Bank Board members
was not reached until October 15, 1996. During the period between October 3 and
October 11, 1996, Mr. Mason requested Mr. Mohler to consider a modification of
the exchange ratio in the event that the price of Mercshares Common Stock were
to decline prior to consummation of the merger. Mercshares did not agree to this
modification. After further deliberation, the Home Bank Board of Directors
unanimously approved the Merger and definitive agreements on October 15, 1996,
and approvals by the boards of Mercshares and Peninsula followed on October 21,
1996.
REASONS FOR THE MERGER; RECOMMENDATION OF THE HOME BANK BOARD OF DIRECTORS
The Home 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, Home Bank and the Home Bank Stockholders. In considering the terms
and conditions of the Affiliation Agreement, the Home Bank Board of Directors
considered a number of factors. The Home 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 Home
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 Home Bank Stockholders resulting from the
Exchange Ratio represented a fair multiple of Home Bank's per share book
value and earnings. The Home Bank Board of Directors also considered that,
under the proposed Exchange Ratio and based on the Home Bank Board of
Directors' belief that Mercshares would continue to pay dividends at its
current rate, the Merger would result in a substantial increase in dividend
income to Home 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 Home Bank Board of Directors
also considered the valuation report prepared by Rowles.
(ii) THE TERMS, OTHER THAN THE FINANCIAL TERMS, AND STRUCTURE OF THE
MERGER. In this respect, the Home Bank Board of Directors considered the
benefits to the customers and employees of Home Bank and the communities it
serves of operating as branches of Peninsula. As branches of Peninsula, Home
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 Home
Bank Board of Directors also considered that Mercshares offered to appoint
three members of the Home Bank Board of Directors to serve on the Peninsula
Board of Directors and that the Merger would qualify as a tax-free
reorganization under the Code. See "--Certain Federal Income Tax
Consequences."
13
<PAGE>
(iii) CERTAIN FINANCIAL AND OTHER INFORMATION CONCERNING MERCSHARES. In
this respect, the Home 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 Home Bank Board of Directors also
considered that the historical dividends per share, net income per share and
book value per share of Mercshares Common Stock to be received by Home Bank
Stockholders, after giving effect to the Exchange Ratio, would represent a
substantial increase in the historical dividends per share, net income per
share and book value per share of Home Bank Common Stock, although there can
be no assurance that pro forma amounts are indicative of future dividends,
income per share or book value per share of Mercshares. The Home Bank Board
of Directors also considered the marketability of Mercshares Common Stock,
which is publicly traded and quoted on The Nasdaq National Market. The Home
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 only
acquisition offer received by Home Bank was the Mercshares offer. The Home
Bank Board of Directors believed it had a fiduciary obligation to the Home
Bank Stockholders to consider the Mercshares proposal as a method of
continuing and strengthening the Home Bank business, with associated
benefits to the Home Bank Stockholders, customers, employees and community.
The Mercshares proposal was considered as a strategic business alternative
to remaining as an independent bank. Based upon the foregoing
considerations, the Home Bank Board of Directors ultimately determined,
after full deliberation and negotiation with Mercshares, that there were
greater advantages in proceeding with the Merger.
(v) CERTAIN RELATED CONSIDERATIONS. The Home Bank Board of Directors
further determined that the addition of resources resulting from the Merger
will enable Home 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 Home Bank Board of Directors concluded that the Merger will
help provide Home 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 HOME BANK BOARD OF DIRECTORS BELIEVES THAT THE MERGER AND THE
AFFILIATION AGREEMENT ARE ADVISABLE AND ARE FAIR TO, AND IN THE BEST INTERESTS
OF, HOME BANK AND THE HOME BANK STOCKHOLDERS. THE HOME BANK BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT HOME BANK STOCKHOLDERS VOTE TO APPROVE THE
AFFILIATION AGREEMENT AND THE MERGER CONTEMPLATED THEREBY.
Home Bank's Board of Directors retained the firm of Rowles, certified public
accountants, to provide valuation information on the Home Bank Common Stock as
of March 31, 1996. Rowles has served as Home Bank's independent certified public
accountants since 1979. Its engagements have included the audit of financial
statements, preparation of income tax returns and management advisory services.
In connection with its services in providing the valuation report, Rowles was
paid a fee of approximately $6,000. Home Bank selected Rowles to perform the
valuation on the basis of its familiarity with the banking industry and
familiarity with Home Bank in particular.
On July 16, 1996, Rowles presented its March 31, 1996 valuation report to
the Board of Directors of Home Bank. As more fully stated below, the scope of
the Rowles engagement was for limited purposes and exclusively for the use of
the Home Bank Board of Directors. The Rowles evaluation was not intended to and
does not constitute any recommendation or advice to any person concerning the
Merger. In conducting the valuation, Rowles reviewed and analyzed: (1) Home
Bank's earnings data; (2) industry earnings data; (3) Home Bank's book value as
of March 31, 1996; (4) the audited financial statements of Home Bank through
December 31, 1995; (5) unaudited financial statements through March 31, 1996;
and (6) certain other publicly available information through March 31, 1996 or
December 31, 1995. In addition,
14
<PAGE>
Rowles obtained information about Home Bank through interviews with management
and about comparable community banks from various public sources. Rowles also
conducted such other studies, analysis and investigations, particularly of the
banking industry, and considered such other information as it deemed
appropriate.
Rowles estimated possible values for Home Bank Common Stock, as of March 31,
1996, based on various circumstances and valuation methods as follows: (1) a
capitalization of earnings value of $52.90 per share based on a
price-to-earnings multiple of 13.6 times 1995 net earnings, a multiple derived
from a median price-to-earnings multiple for 14 Mid-Atlantic banks; (2) a
dividend paying capacity value of $55.33 per share based on an assessment of
Home Bank's capital and earning capacity and industry data; (3) a controlling
interest valuation of $72.35 per share, assuming payment of a premium for
control, reflecting a price-to-earnings ratio of 18.6 (representing the median
ratio for 12 banks acquired in the Mid-Atlantic region during the period from
July 1, 1994 to March 31, 1996) and a multiple of book value of 2.44. The report
also reflected known transactions in Home Bank Common Stock between March 30,
1995 and March 31, 1996. See "DESCRIPTION OF HOME BANK--Price Range of Common
Stock."
This description of the Rowles evaluation is provided solely for disclosure
purposes because the evaluation was given to the Home Bank Board of Directors at
a time when the Merger was under consideration. It was intended solely for the
use of the Home Bank Board in its deliberation on strategic alternatives. The
report did not in any way evaluate Mercshares or Mercshares Common Stock. The
report was not intended as, and may not be construed or relied upon by any
person, as advice or any form of recommendation concerning the Merger. Rowles
was not engaged to evaluate or express any opinion concerning the Merger or the
financial consideration to be received by Home Bank Stockholders and it has not
done so. As to factual matters, Rowles relied on information provided by Home
Bank and on publicly available information. The scope of the engagement did not
require Rowles to verify any such data. Finally, it is noted that any valuation
requires the application of judgment to a variety of unpredictable factors and
there is no assurance that a valuation will ultimately prove correct.
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 Home 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 Home 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 Home Bank Common
Stock shall represent the right to receive certificates representing the number
of shares of Mercshares Common Stock and cash in lieu of fractional shares
represented thereby, as described herein. Certificates representing shares of
Home 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.
15
<PAGE>
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 Home 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, Home 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 Home 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 Home 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.
HOME BANK STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. HOME 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:
(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 Home Bank Stockholders
who receive solely Mercshares Common Stock in exchange for Home Bank Common
Stock pursuant to the Merger;
(iii) provided that the Home Bank Common Stock is held as a capital
asset, the tax basis of the Mercshares Common Stock received by the Home
Bank Stockholders will be the same as the tax basis of the Home Bank Common
Stock surrendered therefor, decreased by the amount of any cash received by
the Home Bank Stockholders in lieu of fractional shares and increased by the
amount of gain, if any, recognized by the Home Bank Stockholders;
(iv) provided that the Home Bank Common Stock is held as a capital
asset, the holding period of the Mercshares Common Stock received by the
Home Bank Stockholders will include the holding period of the Home Bank
Common Stock surrendered therefor; and
(v) no gain or loss will be recognized by Mercshares, Peninsula or Home
Bank in the Merger.
The obligation of Home 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 Home 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 Home Bank Stockholders. The
receipt of such cash generally will be treated as a sale or exchange of the
stock resulting
16
<PAGE>
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.
Certain directors and employees of Home Bank hold options to acquire Home
Bank Common Stock. If such options are cancelled in the Merger, with payment of
cash to optionees as provided for in the Affiliation Agreement, the amount of
such cash will be taxable as ordinary income to the optionees. See "--Treatment
of Employee Benefit Plans."
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 Home 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 $8.2 million, 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
Home Bank Stockholders who may be controlling persons of Home Bank. Mercshares
and Home Bank believe that the only Home Bank Stockholders who may be deemed
controlling persons subject to these limitations are the directors and certain
officers of Home 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 Home 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 Home 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) Home Bank shall not have declared any
dividend with respect to its Common Stock other than a dividend for the year
1996 not in excess of the greater of $.75 per share or 20% of Home Bank's net
income for the year 1996; (3) Home Bank shall not have changed its authorized,
issued or outstanding capital stock, issued any additional, or changed any
outstanding, 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 Home Bank, except as
provided in the
17
<PAGE>
Affiliation Agreement; (5) compliance by Home Bank with certain conditions,
including limits on unapproved increases in compensation of directors, officers
or employees of Home Bank or unapproved alterations in benefits received by such
individuals; (6) absence of any change in Home 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 Home 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) Home 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 Home 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 Home 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 Home Bank prior to the Effective Date in the manner in which such activities
and business were then conducted by Home 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 Home 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 Home 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. Home 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 Home Bank's profit sharing plan will be merged with and
into Mercshares' 401(k) plan. If in the judgment of Mercshares after
consultation with Home Bank, it is not technically feasible or desirable to
merge the plans, the Home 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 Home Bank will become eligible to
participate in Mercshares' cash balance plan according to its applicable
provisions and will be given credit for service with Home Bank for purposes of
eligibility to participate and vesting. Except with respect to Home Bank's
profit sharing plan and Mercshares' cash balance plan, which will be treated as
above, and executive plans, programs and arrangements, eligibility for
participation in which is determined in the discretion of Peninsula or
Mercshares, after the Effective date, Home 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 Home Bank before the Effective Date as service with
Peninsula for purposes of all such employee benefit and seniority-based plans
and programs.
As of the Effective Date, Home Bank's employee and director stock purchase
plans both shall be terminated and all unexercised and unexpired stock options
granted under such plans shall be automatically terminated and canceled on the
Effective Date immediately prior to the Merger becoming effective. With respect
to such canceled stock options which have an option price per share for Home
Bank Common Stock which is less than the market value of two and six-tenths
shares of Mercshares Common Stock, Mercshares shall pay the difference to
holders in cash as soon as practicable after the Effective Date upon delivery to
Mercshares of such documents as it may reasonable request. For such purposes,
the market value of Mercshares Common Stock shall be equal to the closing price
for Mercshares Common
18
<PAGE>
Stock on 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
date on which there is a closing price), without interest.
As of December 23, 1996, Directors of Home Bank, as a group, held the
following options:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF SHARES PRICE EXPIRATION DATE
- ------------------- ------------- ----------------------
<S> <C> <C>
1,184 $ 52.78 February 10, 1997
1,442 $ 85.35 November 14, 1998
1,300 $ 73.02 November 14, 1999
1,100 $ 56.03 November 14, 2000
</TABLE>
As of December 23, 1996, employees of Home Bank, as a group, held the
following options:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF SHARES PRICE EXPIRATION DATE
- --------------------- ------------- ----------------------
<S> <C> <C>
332 $ 73.02 February 10, 1997
359 $ 47.63 November 14, 1997
</TABLE>
Options scheduled to expire before the Effective Date may be extended for a
period of time expiring on or shortly before the Effective Date.
EXCLUSIVE DEALING
Home Bank has agreed that while the Affiliation Agreement is in effect,
neither Home 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 Home 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 Home 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 Home Bank, that its fiduciary
obligations require consideration of such Acquisition Proposal because it may be
in the best interests of the Home Bank Stockholders and is more favorable to the
Home 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 Home Bank, (B) sale, lease or other disposition directly
or indirectly by merger, consolidation, share exchange or otherwise of assets of
Home Bank representing 10% or more of the assets of Home Bank, (C) issue, sale
or other disposition of securities representing 10% or more of the voting power
of Home 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 Securities
Exchange Act of 1934, as amended), or the right to acquire beneficial ownership,
of 20% or more of the outstanding Home Bank Common Stock.
Home Bank has agreed that it will promptly advise Mercshares of, and
communicate to Mercshares the terms of, any such inquiry or proposal addressed
to Home Bank or of which Home Bank or its respective officers, directors,
employees, agents, or representatives (including, without limitation, any
investment banker) has knowledge.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
The Affiliation Agreement provides that following the Effective Date, three
directors of Home Bank, as jointly determined by Mercshares, Peninsula and Home
Bank shall be appointed directors of Peninsula. The three directors are Ralph L.
Mason, Jr., Ralph L. Chapman and Fred T. Parker. The normal policy of
19
<PAGE>
Mercshares' Affiliated Banks is that directors do not stand for reelection after
reaching age 70. An exception will be made for Mr. Chapman, who is expected to
serve until the Peninsula annual meeting following his 72nd birthday in June
1999.
In connection with the negotiation of the Affiliation Agreement, Mercshares
and Peninsula have agreed to employ F. Dennis Parker, President of Home Bank, as
Senior Vice President of Peninsula upon consummation of the Merger and to
appoint him as Chairman of the Advisory Board and as a member of the Management
and Loan Committees of Peninsula. Under this arrangement, Mr. Parker will
receive an annual base salary of $75,000, subject to future increases based on
performance. In addition, Mr. Parker will be eligible to receive annual cash
incentive bonuses, based on performance, equal to 10% to 20% of his base salary
and other benefits available under such Mercshares or Peninsula benefit plans
for which he is eligible.
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 Home Bank Stockholders, by the mutual consent of
Home 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 Home
Bank Board of Directors recommends to the Home Bank Stockholders, or Home Bank
accepts, an Acquisition Proposal, or by Home Bank if, in compliance with the
provisions of the Affiliation Agreement, the Home Bank Board of Directors
recommends to the Home Bank Stockholders, or Home Bank accepts, an Acquisition
Proposal; and (d) by Mercshares, Peninsula or Home Bank if the Merger is not
consummated by October 31, 1997. The Affiliation Agreement provides that in the
case of a termination under (c) above, Home Bank shall pay Mercshares a
termination fee of $200,000. The Affiliation Agreement also provides that if the
Affiliation Agreement is terminated by Mercshares or Peninsula by reason of a
material breach by Home Bank, or by Home 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 B, each Home 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 Home 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 Home 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
20
<PAGE>
receipt requested, to each Home 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 Home Bank Stockholders who have voted against the Merger
not more than what Peninsula considers to be the fair value of the Home Bank
Common Stock as of the time of the Special Meeting. The fair value of shares for
which Home Bank Stockholders make a Payment Demand (the "Appraisal Shares") is
determined as of the date of the Home 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 Home Bank Stockholder who made a Payment Demand (the "Demanding Home Bank
Stockholders"). Within five days after the appraisers have given notice of their
fair value determination, a Demanding Home 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 Home 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 Home 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 Home 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
Home 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 B to this Prospectus and Proxy Statement.
21
<PAGE>
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
directors and certain officers of Home Bank and certain persons related to them
who owned an aggregate of 74,273 shares as of December 23, 1996 (approximately
42%) of the outstanding Home Bank Common Stock (the "Supporting Home Bank
Affiliates") each entered into a Support Agreement (the "Support Agreement")
with Mercshares. Pursuant to the Support Agreement, each of the Supporting Home
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
Home Bank Common Stock owned or acquired by such Supporting Home 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 Home 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 Home Bank, and to use his best efforts to assure that Home Bank takes
no such steps; (c) to promptly advise Mercshares of any such inquiry or proposal
of which such Supporting Home Bank Affiliate has knowledge; (d) to vote his or
her shares of Home 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.
Additionally, such Supporting Home Bank Affiliates hold options to acquire 4,108
shares of Home Bank Common Stock. To the extent that such options are exercised,
the Home Bank Common Stock issuable upon such exercise will also be subject to
the Support Agreements.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the Affiliation Agreement,
the Supporting Home 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 Home Bank Stockholders. See "THE
MERGER-- Resale of Mercshares Common Stock After the Merger by Controlling
Persons."
22
<PAGE>
DESCRIPTION OF HOME BANK
GENERAL
Home Bank was organized in 1918 as a Maryland commercial bank. At December
10, 1996, Home Bank had approximately 306 record holders of its capital stock.
As of September 30, 1996, Home Bank had total assets of approximately $46.1
million, total deposits of approximately $40.3 million, and total stockholders'
equity of approximately $5.6 million.
Home Bank is a community-oriented institution and provides deposit, loan,
and other general banking services to individuals, businesses, institutions, and
governmental entities, including individual and commercial demand and time
deposit accounts, commercial and consumer loans, residential mortgages, credit
card services, and safe deposit boxes.
Home 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.
Home Bank's main executive office is located in Snow Hill, Maryland and its
main banking office is located in Newark, Maryland. Home Bank operates five
banking offices in its service area. Home Bank leases two parcels of land in
Ocean City on which it has constructed branch facilities.
BUSINESS
SERVICES OF HOME BANK
Home 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 Home 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, inventory, and accounts receivable financing.
- Certificates of deposit.
- Letters of credit.
RETAIL SERVICES
- Transaction accounts, including checking and NOW accounts.
- Savings accounts.
- Money market deposit accounts.
- Certificates of deposit.
- Individual retirement accounts.
- Installment and home equity loans and lines of credit.
- Residential construction and first mortgage loans.
- 24-hour automated teller machines.
- Travelers checks and safe deposit boxes.
Home Bank does not have general trust powers.
23
<PAGE>
LENDING ACTIVITIES
GENERAL. At September 30, 1996, Home Bank's loan portfolio totaled
approximately $35.3 million, representing approximately 76.4% of its total
assets of $46.1 million. The principal categories of loans in Home Bank's
portfolio are commercial, real estate development and construction, residential
real estate mortgage, commercial real estate mortgage, and consumer.
LOAN PORTFOLIO COMPOSITION. The following table sets forth Home Bank's
loans by major categories as of September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
<S> <C> <C>
AMOUNT PERCENT
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Commercial.............................................................. $ 5,931 16.8%
Real estate-mortgage:
Residential............................................................. 8,916 25.2%
Commercial.............................................................. 18,905 53.6%
Consumer................................................................ 1,547 4.4%
--------- ---------
Total loans............................................................. $ 35,299 100.0%
--------- ---------
--------- ---------
</TABLE>
COMMERCIAL LOANS. Home 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 $5.9 million or 16.8% of Home
Bank's total loan portfolio consisted of commercial business loans. The
financial condition and cash flow of commercial borrowers are closely monitored
by the submission of corporate financial statements, personal financial
statements, and income tax returns. The frequency of submission of required
information depends upon the size and complexity of the credit and the
collateral which secures the loan.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. Home Bank originates residential
mortgage loans with one to five year balloons. At September 30, 1996,
approximately $8.9 million or 25.2% of Home Bank's total loan portfolio
consisted of residential mortgage loans.
Home Bank requires title insurance insuring the priority of its mortgage
lien, as well as fire and extended coverage casualty insurance protecting the
properties securing its mortgages loans. The properties are appraised by
appraisers approved by Home Bank.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. Home Bank also originates mortgage
loans secured by commercial real estate. At September 30, 1996, approximately
$18.9 million or 53.6% of Home Bank's total loan portfolio consisted of
commercial mortgage loans. Such loans are primarily secured by office buildings,
retail buildings, and warehouse and general purpose business space. Although
terms vary, Home Bank's commercial mortgages generally have maturities of five
years or less, with many payable on demand.
CONSUMER LOANS. Home Bank offers a variety of consumer loans in order to
provide a full range of financial services to its customers and because such
loans generally have higher interest rates than other loans. At September 30,
1996, approximately $1.5 million or 4.4% of Home 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, Home Bank
faces strong competition in all areas of its
24
<PAGE>
operations. Home Bank competes principally with approximately eight other
commercial banks which operate in the vicinity of its offices, most of which
have resources substantially greater than its own. Home Bank also encounters
competition from thrift institutions, consumer loan companies, brokerage firms,
investment companies, credit unions, and other financial institutions. This
competition comes from entities operating in the Ocean City area that include
offices of many of the largest banks in Maryland. Its most direct competition
for deposits comes from other commercial banks, savings banks, savings and loan
associations, and credit unions operating in the Worcester County area, as well
as from mutual fund providers. Home Bank competes with banking entities,
mortgage banking companies, and other institutional lenders for loans. The
competition for loans varies from time to time depending on certain factors.
These factors include, among others, the general availability of lendable funds
and credit, general and local economic conditions, current interest rate levels,
conditions in the real estate market, and other factors which are not readily
predictable.
EMPLOYEES
At September 30, 1996, Home Bank had 36 employees of whom 10 were officers,
35 were full-time employees and 1 was a part-time employee. Home Bank believes
its employee relations are good.
PROPERTIES
The main executive office of Home Bank is located at 309 N. Washington
Street, Snow Hill, Maryland 21863 and its main banking office is located at 8305
Langmaid Road, Newark, Maryland 21841. The other branch offices are located at
8100 Coastal Highway, Ocean City, Maryland 21842, 200 S. Philadelphia Avenue,
Ocean City, Maryland 21842, and 540 White Marlin Mall, Ocean City, Maryland
21842. An administrative office which houses the operation departments of Home
Bank is located at 8420 Newark Road, Newark, Maryland 21841.
DIVIDENDS
Home Bank declared cash dividends of $.75 and $.55 per share for 1995 and
1994, respectively, which were paid during the first quarter of the subsequent
years. In December 1996 Home Bank declared a cash dividend of $.75 per share for
1996, payable in January of 1997. Any future determination as to payment of cash
dividends will, subject to the Affiliation Agreement, be at the discretion of
the Board of Directors of Home Bank and will depend on the Bank's results of
operations, financial condition, capital and regulatory requirements and other
factors deemed relevant by the Home Bank Board of Directors.
As a depository institution whose deposits are insured by the FDIC, Home
Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. Home Bank is not currently 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 payment of dividends by a regulated banking institution such as
Home Bank. As a commercial bank under the Maryland Financial Institutions Law,
Home Bank may declare cash dividends from undivided profits or, with the prior
approval of the Maryland Bank Commissioner, out of surplus in excess of 100% of
its required capital stock, and (in either case) after providing for due or
accrued expenses, losses, interest, and taxes.
Distributions paid by Home Bank to its stockholders will be taxable to the
stockholders as dividends, to the extent of Home Bank's accumulated current
earnings and profits.
PRICE RANGE OF COMMON STOCK
There is no established public trading market for Home Bank Common Stock,
which is traded lightly in privately negotiated transactions. The following
table sets forth the range of sales prices for the periods
25
<PAGE>
indicated. The prices represent actual sales known to management of Home Bank to
have occurred in each quarter shown.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995
First quarter................................................................................... $ 75 $ 67
Second quarter.................................................................................. $ 75 $ 75
Third quarter................................................................................... no sales
Fourth quarter.................................................................................. no sales
1996
First quarter................................................................................... $ 75 $ 65
Second quarter.................................................................................. no sales
Third quarter................................................................................... no sales
Fourth quarter.................................................................................. []
</TABLE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the number of shares of Home Bank Common Stock
beneficially owned by directors and executive officers of Home Bank, and each
person known by Home Bank to beneficially own more than five percent of Home
Bank Common Stock, as of December 23, 1996. Unless otherwise indicated, the
individuals named below have sole voting and investment power over all shares
beneficially owned by them. There are no persons known by Home Bank to own
beneficially, directly or indirectly, more than 5% of the Home Bank Common Stock
except as shown below.
26
<PAGE>
SHARES OF HOME BANK COMMON STOCK
BENEFICIALLY OWNED (1)
<TABLE>
<CAPTION>
NAME AND ADDRESS(2) NUMBER OF SHARES PERCENT OF CLASS
- ---------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Thomas G. Mason........................................... 39,803(3) 22.5%
Ralph L. Mason Jr., Director.............................. 44,845(4) 25.3%
Ralph L. Chapman, Director................................ 1,351(5) *
William A. Gibbs, Jr., Director........................... 1,690(6) *
Richard G. Holland, Director.............................. 484(7) *
Philip I. Houck, Director................................. 940(8) *
Vernon C. Jones, Director................................. 1,199(9) *
Lloyd B. Lewis, Director.................................. 1,546(10) *
Fred T. Parker, Director.................................. 2,892(11) 1.6%
Cynthia M. Wood, Director................................. 50 *
F. Dennis Parker, President/CEO and Director.............. 1,418(12) *
All directors and executive officers as group
(12 persons)............................................ 56,323(13) 31.1%
</TABLE>
- ------------------------
* Indicates holdings of less than one percent
(1) Shares which a person had the right to acquire within 60 days are deemed
outstanding in calculating the percentage ownership of the person but not
deemed outstanding as to any other person.
(2) Each stockholder's address is at Home Bank's principal executive offices.
(3) Includes 1,324 shares owned by Mason Foundation, Inc. of which Mr. Mason
serves as trustee with joint power to vote and 16,547 shares owned by the
Estate of Dorothy Mason for which he serves as executor with joint power
to vote.
(4) Includes 1,324 shares owned by Mason Foundation, Inc. of which Mr. Mason
serves as trustee with joint power to vote, 16,547 shares owned by the
Estate of Dorothy Mason for which he serves as executor with joint power
to vote and 451 shares issuable upon the exercise of options that are
exercisable within 60 days.
(5) Includes 451 shares issuable upon the exercise of options that are
exercisable within 60 days.
(6) Includes 33 shares owned jointly with spouse and 451 shares issuable upon
the exercise of options that are exercisable within 60 days.
(7) Includes 303 shares issuable upon the exercise of options that are
exercisable within 60 days.
(8) Includes 313 shares owned jointly with spouse and 451 shares issuable upon
the exercise of options that are exercisable within 60 days.
(9) Includes 303 shares issuable upon the exercise of options that are
exercisable within 60 days.
(10) Includes 451 shares issuable upon the exercise of options that are
exercisable within 60 days.
(11) Includes 471 shares jointly owned with Peggy P. Parker and F. Dennis
Parker, 471 shares jointly owned with Peggy P. Parker and Dawn P. Parker,
471 shares jointly owned with Peggy P. Parker and H. Dean Parker and 603
shares issuable upon the exercise of options that are exercisable within
60 days.
(12) Includes 471 shares jointly owned with Fred T. Parker and Peggy P. Parker
and 501 shares issuable upon the exercise of options that are exercisable
within 60 days.
(13) Includes 4,108 shares issuable upon the exercise of options that are
exercisable within 60 days.
27
<PAGE>
SELECTED FINANCIAL INFORMATION
This selected financial information for Home 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 Home Bank for the periods ended September 30, 1995 and 1996 have
been derived from Home Bank's unaudited financial statements. In the opinion of
Home 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>
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and dividend revenue......... $ 3,077 $ 2,990 $ 4,045 $ 3,299 $ 3,026 $ 3,156 $ 3,446
Interest expense...................... 1,131 1,063 1,445 1,047 1,009 1,292 1,704
Net interest income................... 1,946 1,927 2,600 2,252 2,017 1,864 1,742
Provision for credit losses........... 89 52 82 90 121 252 125
Other operating revenue............... 290 318 419 361 395 290 291
Other operating expense............... 1,313 1,331 1,855 1,738 1,652 1,635 1,518
Income taxes.......................... 305 319 401 301 245 96 135
Cummulative effect of change in
accounting method................... -- -- -- -- -- 15 --
Net income............................ $ 529 $ 543 $ 681 $ 484 $ 394 $ 156 $ 255
BALANCE SHEET DATA,
AT PERIOD-END:
Total assets.......................... $ 46,124 $ 46,237 $ 44,316 $ 42,118 $ 38,827 $ 36,090 $ 35,721
Total loans, net of deferred fees and
costs............................... 35,300 33,885 35,318 32,253 28,424 27,700 25,746
Total deposits........................ 40,325 40,906 38,637 36,701 34,197 31,730 31,282
Total stockholders' equity............ 5,593 5,009 5,078 4,397 4,036 3,684 3,572
PER COMMON SHARE DATA(A):
Net income............................ $ 3.01 $ 3.11 $ 3.89 $ 2.78 $ 2.27 $ 0.90 $ 1.47
Cash dividends declared............... -- -- 0.75 0.55 0.39 0.34 0.34
Tangible book value................... 31.70 28.54 28.86 25.22 23.15 21.20 20.59
Number of shares of
Common Stock outstanding,
at period-end....................... 175,947 174,816 175,892 174,343 174,343 173,779 173,444
RATIOS:
Return on average assets.............. 1.55% 1.64% 1.53% 1.18% 1.03% 0.43% 0.74%
Return on average stockholders'
equity.............................. 13.25 15.35 14.08 11.36 10.01 4.27 7.3
Average stockholders' equity to
average total assets................ 11.68 10.7 10.89 10.41 10.33 10.14 10.07
Cash dividend declared to net
income.............................. -- -- 19.37 19.80 17.27 37.92 23.00
Period-end capital to period-end
risk-weighted assets:(b)
Tier 1.............................. 14.91 13.11 14.43 13.73 13.13 13.15 11.99
Total............................... 16.16 14.44 15.69 15.33 14.52 14.53 13.02
Period-end Tier 1 leverage ratio...... 12.22 11.32 11.40 10.80 10.40 10.20 10.00
</TABLE>
- ------------------------
(a) Per share data for 1992 and 1991 have been adjusted to reflect the 2.5% and
20% stock dividends declared during 1993 and 1992, respectively.
(b) The FDIC capital guidelines for banks require minimum risk-based ratios of
Tier 1 and total capital to risk-weighted assets to be 4.0% and 8.0%,
respectively, and a minimum leveraged-based ratio of Tier 1 capital to total
average assets generally of 3.0% to 5.0%.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The net income of Home Bank for the five years ended December 31, 1995
showed an increasing profit with the exception of the year ended 1992. During
that year Home Bank incurred larger than normal loan charge-offs and also had to
write-down the carrying value of a municipal security where the underlying
insurer was in default. Net interest income has increased annually during this
period from $1,742,738 to $2,600,206. Although the net interest income for the
nine months ended September 30, 1996, compared to the same period in 1995,
increased by $18,692 from $1,927,191 to $1,945,883, the net income for the same
periods decreased by $13,597 from $542,996 to $529,399. Several items have
caused the decrease in the net income for the nine months ended September 30,
1996. Home Bank has increased its reserve for loan losses from 1.70% of gross
loans to 1.83% with a larger loan loss provision. This increased provision was
partially offset by lower overhead. Service charges on deposits have decreased
9.2%. Home Bank has not decreased its fees but has seen fewer accounts with
nonsufficient funds.
Although both the gross loan portfolio and total assets of Home Bank
decreased during the first nine months of 1996 compared to the December 31,
1995, levels, the decreases represented changes of less than 1%. Deposits of
Home Bank increased $1,687,662 or 4.4%, for the first three quarters of 1996.
These additional funds were invested in federal funds sold.
The following sections provide an analysis of the financial condition and
results of operations of Home Bank.
INTEREST REVENUE
Interest revenue on a fully taxable equivalent basis increased $766,034 or
23.2% during 1995 as compared to 1994, due to increased rates and an increase in
the outstanding loans, with most of the growth occurring in time and demand
loans. This increase in loan rates was the primary reason that the composite
yield on earning assets on a fully taxable equivalent basis increased by
approximately 107 basis points.
Interest revenue on a fully taxable equivalent basis increased $277,471 or
9.2% during 1994 as compared to 1993, due to higher loan volume for all types of
loans. Rates on loans and other investments were stable during the year
providing a composite yield on earning assets on a fully taxable equivalent
basis of 8.98% which was relatively unchanged from the comparable 1994 yield of
8.95%.
Interest revenue on a fully taxable equivalent basis increased $86,887 or
2.9% during the first nine months of 1996 compared to the corresponding period
in 1995. Although rates were generally lower, higher volume for all loan types
produced the increased revenues.
INTEREST EXPENSE
Interest expense on deposits and borrowings increased $398,594 or 38.1%
during 1995 as compared to 1994 due primarily to an increase in volume,
$3,195,340, and a rate increase of 151 basis points on time deposits.
Interest expense on deposits and borrowings increased $37,888 or 3.8% during
1994 as compared to 1993. Although rates on deposits and borrowings decreased 10
basis points, average interest-bearing deposits increased $1,767,784, with most
of the growth occurring in savings accounts.
Interest expense on deposits and borrowings increased $68,444 or 6.4% during
the first nine months of 1996 compared to the corresponding period in 1995 as a
result of composite rates increasing 15 basis points and average time deposits
increasing $1,507,106.
NET INTEREST INCOME
Net interest income, the amount by which interest revenue exceeds interest
expense, is the largest source of earnings for Home Bank. Net interest income is
a function of volume, mix, and rates of earning
29
<PAGE>
assets and funding sources. Management policies influence these factors but
external forces such as competition, customer needs, economic policies of the
federal government, or monetary policies of the Federal Reserve Board also
impact these factors.
Interest rate spread using fully taxable equivalent revenue, which is the
difference between the composite yield on earning assets less the composite
yield on deposits and borrowings, is closely monitored by management. The
interest rate spread was 5.96%, 6.13% and 6.48% during 1993, 1994, and 1995,
respectively. This increasing trend was reversed for the nine months ended
September 30, 1996 when the spread was 6.31%. The spread for the comparable
period of 1995 was 6.47%. Average earning assets grew 8.8% from 1993 to 1994 and
10.0% from 1994 to 1995 while interest-bearing liabilities grew 5.0% and 7.1%
for the respective periods. Yields on earning assets and rates paid on
interest-bearing liabilities increased during 1994 and 1995.
Average assets grew 3.4% for the first three quarters of 1996 as compared to
the first three quarters of 1995. Average liabilities grew only 0.7% for the
same period. This growth was mitigated by a decrease of 6 basis points in the
yield on earning assets and an increase of 15 basis points in the rates paid on
interest-bearing deposits and borrowed funds for the 1996 nine month period
compared to the comparable 1995 period. As a result the growth in net interest
income for the nine months ended September 30, 1996 compared to the same period
in 1995 was less than 1.0%.
30
<PAGE>
The following table provides further analysis of the increase in net
interest income during 1995 and the first nine months of 1996.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1996 COMPARED WITH 1995 1995 COMPARED WITH 1994
VARIANCE DUE TO VARIANCE DUE TO
----------------------------------- ----------------------------------
TOTAL RATE VOLUME TOTAL RATE VOLUME
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
EARNING ASSETS
Federal funds sold................... $ (7,410) $ (1,077) $ (6,333) $ (44,431) $ 17,650 $ (62,081)
Interest bearing deposits............ -- -- -- (2,076) -- (2,076)
Investment securities:
U.S. Treasury...................... (13,523) 6,734 (20,257) (19,376) 1,770 (21,146)
U.S. Agency........................ 799 773 26 24,987 (1,113) 26,100
State and municipal................ (802) (1,071) 269 64,908 (1,572) 66,480
Loans:
Demand and time.................... 59,423 (14,106) 73,529 282,149 113,183 168,966
Mortgage........................... 24,172 (67,977) 92,149 394,901 190,545 204,356
Installment........................ 24,228 (18,707) 42,935 64,972 7,851 57,121
---------- ----------- ---------- ---------- ---------- ----------
Total interest income............ 86,887 (95,431) 182,318 766,034 328,314 437,720
---------- ----------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits............. 227 (7,183) 7,410 20,254 384 19,870
Money market and supernow............ (15,556) 5,644 (21,200) (73,750) (1,322) (72,428)
Other time deposits.................. 124,397 44,621 79,776 399,141 272,606 126,535
Federal funds purchased and
short-term borrowings.............. (40,624) 9,035 (49,659) 52,949 (22,956) 75,905
---------- ----------- ---------- ---------- ---------- ----------
Total interest expense........... 68,444 52,117 16,327 398,594 248,712 149,882
---------- ----------- ---------- ---------- ---------- ----------
Net interest income.................... $ 18,443 $ (147,548) $ 165,991 $ 367,440 $ 79,602 $ 287,838
---------- ----------- ---------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ---------- ----------
</TABLE>
INCOME TAXES
In 1994 and 1995, the effective tax rate on earnings was 38.4% and 37.1%,
respectively. These effective rates differ from statutory rates due primarily to
the tax effect of tax-exempt income.
LIQUIDITY
Liquidity represents the ability to provide steady sources of funds for loan
commitments and investment activities, as well as to provide sufficient funds to
cover deposit withdrawals and payment of debt and operating obligations. These
funds can be obtained by converting assets to cash or by attracting new
deposits.
Home Bank maintains a portfolio of readily marketable securities. The Bank
also considers its loan portfolio as an alternate source of liquidity since it
has available third parties who will buy participations in loans.
At September 30, 1996, Home Bank had available lines of credit of $1,250,000
in overnight federal funds and $2,500,000 in secured term loans from other
banks. Management believes that it has the ability to satisfy its cash and
capital needs for the foreseeable future.
31
<PAGE>
INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to ensure the steady
growth of Home Bank's primary source of earnings, net interest income. Net
interest income can fluctuate with significant interest rate movements. To
lessen the impact of these margin swings, the balance sheet should be structured
so that repricing opportunities exist for both assets and liabilities in roughly
equivalent amounts at approximately the same time intervals. Imbalances in these
repricing opportunities at any point in time constitute interest rate
sensitivity.
Interest rate sensitivity may be controlled on either side of the balance
sheet. On the asset side, management can exercise some control on maturities.
Also, loans may be structured with rate floors and ceilings on variable rate
notes and by providing for repricing opportunities on fixed rate notes. Home
Bank's investment portfolio, including federal funds sold, probably provides the
most flexible and faster control over rate sensitivity since it can generally be
restructured more quickly than the loan portfolio.
On the liability side, deposit products can be restructured so as to offer
incentives to attain the maturity distribution desired. Competitive factors
sometimes make control over deposits more difficult and less effective.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rate. The rate-sensitive
position, or gap, is the difference in the volume of rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Bank.
The asset mix of the balance sheet is continually evaluated in terms of
several variables; yield, credit quality, appropriate funding sources, and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.
The interest rate sensitivity position at September 30, 1996, is presented
in the table that follows. The difference between rate-sensitive assets and
rate-sensitive liabilities, or the interest rate sensitivity gap is shown at the
bottom of the table. Home Bank was asset-sensitive for all time horizons beyond
three months. For asset-sensitive institutions, if interest rates should
increase, the net interest margins should improve. Since all interest rates and
yields do not adjust at the same velocity, the gap is only a general indicator
of rate sensitivity.
32
<PAGE>
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------
AFTER ONE
AFTER THREE BUT
WITHIN BUT WITHIN WITHIN
THREE TWELVE FIVE AFTER
MONTHS MONTHS YEARS FIVE YEARS TOTAL
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Earning Assets...........................................
Federal funds sold..................................... $ 2,125 $ -- $ -- $ -- $ 2,125
Investment securities.................................. 700 900 2,315 1,032 4,947
Loans.................................................. 11,705 18,423 4,648 523 35,299
--------- ----------- --------- ----------- ---------
Total earning assets..................................... $ 14,530 $ 19,323 $ 6,963 $ 1,555 $ 42,371
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
LIABILITIES
Interest-bearing Liabilities
Money market and now................................... $ 5,042 -- -- -- $ 5,042
Savings deposits....................................... 7,388 -- -- -- 7,388
Certificates $100,000 and over......................... 414 1,265 536 -- 2,215
Other time under $100,000.............................. 2,612 8,110 6,094 -- 16,816
--------- ----------- --------- ----------- ---------
Total interest-bearing liabilities....................... 15,456 9,375 6,630 -- 31,461
Non interest-bearing liabilities......................... -- -- -- 10,910 10,910
--------- ----------- --------- ----------- ---------
Total funds.............................................. $ 15,456 $ 9,375 $ 6,630 $ 10,910 $ 42,371
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
Period gap............................................... $ (926) $ 9,948 $ 333 $ (9,355) --
Cumulative gap........................................... $ (926) $ 9,022 $ 9,355 -- --
Ratio of cumulative gap to total earning assets.......... -2.19% 21.29% 22.08% -- --
</TABLE>
Loans are stated net of deferred fees and costs, and before deducting
allowance for credit losses.
Investments are stated at amortized cost.
The analysis provided in the preceding table includes the following
assumptions: fixed-rate loans are scheduled by contractual maturity, and
variable-rate loans are scheduled by repricing date. Investment securities are
scheduled by contractual maturity. Due to their liquid nature, the entire
balance of savings, money markets, and NOW accounts are assumed to be sensitive
within three months.
33
<PAGE>
ANALYSIS OF INVESTMENT SECURITIES
During 1995 and the first nine months of 1996, Home Bank has purchased only
one security, a municipal security with a maturity within eight years. The
decline in the investment securities from December 31, 1995, to September 30,
1996, is the result of maturities which were used to fund loan growth. The
composition of the investment portfolio as of December 31, 1993, 1994, and 1995,
and September 30, 1996, valued at carrying value, is as follows:
ANALYSIS OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1993 1994 1995
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
AVAILABLE FOR SALE
U.S. Treasury...................................................... $ 397 $ -- $ 474 $ 401
U.S. Government agency............................................. 210 -- 197 221
State and municipal................................................ 724 -- 693 736
------ --------- --------- ---------
$ 1,331 $ -- $ 1,364 $ 1,358
------ --------- --------- ---------
------ --------- --------- ---------
HELD TO MATURITY
U.S. Treasury...................................................... $ 3,115 $ 3,974 $ 4,628 $ 3,620
U.S. Government agency............................................. 199 100 199 199
State and municipal................................................ 302 -- 199 302
------ --------- --------- ---------
$ 3,616 $ 4,074 $ 5,026 $ 4,121
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
Home Bank adopted Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, during the
first quarter of 1994, and accordingly, segregated the portfolio between
securities held to maturity and securities available for sale.
34
<PAGE>
At September 30, 1996, the estimated weighted average life of investments in
debt securities was 2.9 years. The amortized cost and market values of debt
securities at September 30, 1996 are as follows:
AVERAGE LIFE OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
------------------------------------------------------ --------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
----------- --------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
U.S. Treasury.........
Due in one year or
less............. $ 1,400 $ 2 $ 1 $ 1,401 $ 200 $ -- $ -- $ 200
Due after one
through five
years............ 1,715 35 11 1,739 201 -- 4 197
U.S. Government agency
Due after one
through five
years............ 199 11 -- 210 100 5 -- 105
Due after five
through seven
years............ -- -- -- -- 100 5 -- 105
State and municipal
Due after one
through five
years............ 199 7 -- 206 197 6 -- 203
Due after five
through seven
years............ 103 5 -- 108 506 15 -- 521
----------- --- ----------- ----------- ----------- ----------- ----------- -----------
$ 3,616 $ 60 $ 12 $ 3,664 $ 1,304 $ 31 $ 4 $ 1,331
----------- --- ----------- ----------- ----------- ----------- ----------- -----------
----------- --- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Except for Home Bank's investment in U.S. Treasury Notes, Home Bank had no
investments that were obligations of an issuer, or payable from or secured by a
source of revenue or taxing authority of an issuer, whose aggregate book value
exceeded 10% of stockholders' equity at September 30, 1996.
ANALYSIS OF LOANS
The table below represents a breakdown of loan balances of Home Bank. Home
Bank has no foreign loans.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
SEPTEMBER 30,
1996 1995 1994
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Demand and time................................. $ 10,041 28.43% $ 10,169 28.76% $ 8,204 25.39%
Mortgage........................................ 22,617 64.03% 22,694 64.20% 22,017 68.14%
Installment..................................... 2,665 7.54% 2,489 7.04% 2,089 6.47%
----------- ----------- -----------
Total loans................................. 35,323 100.00% 35,352 100.00% 32,310 100.00%
----------- ----------- -----------
----------- ----------- -----------
Less deferred loan origination fees............. 24 35 57
Less allowance for credit losses................ 646 596 517
----------- ----------- -----------
Net loans................................... $34,653 $34,721 $31,736
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
1993
------------------------
PERCENT
AMOUNT OF TOTAL
----------- -----------
<S> <C> <C>
Demand and time................................. $ 7,137 25.06%
Mortgage........................................ 19,541 68.60%
Installment..................................... 1,807 6.34%
-----------
Total loans................................. 28,485 100.00%
-----------
-----------
Less deferred loan origination fees............. 61
Less allowance for credit losses................ 425
-----------
Net loans................................... $27,999
-----------
-----------
</TABLE>
At September 30, 1996, Home Bank had no concentrations in any one industry
exceeding 10% of its total portfolio.
35
<PAGE>
Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest at current market rates, fixed expiration dates, and
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. The
following loan commitments are outstanding as of September 30, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
<S> <C>
(IN
THOUSANDS)
Construction loans................................................................................. $ 3,411
Letters of credit.................................................................................. 112
Other commitments.................................................................................. 549
------
Total...................................................................................... $ 4,072
------
------
</TABLE>
The following table shows the contractual final maturities and interest rate
sensitivities of loans of Home Bank as of September 30, 1996. Some loans may
include contractual installment payments which are not reflected in the table
until final maturity. In addition, the experience of Home Bank 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
-----------------------------------------------------------
FIXED INTEREST RATE
-----------------------------------
VARIABLE OVER ONE
INTEREST ONE YEAR THROUGH OVER FIVE
RATE OR LESS FIVE YEARS YEARS TOTAL
----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Demand and time............................................. $ 3,557 $ 6,201 $ 283 $ -- $ 10,041
Mortgage.................................................... 618 17,679 2,970 1,350 22,617
Installment................................................. -- 1,087 1,408 170 2,665
----------- --------- ----------- ----------- ---------
Total................................................. $ 4,175 $ 24,967 $ 4,661 $ 1,520 $ 35,323
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>
36
<PAGE>
The following tables provides information concerning non-performing loans,
past due loans and non-performing assets (including other real estate owned).
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Non-performing loans:
Nonaccrual loans (1)....................................... $354 $154 $412 $434
Restructured loans (2)..................................... -- -- -- --
----- --------- --------- ---------
Total non-performing loans............................... 354 154 412 434
Other real estate owned and property
in liquidation (3).......................................... -- -- -- 267
----- --------- --------- ---------
Total non-performing assets.............................. 354 154 412 701
Loans past due 90 days or more (4)........................... 618 724 73 55
----- --------- --------- ---------
Total nonperforming assets and past due loans............ 972 878 485 756
----- --------- --------- ---------
----- --------- --------- ---------
Non-performing assets to total loans at period end......... 1.00 % 0.44% 1.28% 2.46%
Non-performing assets and past due loans to
total loans, net of deferred fees and costs, at period
end...................................................... 2.75 % 2.49% 1.50% 2.66%
</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 accruing status when all amounts
past due have been paid and the borrower has demonstrated the ability to
service the debt on a current basis.
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are not
included in these totals.
(3) Other real estate and property in liquidation were collateral on loans to
which Home 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.
Home Bank maintains an allowance for loan losses that, in management's
judgment, 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. Management's review and analysis includes evaluating
historical relationships among loans and prior credit experience as well as
evaluating loans that are non-performing or have been identified by management
as having potential for future deterioration taking into consideration
collateral value and the financial strength of borrowers and guarantors. The
allowance was established by provisions charged against earnings. Net
charge-offs are applied against the allowance. If charges against the allowance
for loan losses should exceed the amount of the allowance or are substantial in
relation to the allowance, it would be necessary to restore the allowance to an
adequate level through charges to operating expenses. If the current economy or
real estate market were to suffer a severe downturn, the estimate for
uncollectible accounts could need to be increased. Management considered the
September 30, 1996, allowance of $646,367 to be a sufficient to address the
risks in the loan portfolio as of that date.
37
<PAGE>
The following table presents certain information regarding loan loss
experience and the allowance for loan losses:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 30,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of year........................................ $ 596 $517 $ 425 $ 388
Loan losses:
Time and demand................................................... -- -- -- 110
Mortgages......................................................... 26 -- 11 4
Installment....................................................... 13 9 6 11
------ --------- --------- ---------
Total loan losses............................................... 39 9 17 125
------ --------- --------- ---------
Recoveries on loans previously charged off
Time and demand................................................... -- -- -- 5
Mortgages......................................................... -- -- 11 31
Installment....................................................... -- 6 7 5
------ --------- --------- ---------
Total loan recoveries........................................... -- 6 18 41
------ --------- --------- ---------
Net loan losses..................................................... 39 3 (1) 84
Provision for loan losses charged to expense........................ 89 82 91 121
------ --------- --------- ---------
Balance at end of period............................................ $ 646 $596 $ 517 $ 425
------ --------- --------- ---------
------ --------- --------- ---------
Allowance for loan losses to loans outstanding, net of defered fees
and costs.......................................................... 1.83% 1.69% 1.60% 1.50%
Allowance for loan losses to non-performing loans and loans past due
90 days or more.................................................... 66.46% 67.88% 106.60% 56.22%
Net charge-offs to average loans.................................... 0.11% 0.01% 0.00% 0.30%
</TABLE>
The allowance of $646,367 at September 30, 1996, represented 1.8% of gross
loans. At December 31, 1995, the allowance was 1.7% of gross loans. The
provision for credit losses of $89,131 for the nine months ended September 30,
1996, was 71.3% larger than the provision of $52,034 for the comparable period
in 1995 because of an increase in loans charged-off, an increase in outstanding
loans, and an increase in the allowance as a percentage of gross loans.
A breakdown of the allowance is provided in the table below; however,
management of Home Bank does not believe that the allowance can be fragmented by
category with any precision that would be useful. The breakdown of the allowance
is based primarily on those factors used in evaluating the adequacy of the
allowance as a whole. Since all of those factors are subject to change, the
breakdown is not necessarily indicative of the category of future credit losses.
The following table presents the allocation of the allowance among the various
loan categories.
38
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994 1993
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Time and demand............................................................ $ 284 $ 255 $ 220 $ 144
Mortgage................................................................... 220 209 207 128
Installment................................................................ 139 127 90 49
General.................................................................... 3 5 -- 104
----- --------- --------- ---------
Total................................................................ $ 646 $ 596 $ 517 $ 425
----- --------- --------- ---------
----- --------- --------- ---------
</TABLE>
DEPOSIT ANALYSIS
The following table sets forth the average deposit balances and average
rates paid on deposits during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
SEPTEMBER 30,
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ---------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-bearing deposits
Savings and NOW deposits................. $ 6,996 3.08% $ 7,062 3.17% $ 6,433 3.16% $ 4,903
Money market and supernow................ 5,373 2.82 5,992 2.82 8,542 2.84 9,190
Other time deposits...................... 19,368 5.74 18,093 5.47 14,898 3.96 14,012
--------- --- --------- --- --------- --- ---------
Total interest-bearing deposits............ 31,737 4.66% 31,147 4.44% 29,873 3.47% 28,105
--- --- ---
Noninterest-bearing deposits............... 7,685 7,060 6,368 5,277
--------- --------- --------- ---------
Total deposits............................. $ 39,422 $ 38,207 $ 36,241 $ 33,382
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
AVERAGE
RATE
-----------
<S> <C>
Interest-bearing deposits
Savings and NOW deposits................. 3.18%
Money market and supernow................ 3.11
Other time deposits...................... 3.86
---
Total interest-bearing deposits............ 3.50%
---
Noninterest-bearing deposits...............
Total deposits.............................
</TABLE>
The following table provides the maturities of certificates of deposit of
Home Bank in amounts of $100,000 or more. Home Bank had no brokered deposits
during any of the periods shown.
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------------
AFTER SIX
AFTER THREE THROUGH
WITHIN THREE THROUGH SIX TWELVE AFTER TWELVE
MONTHS MONTHS MONTHS MONTHS TOTAL
--------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificates of deposit of $100,000 or more.......... $ 414 $ 1,265 $ 536 $ -- $ 2,215
Other time deposits of $100,000 or more.............. -- -- -- -- --
----- ----------- ----- ----- ---------
Total............................................ $ 414 $ 1,265 $ 536 $ -- $ 2,215
----- ----------- ----- ----- ---------
----- ----------- ----- ----- ---------
</TABLE>
OTHER BORROWED FUNDS
To the extent that deposits are not adequate to fund customer loan demand,
liquidity needs can be met in the short-term funds markets. Historically Home
Bank has borrowed funds during the first and second quarters of the year. There
were no outstanding borrowed funds at September 30, 1996.
During 1994, 1995, and the first nine months of 1996, the average balance of
other borrowed funds was $111,850, $962,800, and $516,150, respectively.
39
<PAGE>
CAPITAL ADEQUACY
The Federal Deposit Insurance Corporation (FDIC) has adopted risk-based
capital standards for banks which require minimum ratios of capital to
risk-based assets of 4% for Tier 1 capital and 8% for total capital. Assets and
off-balance sheet commitments are assigned a risk weight of 0%, 20%, 50% or 100%
depending upon the risk involved as defined by the FDIC. Tier 1 capital consists
of stockholders' equity less certain intangible assets. Total capital includes a
limited amount of the allowance for credit losses.
Home Bank must also maintain a minimum capital leverage ratio of 3% to 5% of
Tier 1 capital to average total assets. The standard is based on a discretionary
evaluation of Home Bank's risk profile by the FDIC. Failure to meet the capital
guidelines could subject the bank to a variety of enforcement remedies available
to federal bank regulatory agencies. The capital ratios of the Bank have
historically exceeded the regulatory minimums. At September 30, 1996, the total
capital of Home Bank to its risk-weighted assets was 16.2% compared to the
regulatory guideline of 8%. The table below shows the capital position of Home
Bank relative to its various minimum statutory and regulatory capital
requirements at September 30, 1996.
CAPITAL RATIOS
<TABLE>
<CAPTION>
LEVERAGE CAPITAL
RATIO
SEPTEMBER 30, 1996
--------------------
AMOUNT RATIOS
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Tier 1 capital................................................................................. $ 5,577 12.22%
Leverage capital ratio......................................................................... 1,369 3.00%
---------
Excess................................................................................... $ 4,208 9.22%
---------
---------
Average total assets (for nine months ended September 30, 1996)................................ $ 45,621
---------
---------
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
RATIO
SEPTEMBER 30, 1996
--------------------
<S> <C> <C>
AMOUNT RATIOS
--------- ---------
Tier 1 capital................................................................................. $ 5,577 14.91%
Risk-based Tier 1 capital requirement.......................................................... 1,496 4.00%
---------
Excess................................................................................... $ 4,081 10.91%
---------
---------
Tier 1 capital................................................................................. $ 5,577 14.91%
Tier 2 capital................................................................................. 470 1.25%
---------
Total risk-based capital................................................................. 6,047 16.16%
Total risk-based capital requirement........................................................... 1,496 8.00%
---------
Excess................................................................................... $ 4,551 8.16%
---------
---------
Risk-weighted assets........................................................................... $ 37,411
---------
---------
</TABLE>
40
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF
MERCSHARES COMMON STOCK AND HOME BANK COMMON STOCK
The rights of Home Bank Stockholders currently are governed by the MGCL, the
Financial Institutions Article, Home Bank's Charter and its By-laws. Upon
consummation of the Merger, Home 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 Home 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 Home
Bank and Mercshares.
NOTICE OF ANNUAL MEETING, PLACE OF ANNUAL MEETING
The Home Bank By-laws require, in addition to other required notice of the
annual meeting, that notice of an annual meeting be published at least three
weeks prior to the annual meeting in a newspaper published in the county where
Home Bank has its principal banking office. The MGCL and Mercshares By-laws do
not require that notice of meetings be published in such a manner.
The Home Bank By-laws require that meetings of Home Bank stockholders be
held in the State of Maryland. The Mercshares By-laws provide that meetings of
Mercshares stockholders may be held within or without the State of Maryland.
DISSENTER'S RIGHTS
Under the MGCL, a stockholder does not have appraisal rights in certain
circumstances, including in a merger or consolidation if such stockholder's
stock is listed on a national exchange or is designated as a security listed on
The Nasdaq National Market. As Home 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
Home 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.
PREEMPTIVE RIGHTS
Home Bank Stockholders have preemptive rights, under certain circumstances,
which give Home Bank Stockholders the right to subscribe for a pro rata share of
a new issue of Home Bank Common Stock before such stock is offered to others for
cash. The Mercshares Charter specifically provides that Mercshares stockholders
do not have preemptive rights. As a result, the issuance of additional shares of
Mercshares Common Stock or the issuance of Mercshares Preferred Stock may have
the effect of decreasing the proportionate interest held by existing holders of
Mercshares Common Stock.
QUALIFICATION, NOMINATION AND NUMBER OF DIRECTORS
Under the Financial Institutions Article, a director must be a Home Bank
Stockholder owning shares of unencumbered Home Bank Common Stock worth at least
$500 and a majority of Home Bank directors must be resident in Maryland. The
Home Bank' By-laws provide that the number of Home Bank directors
41
<PAGE>
must be between 5 and 15, and currently Home Bank has 10 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 20 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 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 Home
Bank Stockholders in exchange for Home 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,
42
<PAGE>
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 Home 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 Home Bank by Williams, Hammond, Moore, Schockley
& Harrison, P.A. Ocean City, Maryland.
EXPERTS
The financial statements incorporated in this Prospectus and Proxy Statement
by reference to the Annual Report on Form 10-K of Mercshares as of December 31,
1995 and 1994 and for each of the three 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 Home 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 Home
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.
43
<PAGE>
HOME BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of independent auditors........................................................................... F-2
FINANCIAL STATEMENTS
Balance sheets as of December 31, 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-8-19
Independent Auditors' Report on Supplementary Information................................................ F-20
Supplementary Information--Average Balances, Interest, and Yields........................................ F-21
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance sheets as of September 30, 1996 and September 30, 1995........................................... F-22
Statements of income for the nine months ended September 30, 1996 and 1995............................... F-23
Statements of changes in stockholders' equity for the nine months ended September 30, 1996 and 1995...... F-24
Statements of cash flows for the nine months ended September 30, 1996 and 1995........................... F-25
Note to unaudited financial statements................................................................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Stockholders
Home Bank
Newark, Maryland
We have audited the accompanying balance sheets of Home Bank 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 Home Bank 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>
HOME BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1994 1993
------------- ------------- -------------
<CAPTION>
ASSETS
<S> <C> <C> <C>
Cash and due from banks............................................. $ 2,145,354 $ 2,066,254 $ 2,337,943
Federal funds sold.................................................. 100,000 -- 1,700,000
Certificates of deposit in other banks.............................. -- -- 500,000
Investment securities available for sale............................ 1,358,571 1,363,564 --
Investment securities held to maturity (approximate market value of
$4,268,798 $4,895,632, and $4,201,900)............................ 4,121,231 5,025,800 4,073,631
Loans, less allowance for loan losses of $596,177, $516,847, and
$425,473.......................................................... 34,721,348 31,736,146 27,998,521
Bank premises and equipment......................................... 1,257,958 1,366,597 1,459,399
Other real estate owned............................................. -- -- 267,166
Accrued interest receivable......................................... 415,368 341,870 321,046
Deferred income taxes............................................... 34,159 42,943 --
Other assets........................................................ 161,762 174,510 169,755
------------- ------------- -------------
$ 44,315,751 $ 42,117,684 $ 38,827,461
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Deposits............................................................ $ 38,637,327 $ 36,701,177 $ 34,197,494
Federal funds purchased............................................. -- 500,000 --
Subordinated debentures............................................. -- 100,000 200,000
Accrued interest payable............................................ 171,910 127,802 118,437
Accrued income taxes................................................ 109,279 51,081 105,597
Other liabilities................................................... 187,805 144,608 98,140
Deferred income taxes............................................... -- -- 3,914
Dividend payable.................................................... 131,919 95,889 68,036
------------- ------------- -------------
39,238,240 37,720,557 34,791,618
------------- ------------- -------------
Stockholders' equity Common stock, par value $10 per share;
authorized 500,000 shares, issued and outstanding 175,892 shares
in 1995 and 174,343 shares in 1994 and 1993....................... 1,758,920 1,743,430 1,743,430
Surplus............................................................. 1,800,020 1,743,485 1,743,430
Undivided profits................................................... 1,486,255 937,287 548,983
------------- ------------- -------------
5,045,195 4,424,202 4,035,843
Unrealized gain (loss) on investment securities available for
sale.............................................................. 32,316 (27,075) --
------------- ------------- -------------
5,077,511 4,397,127 4,035,843
------------- ------------- -------------
$ 44,315,751 $ 42,117,684 $ 38,827,461
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HOME BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1995 1994 1993
------------ ------------ ------------
INTEREST REVENUE
Loans, including fees................................................. $ 3,627,213 $ 2,885,191 $ 2,704,568
U. S. Treasury securities............................................. 264,430 283,806 257,030
U. S. Government agency securities.................................... 30,904 5,917 7,584
State and municipal securities........................................ 53,578 8,267 --
Federal funds sold.................................................... 69,468 113,899 50,257
Certificates of deposit in other banks................................ -- 2,076 6,094
------------ ------------ ------------
Total interest revenue............................................ 4,045,593 3,299,156 3,025,533
------------ ------------ ------------
INTEREST EXPENSE
Deposits.............................................................. 1,382,460 1,036,815 982,384
Other................................................................. 62,927 9,978 26,521
------------ ------------ ------------
Total interest expense............................................ 1,445,387 1,046,793 1,008,905
------------ ------------ ------------
Net interest income............................................... 2,600,206 2,252,363 2,016,628
PROVISION FOR LOAN LOSSES............................................... 81,725 90,523 121,267
------------ ------------ ------------
Net interest income after provision for loan losses............... 2,518,481 2,161,840 1,895,361
------------ ------------ ------------
OTHER OPERATING REVENUE
Service charges on deposit accounts................................... 344,907 296,885 286,770
Other revenue......................................................... 73,863 64,470 54,790
Gain on sale of securities............................................ -- -- 53,848
------------ ------------ ------------
Total other operating revenue..................................... 418,770 361,355 395,408
------------ ------------ ------------
OTHER EXPENSES
Salaries.............................................................. 821,185 747,494 698,988
Employee benefits..................................................... 241,026 214,675 196,689
Occupancy............................................................. 151,047 155,067 163,492
Furniture and equipment............................................... 166,776 156,437 153,200
Other operating....................................................... 475,138 464,075 439,542
------------ ------------ ------------
Total other expenses.............................................. 1,855,172 1,737,748 1,651,911
------------ ------------ ------------
Income before income taxes.............................................. 1,082,079 785,447 638,858
Income taxes............................................................ 401,192 301,254 244,793
------------ ------------ ------------
NET INCOME.............................................................. $ 680,887 $ 484,193 $ 394,065
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share............................................... $ 3.89 $ 2.78 $ 2.27
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOME BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK (LOSSES)
------------------------------- UNDIVIDED ON
SHARES PAR VALUE SURPLUS PROFITS SECURITIES
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992................................. 169,540 $1,695,400 $1,695,400 $ 293,466 $ --
Net income................................................. -- -- -- 394,065 --
Proceeds from sale of 1992 stock dividend fractional
shares................................................... -- -- 76 -- --
Proceeds from sale of stock................................ 550 5,500 19,972 -- --
2.5% stock dividend 4,253 42,530 (42,530) -- --
Transfer from undivided profits............................ -- -- 70,512 (70,512) --
Cash dividend, $0.39 per share............................. -- -- -- (68,036) --
--------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1993................................. 174,343 1,743,430 1,743,430 548,983 --
Unrealized gains on investment securities available for
sale at January 1, 1994.................................. -- -- -- -- 3,642
Net income................................................. -- -- -- 484,193 --
Proceeds from sale of 1993 stock dividend fractional
shares................................................... -- -- 55 -- --
Cash dividend, $.55 per share.............................. -- -- -- (95,889) --
Change in unrealized gains (losses) on investment
securities available for sale............................ -- -- -- -- (30,717)
--------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1994................................. 174,343 1,743,430 1,743,485 937,287 (27,075)
Net income................................................. -- -- -- 680,887 --
Proceeds from sale of stock................................ 1,549 15,490 56,535 -- --
Cash dividend, $.75 per share.............................. -- -- -- (131,919) --
Change in unrealized gains (losses) on investment
securities available for sale............................ -- -- -- -- 59,391
--------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1995................................. 175,892 $1,758,920 $1,800,020 $1,486,255 $ 32,316
--------- --------- --------- --------- ------------
--------- --------- --------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOME BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1995 1994 1993
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received..................................................... $ 3,958,915 $ 3,278,332 $ 3,105,632
Fees and commissions received......................................... 422,501 382,010 460,268
Interest paid......................................................... (1,401,279) (1,037,428) (1,039,477)
Cash paid to suppliers and employees.................................. (1,637,479) (1,538,453) (1,459,364)
Income taxes paid..................................................... (371,580) (385,591) (225,589)
------------ ------------ ------------
971,078 698,870 841,470
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities and certificates of
deposit
Held to maturity.................................................... 1,000,000 1,050,000 579,063
Available for sale.................................................. 100,000 100,000 --
Purchase of investment securities and certificates of deposit
Held to maturity.................................................... (103,482) (2,118,964) (1,008,375)
Available for sale.................................................. -- (904,361) --
Loans made, net of principal collected................................ (3,043,943) (3,823,906) (802,657)
Purchases of premises and equipment and software...................... (57,779) (74,561) (67,296)
Acquisition of other real estate...................................... -- (6,161) --
Proceeds from the sale of other real estate owned..................... -- 270,492 336,166
Proceeds from sale of premises and equipment.......................... 940 1,200 3,700
------------ ------------ ------------
(2,104,264) (5,506,261) (959,399)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.............................................. 1,936,150 2,503,683 2,467,446
Increase (decrease) in federal funds purchased........................ (500,000) 500,000 --
Decrease in subordinated debentures................................... (100,000) (100,000) (100,000)
Dividends paid........................................................ (95,889) (68,036) (59,233)
Proceeds from sale of stock........................................... 72,025 55 25,548
------------ ------------ ------------
1,312,286 2,835,702 2,333,761
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 179,100 (1,971,689) 2,215,832
Cash and cash equivalents at beginning of year.......................... 2,066,254 4,037,943 1,822,111
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 2,245,354 $ 2,066,254 $ 4,037,943
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-6
<PAGE>
HOME BANK
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............................................................ $ 680,887 $ 484,193 $ 394,065
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Amortization of premiums and accretion of discounts................... 9,805 13,481 15,809
Gain on sale of securities............................................ -- -- (53,848)
Loss on sale of other real estate owned............................... -- 2,835 9,073
Provision for loan losses............................................. 81,725 90,523 121,267
Depreciation.......................................................... 154,218 153,426 154,149
Amortization of software.............................................. 30,466 28,455 26,361
Gain on sale of premises and equipment................................ (644) (128) (3,700)
Deferred income taxes................................................. (28,585) (29,821) (33,685)
Decrease (increase) in
Accrued interest receivable......................................... (73,498) (20,824) 79,506
Other assets........................................................ (5,815) (20,345) 93,341
Increase (decrease) in
Deferred income..................................................... (22,984) (4,242) (4,530)
Accrued interest payable............................................ 44,108 9,365 (30,572)
Income taxes payable................................................ 58,198 (54,516) 53,409
Other liabilities................................................... 43,197 46,468 20,825
------------ ------------ ------------
$ 971,078 $ 698,870 $ 841,470
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected in the financial statements
conform to generally accepted accounting principles and to general practices
within the banking industry.
Home Bank is a financial institution operating primarily in Worcester
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, cash management services, safe deposit boxes,
money orders and travelers cheques. The Bank also offers credit card services
and discount brokerage services through other institutions and firms.
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 of Financial Accounting Standards No.
115 (SFAS) of the Financial Accounting Standards Board (FASB), ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Management has reviewed its
portfolio and classified securities as held to maturity or available for sale.
Securities which management has the intent and ability to hold to maturity are
recorded at amortized cost which is cost adjusted for amortization of premiums
and accretion of discounts to maturity. Securities which may be sold before
maturity are classified as available for sale and are carried at fair value with
unrealized gains and losses included in stockholders' equity on an after tax
basis.
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 straight-line and accelerated
methods over the estimated useful lives of the assets.
EARNINGS PER COMMON SHARE
Earnings per common share are determined by dividing net income by the
weighted average number of shares outstanding, giving retroactive effect to
stock dividends.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at face value less deferred origination fees and the
allowance for loan losses.
F-8
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest income on loans is accrued based on the principal amounts
outstanding. The Bank recognizes loan origination fees as revenue over the
contractual life of the loans. Unamortized loan fees are recorded as income when
a loan is paid before maturity. The accrual of interest is discontinued when
circumstances indicate that collection is questionable.
The allowance for loan losses has been maintained at the amount that, in
management's judgment, 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 could
need to be increased. The allowance is increased by provisions charged to
earnings and reduced by charge offs net of recoveries.
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 loan 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 for the temporary
differences between financial and taxable income.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
2. CASH AND EQUIVALENTS
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
$1,191,000 and $2,618,000 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>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Available for sale
U. S. Treasury............................................. $ 402,226 $ 120 $ 1,033 $ 401,313
U. S. Government agency.................................... 200,000 21,416 -- 221,416
State and municipal........................................ 703,695 32,147 -- 735,842
------------ ----------- ----------- ------------
$ 1,305,921 $ 53,683 $ 1,033 $ 1,358,571
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Held to maturity
U. S. Treasury............................................. $ 3,620,479 $ 111,121 $ 3,131 $ 3,728,469
U. S. Government agency.................................... 198,814 22,248 -- 221,062
State and municipal........................................ 301,938 17,329 -- 319,267
------------ ----------- ----------- ------------
$ 4,121,231 $ 150,698 $ 3,131 $ 4,268,798
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
DECEMBER 31, 1994
Available for sale
U. S. Treasury............................................. $ 503,356 $ -- $ 29,668 $ 473,688
U. S. Government agency.................................... 200,000 -- 2,895 197,105
State and municipal........................................ 704,319 -- 11,548 692,771
------------ ----------- ----------- ------------
$ 1,407,675 $ -- $ 44,111 $ 1,363,564
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Held to maturity
U. S. Treasury............................................. $ 4,628,490 $ 1,346 $ 129,275 $ 4,500,561
U. S. Government agency.................................... 198,596 -- 810 197,786
State and municipal........................................ 198,714 1,596 3,025 197,285
------------ ----------- ----------- ------------
$ 5,025,800 $ 2,942 $ 133,110 $ 4,895,632
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
DECEMBER 31, 1993
U. S. Treasury............................................. $ 3,973,631 $ 129,499 $ 2,130 $ 4,101,000
U. S. Government agency.................................... 100,000 900 -- 100,900
------------ ----------- ----------- ------------
$ 4,073,631 $ 130,399 $ 2,130 $ 4,201,900
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
During 1991, losses of $50,000 were recorded for the declines in market
value that were considered permanent declines in value. During 1992, additional
losses of $25,214 were recorded as required by regulatory authorities for the
decline in market value. In 1993, the security was sold. Proceeds from the sale
were $79,063 resulting in a gain on disposition of $53,848.
F-10
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
Contractual maturities are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- ------------ -------------- ------------
DECEMBER 31, 1995
Maturing
Within one year.................................... $ -- $ -- $ 1,202,389 $1,216,000
Over one to five years............................. 402,226 401,313 1,704,257 1,730,656
Over five to seven years........................... 903,695 957,258 1,214,585 1,322,142
-------------- ------------ -------------- ------------
$ 1,305,921 $1,358,571 $ 4,121,231 $4,268,798
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
DECEMBER 31, 1994
Maturing
Within one year.................................... $ 100,000 $ 100,000 $ 1,001,059 $1,002,000
Over one to five years............................. 403,356 373,688 2,911,138 2,797,001
Over five to seven years........................... 904,319 889,876 1,113,603 1,096,631
-------------- ------------ -------------- ------------
$ 1,407,675 $1,363,564 $ 5,025,800 $4,895,632
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
DECEMBER 31, 1993
Maturing
Within one year.................................... $ 951,871 $ 970,200
Over one to five years............................. 3,018,063 3,128,500
Over five to seven years........................... 103,697 103,200
-------------- ------------
$ 4,073,631 $4,201,900
-------------- ------------
-------------- ------------
</TABLE>
Investments pledged to secure the deposits of federal and local governments
and lines of credit with correspondent banks are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Amortized cost.......................................................... $ 2,805,036 $ 2,560,869 $ 3,162,467
Market value............................................................ $ 2,865,678 $ 2,495,174 $ 3,286,033
</TABLE>
F-11
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Demand and time..................................................... $ 10,168,776 $ 8,203,654 $ 7,137,197
Mortgage............................................................ 22,693,870 22,017,367 19,540,624
Installment......................................................... 2,489,054 2,089,131 1,807,574
------------- ------------- -------------
35,351,700 32,310,152 28,485,395
Deferred loan fees.................................................. 34,175 57,159 61,401
Allowance for loan losses........................................... 596,177 516,847 425,473
------------- ------------- -------------
Loans, net.......................................................... $ 34,721,348 $ 31,736,146 $ 27,998,521
------------- ------------- -------------
------------- ------------- -------------
Final loan maturities of the loan portfolio are as follows:
Within ninety days.................................................. $ 9,119,772 $ 11,089,042 $ 12,313,050
After ninety days, within one year.................................. 17,583,570 14,302,147 10,861,794
After one year, within five years................................... 6,483,167 6,909,177 5,298,323
After five years.................................................... 2,165,191 9,786 12,228
------------- ------------- -------------
$ 35,351,700 $ 32,310,152 $ 28,485,395
------------- ------------- -------------
------------- ------------- -------------
Transactions in the allowance for loan losses are as follows:
Beginning balance................................................... $ 516,847 $ 425,473 $ 387,805
Provision charged to operations..................................... 81,725 90,523 121,267
Recoveries.......................................................... 6,409 18,142 41,579
------------- ------------- -------------
604,981 534,138 550,651
------------- ------------- -------------
------------- ------------- -------------
Loans charged off................................................... 8,804 17,291 125,178
------------- ------------- -------------
Ending balance...................................................... $ 596,177 $ 516,847 $ 425,473
------------- ------------- -------------
------------- ------------- -------------
Amounts 90 days or more past due at December 31, including
nonaccruing loans are:
Demand and time..................................................... $ 97,020 $ 27,897 $ 49,500
Mortgage............................................................ 748,886 426,925 427,122
Installment......................................................... 31,969 29,211 12,334
------------- ------------- -------------
Total past due 90 days or more...................................... $ 877,875 $ 484,033 $ 488,956
------------- ------------- -------------
------------- ------------- -------------
Nonaccrual loans included........................................... $ 154,142 $ 412,529 $ 434,059
------------- ------------- -------------
------------- ------------- -------------
Interest not accrued................................................ $ 7,034 $ 18,152 $ 6,890
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
No loans are considered impaired.
F-12
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following loan commitments are outstanding at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Commercial lines-of-credit.............................................. $ 2,783,255 $ 2,496,918 $ 1,375,676
Other loan commitments.................................................. 783,400 1,908,552 1,262,190
------------ ------------ ------------
$ 3,566,655 $ 4,405,470 $ 2,637,866
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
At December 31, 1995, outstanding letters of credit total $193,996. All
letters of credit are secured by deposits.
Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan commitments
generally have interest 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 and lines 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 loan losses related to these financial
instruments with off-balance sheet risk.
The Bank lends to customers located primarily in the Delmarva region.
Although the loan portfolio is diversified, its performance will be influenced
by the economy of the region.
5. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment and related depreciation expense is
as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1995 1994 1993
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Land.................................................... $ 186,823 $ 186,823 $ 186,823
Bank premises........................................... 7--40 years 1,259,690 1,259,146 1,246,685
Furniture and equipment................................. 3--20 years 1,078,151 1,046,492 1,005,559
------------ ------------ ------------
2,524,664 2,492,461 2,439,067
Accumulated depreciation................................ 1,266,706 1,125,864 979,668
------------ ------------ ------------
Net bank premises and equipment......................... $ 1,257,958 $ 1,366,597 $ 1,459,399
------------ ------------ ------------
------------ ------------ ------------
Depreciation expense.................................... $ 154,218 $ 153,426 $ 154,149
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-13
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. BANK PREMISES AND EQUIPMENT (CONTINUED)
Computer software included in other assets and the related amortization are
as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cost............................................................. 3-5 years $ 161,322 $ 149,417 $ 136,552
Accumulated amortization......................................... 106,460 75,994 47,539
---------- ---------- ----------
Net computer software............................................ $ 54,862 $ 73,423 $ 89,013
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Amortization expense............................................. $ 30,466 $ 28,455 $ 26,361
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
6. DEPOSITS
Major classifications of deposits are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Demand.............................................................. $ 7,135,398 $ 6,757,121 $ 5,395,589
Money market and SuperNow........................................... 4,873,018 7,294,250 9,051,122
Savings and NOW..................................................... 7,145,251 7,113,459 5,584,895
Other time.......................................................... 19,483,660 15,536,347 14,165,888
------------- ------------- -------------
$ 38,637,327 $ 36,701,177 $ 34,197,494
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Other time deposits include certificates of deposit in denominations of
$100,000 or more as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Certificate of deposit.............................................. $ 2,943,428 $ 1,983,619 $ 2,179,920
Interest expense.................................................... $ 144,199 $ 78,629 $ 70,091
</TABLE>
F-14
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal...................................................................... $ 349,852 $ 270,549 $ 228,563
State........................................................................ 79,925 60,526 49,915
---------- ---------- ----------
429,777 331,075 278,478
Deferred..................................................................... (28,585) (29,821) (33,685)
---------- ---------- ----------
$ 401,192 $ 301,254 $ 244,793
---------- ---------- ----------
---------- ---------- ----------
The components of the deferred tax are as follows:
Provision for loan losses.................................................... $ (30,966) $ (34,960) $ (14,547)
Deferred loan origination fees............................................... 12,314 1,638 1,750
Depreciation................................................................. (10,310) (1,629) 550
Cash method accounting....................................................... 377 5,130 (21,438)
---------- ---------- ----------
$ (28,585) $ (29,821) $ (33,685)
---------- ---------- ----------
---------- ---------- ----------
The components of the net deferred tax asset (liability) were as follows:
Deferred tax assets
Allowance for loan losses.................................................. $ 186,761 $ 155,795 $ 120,835
Deferred loan origination fees and costs................................... 9,761 22,075 23,713
Unrealized loss on investment securities................................... -- 17,036 --
---------- ---------- ----------
196,522 194,906 144,548
---------- ---------- ----------
Deferred tax liabilities
Depreciation............................................................... 65,744 76,054 77,683
Cash method accounting..................................................... 76,286 75,909 70,779
Unrealized gain on investment securities................................... 20,333 -- --
---------- ---------- ----------
162,363 151,963 148,462
---------- ---------- ----------
Net deferred tax asset (liability)........................................... $ 34,159 $ 42,943 $ (3,914)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation of the provision for taxes on income from the statutory
federal rate to the effective rate follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory federal income tax rate.................................................... 34.0% 34.0% 34.0%
Tax effect of
Tax-exempt income......................................................................... (1.6) (.3) --
State franchise tax, net of federal benefit............................................... 4.6 4.6 4.6
Other, net................................................................................ .1 .1 (.3)
--- --- ---
37.1% 38.4% 38.3%
--- --- ---
--- --- ---
</TABLE>
F-15
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Advertising.................................................................. $ 19,558 $ 16,392 $ 20,650
Courier express.............................................................. 32,439 27,185 25,192
Data processing.............................................................. 28,466 18,559 20,166
Directors and committee fees................................................. 57,300 54,950 54,600
FDIC insurance............................................................... 43,428 77,295 71,578
Insurance.................................................................... 18,952 19,760 19,036
Postage...................................................................... 34,026 32,097 28,441
Printing, stationery, and supplies........................................... 43,777 38,440 39,722
Professional fees............................................................ 35,111 32,965 27,177
Software amortization........................................................ 30,466 28,455 26,361
Telephone.................................................................... 27,742 28,812 27,369
Other........................................................................ 103,873 89,165 79,250
---------- ---------- ----------
$ 475,138 $ 464,075 $ 439,542
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
9. LEASE COMMITMENTS
The Bank leases land in South Ocean City and West Ocean City on which it has
constructed branch offices. The South Ocean City lease, dated October 8, 1982,
is for an initial term of twenty years and provides for an annual increase in
rent after the first five years based on the cost-of-living index. The lease
also provides an option to renew for two ten-year terms. The Bank is liable for
increases in taxes and assessments in addition to rent.
The West Ocean City lease has an initial term of thirty years with two
renewal options of ten years each. Lease payments commenced in May, 1990.
Lease obligations will require payments as follows:
MINIMUM RENTALS
<TABLE>
<CAPTION>
YEAR SOUTH OCEAN CITY WEST OCEAN CITY TOTAL
- ---------------------------------------------- ---------------- --------------- ----------
<S> <C> <C> <C>
1996.......................................... $ 11,990 $ 17,500 $ 28,922
1997.......................................... 11,990 17,500 28,922
1998.......................................... 11,990 17,500 28,922
1999.......................................... 11,990 17,500 28,922
Remaining years............................... 20,983 338,333 387,244
------- --------------- ----------
$ 68,943 $ 408,333 $ 502,932
------- --------------- ----------
------- --------------- ----------
</TABLE>
Rent expense was $28,434, $26,490, and $26,219 for the years ended December
31, 1995, 1994, and 1993, respectively.
F-16
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. 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 $74,742, $52,850, and $29,633 to the
profit sharing plan are included in expenses for 1995, 1994, and 1993,
respectively. The contributions represent 9.8 percent of the eligible
compensation of the participants for 1995, 8.5 percent for 1994, and 5 percent
for 1993.
11. EMPLOYEE STOCK PURCHASE PLAN
The stockholders, at their meeting in 1987, authorized 10,739 shares of
common stock of the Bank, as restated for the effect of stock dividends, for an
employee stock purchase plan. Under the terms of the plan, eligible employees
are given the right to purchase shares of stock in the Bank. The purchase price
may be up to 15 percent less than the market value of the stock, but in no event
less than 120 percent of the book value of the stock at the year end prior to
the date of the grant of the option. As of December 31, 1995, there have been
1,028 shares, as restated, issued. There are outstanding options to purchase 355
shares at $62.07 which expire November 14, 1996 and 438 at $47.63 which expire
November 15, 1997.
12. DIRECTOR STOCK PURCHASE PLAN
The stockholders, at their meeting in 1990, authorized 7,749 shares of
common stock of the Bank, as restated for the effect of stock dividends, for a
director stock purchase plan. Under the terms of the plan, each eligible
director is given the right to purchase shares of stock in the Bank. The
purchase price is fair market value of the stock as of the date on which the
option is granted, but in no event less than 120 percent of the book value of
the stock at the previous year end. As of December 31, 1995, there have been
2,070 shares, as restated, issued.
At December 31, 1995, the following options are outstanding:
<TABLE>
<CAPTION>
EXPIRATION DATE NUMBER OF SHARES PRICE PER SHARE
- ----------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
October 10, 1996........................................... 1874 $ 52.78
November 14, 1998.......................................... 1538 85.35
November 14, 1999.......................................... 1400 73.02
November 14, 2000.......................................... 1300 56.03
</TABLE>
13. 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 $1,827,604, $2,282,947, and $2,230,222, respectively.
14. STOCKHOLDERS' EQUITY
Effective for years after December 31, 1983, banks must report stock
dividends of less than 20% at fair market value. Prior to this time, banks were
permitted to account for stock dividends at par value.
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,
F-17
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
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.
At December 31, 1995, the surplus account of the Bank includes earned
surplus of $708,797 which is available for recording of future stock dividends
at fair market value.
15. 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, specific 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, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Risk-based ratios
Tier 1 capital................................. 14.4% 13.7% 13.1%
Total risk-based capital....................... 15.7% 15.3% 14.5%
Leverage ratio (using annual average assets)..... 11.4% 10.8% 10.4%
Capital balances
Tier 1......................................... $ 5,045,195 $ 4,424,202 $ 4,035,843
Total.......................................... 5,484,169 4,941,049 4,461,316
Risk-weighted assets........................... 34,961,000 32,232,000 30,731,000
</TABLE>
16. LINES OF CREDIT
The Bank has available lines of credit of $1,250,000 in overnight federal
funds and $2,500,000 in secured term loans from other banks.
17. 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
F-18
<PAGE>
HOME BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
CARRYING ESTIMATED
DECEMBER 31, 1995 VALUE FAIR VALUE
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Financial assets
Cash and due from banks......................................... $ 2,145,354 $ 2,145,354
Federal funds sold.............................................. 100,000 100,000
Investment securities........................................... 5,479,802 5,627,369
Accrued interest receivable..................................... 415,368 415,368
Financial liabilities
Noninterest-bearing deposits.................................... $ 7,135,398 $ 7,135,398
Interest-bearing deposits....................................... 31,501,929 31,926,783
Accrued interest payable........................................ 171,910 171,910
Dividend payable................................................ 131,919 131,919
</TABLE>
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 loans or outstanding
credit commitments. The Bank does not presently have available resources to
estimate fair values based on quoted prices or discounted cash flows for
individual accounts. The average interest rate for fixed-rate accounts at
December 31, 1995, is not readily determinable. Repricing opportunities are
stated in Note 4 for loans.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Our audits of the basic financial statements presented in the preceding
section of this report were made primarily to form an opinion on such financial
statements taken as a whole. Supplementary information, contained in the
following pages, is not considered essential for the fair presentation of the
financial position of Home Bank and the results of its operations, changes in
stockholders' equity, and cash flows in conformity with generally accepted
accounting principles. However, the following data were subjected to the audit
procedures applied in the audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ ROWLES & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
Salisbury, Maryland
January 16, 1996
F-20
<PAGE>
SUPPLEMENTARY INFORMATION
HOME BANK
AVERAGE BALANCES, INTEREST, AND YIELDS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1993 1994
---------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
ASSETS
Federal funds sold..... $1,190,914 $ 69,468 5.83% $2,618,063.. $ 113,899 4.35% $1,682,397 $ 50,257 2.99%
Interest-bearing
deposits 60,440 2,076 3.43 187,671 6,094 3.25
Investment securities
U.S. Treasury........ 4,202,867 264,430 6.29 4,541,195.. 283,806 6.25 3,983,718 257,030 6.45
U.S. Government
agency............. 408,355 30,904 7.57 75,441.... 5,917 7.84 100,000 7,584 7.58
State and
municipal............ 1,015,433 77,023 7.59 156,512... 12,115 7.74 9,999 --
---------- --------- ---------- --------- ---------- ---------
5,626,655 372,357 6.62 4,773,148.. 301,838 6.32 4,093,717 264,614 6.46
---------- --------- ---------- --------- ---------- ---------
Loans
Demand and time...... 9,754,678 1,041,220 10.67 7,977,959.. 759,071 9.51 7,536,745 663,437 8.80
Mortgage and
construction....... 22,143,925 2,307,037 10.42 20,006,315.. 1,912,136 9.56 19,082,307 1,843,436 9.66
Installment.......... 2,334,568 278,956 11.95 1,842,574.. 213,984 11.61 1,656,204 197,695 11.94
---------- --------- ---------- --------- ---------- ---------
34,233,171 3,627,213 10.60 29,826,848.. 2,885,191 9.67 28,275,256 2,704,568 9.57
---------- --------- ---------- --------- ---------- ---------
Allowance for loan
losses............. (579,454) (488,428) (420,966)
33,653,717 3,627,213 10.78 29,338,420.. 2,885,191 9.83 27,854,290 2,704,568 9.71
---------- --------- ---------- --------- ---------- ---------
Total interest-earning
assets............... 40,471,286 4,069,038 10.05 36,790,071.. 3,303,004 8.98 33,818,075 3,025,533 8.95
Noninterest-bearing
cash................. 1,935,405 1,956,255 1,688,192
Bank premises and
equipment............ 1,315,494 1,417,921 1,513,644
Other assets........... 690,391 788,936 1,069,572
---------- --------- ---------- --------- ---------- ---------
Total assets..... $44,412,576 $4,069,038 9.16% $40,953,183.. $3,303,004 8.07% $38,089,483 $3,025,533 7.94%
---------- --------- --- ---------- --------- --- ---------- --------- ---
---------- --------- --- ---------- --------- --- ---------- --------- ---
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Savings and NOW...... $7,062,000 $ 223,649 3.17% $6,433,190.. $ 203,395 3.16% $4,903,340 $ 155,980 3.18%
Money market and
Super Now.......... 5,991,832 169,235 2.82 8,542,130.. 242,985 2.84 9,190,201 285,398 3.11
Other time........... 18,093,269 989,576 5.47 14,897,929.. 590,435 3.96 14,011,924 541,006 3.86
---------- --------- ---------- --------- ---------- ---------
Total
interest-bearing.. 31,147,101 1,382,460 4.44 29,873,249.. 1,036,815 3.47 28,105,465 982,384 3.50
Noninterest-bearing
deposits........... 7,059,533 6,367,951 5,277,078
---------- --------- ---------- --------- ---------- ---------
38,206,634 1,382,460 3.62 36,241,200.. 1,036,815 2.86 33,382,543 982,384 2.94
Borrowed funds....... 962,800 62,927 6.54 111,850... 9,978 8.92 463,562 26,521 5.72
Other liabilities.... 408,605 377,393 308,151
Stockholders'
equity............. 4,834,528 4,262,740 3,935,227
---------- --------- ---------- --------- ---------- ---------
Total liabilities
and equity..... $44,412,567 $1,445,387 3.25% $40,953,183.. $1,046,793 2.56% $38,089,483 $1,008,905 2.65%
---------- --------- --- ---------- --------- --- ---------- --------- ---
---------- --------- --- ---------- --------- --- ---------- --------- ---
NET MARGIN ON INTEREST-
EARNING ASSETS....... $40,471,286 $2,623,651 6.48% $36,790,071.. $2,256,211 6.13% $33,818,075 $2,016,628 5.96%
---------- --------- --- ---------- --------- --- ---------- --------- ---
---------- --------- --- ---------- --------- --- ---------- --------- ---
</TABLE>
INTEREST ON INVESTMENTS IS PRESENTED ON A FULLY TAXABLE EQUIVALENT BASIS.
F-21
<PAGE>
HOME BANK
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................ $ 2,560,769 $ 1,723,487
Federal funds sold................................................................. 2,125,000 3,800,000
Investment securities available for sale........................................... 1,330,701 1,338,977
Investment securities held to maturity (approximate fair value of $3,664,189 and
$4,310,112)...................................................................... 3,615,980 4,223,023
Loans, less allowance for credit losses of $646,367 and $574,479................... 34,653,383 33,310,220
Premises and equipment............................................................. 1,193,517 1,294,466
Accrued interest income............................................................ 393,248 349,222
Deferred income taxes.............................................................. 44,414 13,143
Other assets....................................................................... 207,385 184,371
------------- -------------
$ 46,124,397 $ 46,236,909
------------- -------------
------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Deposits
Noninterest-bearing.............................................................. $ 8,863,625 $ 8,061,870
Interest-bearing................................................................. 31,461,364 32,844,575
------------- -------------
40,324,989 40,906,445
Accrued interest payable........................................................... 147,913 162,119
Accrued income taxes............................................................... -- 109,127
Other liabilities.................................................................. 58,264 49,816
------------- -------------
40,531,166 41,227,507
------------- -------------
Stockholders' equity
Common stock, par value $10 per share authorized 500,000 shares, issued and
outstanding 175,947 shares in 1996 and 174,816 shares in 1995.................... 1,759,470 1,748,160
Capital surplus.................................................................... 1,802,089 1,760,938
Undivided profits.................................................................. 2,015,654 1,480,283
------------- -------------
5,577,213 4,989,381
Net unrealized gain on securities available for sale............................... 16,018 20,021
------------- -------------
5,593,231 5,009,402
------------- -------------
$ 46,124,397 $ 46,236,909
------------- -------------
------------- -------------
</TABLE>
See Note to Unaudited Financial Statements.
F-22
<PAGE>
HOME BANK
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND REVENUE
Loans, including fees............................................................... $ 2,797,651 $ 2,689,828
U.S. Treasury securities............................................................ 184,068 197,591
U.S. Government agency securities................................................... 23,777 22,978
State and municipal securities...................................................... 40,513 41,066
Federal funds sold.................................................................. 30,842 38,252
------------ ------------
Total interest and dividend revenue............................................. 3,076,851 2,989,715
------------ ------------
INTEREST EXPENSE
Deposit interest.................................................................... 1,109,361 1,000,293
Other............................................................................... 21,607 62,231
------------ ------------
Total interest expense.......................................................... 1,130,968 1,062,524
------------ ------------
Net interest income............................................................. 1,945,883 1,927,191
PROVISION FOR CREDIT LOSSES........................................................... 89,131 52,034
------------ ------------
Net interest income after provision for credit losses............................... 1,856,752 1,875,157
OTHER OPERATING REVENUE
Service charges on deposit accounts................................................. 260,334 286,830
Miscellaneous revenue............................................................... 30,411 31,339
------------ ------------
Total other operating revenue................................................... 290,745 318,169
------------ ------------
OTHER EXPENSES
Salaries............................................................................ 574,358 590,439
Employee benefits................................................................... 116,907 143,936
Occupancy........................................................................... 122,316 113,853
Furniture and equipment............................................................. 138,885 125,370
Other operating 360,749 357,554
------------ ------------
Total other expenses............................................................ 1,313,215 1,331,152
------------ ------------
Income before income taxes............................................................ 834,282 862,174
Income taxes.......................................................................... 304,883 319,178
------------ ------------
NET INCOME $ 529,399 $ 542,996
------------ ------------
------------ ------------
Earnings per common share........................................................... $ 3.01 $ 3.11
------------ ------------
------------ ------------
</TABLE>
See Note to Unaudited Financial Statements.
F-23
<PAGE>
HOME BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
COMMON STOCK
Beginning balance.................................................................. $ 1,758,920 $ 1,743,430
Proceeds of stock sales............................................................ 550 4,730
------------ ------------
Balance, September 30,............................................................. $ 1,759,470 $ 1,748,160
------------ ------------
------------ ------------
CAPITAL SURPLUS
Beginning balance.................................................................. $ 1,800,020 $ 1,743,485
Proceeds of stock sales............................................................ 2,069 17,453
------------ ------------
Balance, September 30,............................................................. $ 1,802,089 $ 1,760,938
------------ ------------
------------ ------------
UNDIVIDED PROFITS
Beginning balance.................................................................. $ 1,486,255 $ 937,287
Net income......................................................................... 529,399 542,996
------------ ------------
Balance, September 30,............................................................. $ 2,015,654 $ 1,480,283
------------ ------------
------------ ------------
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Beginning balance.................................................................. $ 32,316 $ (27,075)
Change in unrealized gains (losses) on investment securities
available for sale............................................................... (16,298) 47,096
------------ ------------
Balance, September 30,............................................................. $ 16,018 $ 20,021
------------ ------------
------------ ------------
</TABLE>
See Note to Unaudited Financial Statements.
F-24
<PAGE>
HOME BANK
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received................................................................... $ 3,095,002 $ 2,977,965
Fees and commissions received....................................................... 290,665 316,606
Interest paid....................................................................... (1,154,965) (1,028,207)
Cash paid to suppliers and employees................................................ (1,307,256) (1,308,466)
Income taxes paid................................................................... (463,338) (261,132)
------------ ------------
460,108 696,766
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities
Held to maturity.................................................................. 500,000 1,000,000
Purchase of investment securities
Held to maturity.................................................................. -- (103,482)
Loans made, net of principal collected.............................................. (10,629) (1,613,968)
Purchases of premises and equipment and software.................................... (70,623) (54,322)
Proceeds from sale of premises and equipment........................................ 3,197 677
------------ ------------
421,945 (771,095)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits............................................................ 1,687,662 4,205,268
Decrease in federal funds purchased................................................. -- (500,000)
Decrease in subordinated debentures................................................. -- (100,000)
Dividends paid...................................................................... (131,919) (95,889)
Proceeds from sale of stock......................................................... 2,619 22,183
------------ ------------
1,558,362 3,531,562
NET INCREASE IN CASH AND EQUIVALENTS.................................................. 2,440,415 3,457,233
Cash and cash equivalents at beginning of year........................................ 2,245,354 2,066,254
------------ ------------
Cash and cash equivalents at end of period............................................ $ 4,685,769 $ 5,523,487
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income.......................................................................... $ 529,399 $ 542,996
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of premiums and accretion of discounts................................. 6,568 7,742
Gain on sale of premises and equipment.............................................. (937) (677)
Provision for loan losses........................................................... 89,131 52,034
Depreciation........................................................................ 112,063 114,547
Amortization of software............................................................ 24,856 21,359
Deferred income taxes............................................................... --
Decrease (increase) in
Accrued interest receivable....................................................... 22,120 (7,352)
Other assets...................................................................... (562) (19,314)
Increase (decrease) in
Deferred income................................................................... (10,537) (12,140)
Accrued interest payable.......................................................... (23,997) 34,317
Income taxes payable, net of refunds.............................................. (158,455) 58,046
Other liabilities................................................................. (129,541) (94,792)
------------ ------------
$ 460,108 $ 696,766
------------ ------------
------------ ------------
</TABLE>
See Note to Unaudited Financial Statements.
F-25
<PAGE>
HOME BANK
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 Home 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-26
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF AFFILIATION AND MERGER
AMONG
MERCANTILE BANKSHARES CORPORATION,
PENINSULA BANK
AND
HOME BANK
A-1
<PAGE>
AGREEMENT AND PLAN OF
AFFILIATION AND MERGER
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 21st day of October, 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 Home Bank, a Maryland commercial
bank (the "Bank").
WITNESSETH, that for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable consideration,
and in the expectation of the delivery of a Support Agreement, to be dated and
delivered as of the first business day after the date hereof, between the
Corporation and certain stockholders of the Bank, the parties hereto agree as
follows:
ARTICLE I
GENERAL PROVISIONS
1.1. THE AFFILIATION 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.
(a) The Merger shall be accomplished on the basis of two and six tenths
(2.6) 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);
(b) All unexercised and theretofore unexpired Stock Options, as hereinafter
defined, with respect to the Bank's common stock shall automatically terminate
and be cancelled on the Effective Date, as hereinafter defined, immediately
prior to the Merger becoming effective. With respect to such unexercised Stock
Options having an option price per share for the Bank's common stock which is
less than the then market value of two and six tenths (2.6) shares of the Common
Stock (subject to any appropriate adjustment pursuant to Section 1.5(b)), the
difference shall be paid by the Corporation to the holders of such Stock Options
in cash as soon as practicable after the Effective Date, upon delivery to the
Corporation of such documents as it may reasonably request. For this purpose,
the then market value of the Common Stock shall be the closing price for the
Common Stock on 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 date on which there is a closing price), without interest.
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
A-2
<PAGE>
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.
(4) As of June 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 June 30, 1996, no
shares of Mercantile Preferred were outstanding, 47,665,507 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 six months ended June 30, 1996 containing a consolidated
balance sheet as of June 30, 1996 and statements of consolidated income,
consolidated cash flows and consolidated changes in stockholders' equity for
the six months then ended (the "Corporation's June 30, 1996 Financial
Statements"). All of the Corporation's Audited Financial Statements and the
Corporation's June 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 June 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 June 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.
A-3
<PAGE>
(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.
(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. Any payments with respect to certain Stock Options pursuant to
Section 1.2(b) will also be adjusted in a commensurate manner. 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 has five
banking offices, with its main office in Newark, Maryland, three branch
offices located in Ocean City, Maryland and one branch office located in
Snow Hill, Maryland. The offices located in South Ocean City and in White
Marlin Mall are leased by the Bank, and the other offices are owned by the
Bank. No application for any additional office is pending. The Bank also
owns an administrative office and a vacant lot in Newark, 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 500,000 shares
of a single class of common stock, par value of $10.00 per share, of which
175,947 shares were issued and outstanding as of September 27, 1996. All of
such issued and outstanding shares and any shares issued hereafter pursuant
to the Stock Options, hereinafter defined, are and will be, 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
A-4
<PAGE>
stock or any security representing the right to purchase or receive any
capital stock of the Bank except for the existing employee stock options for
an aggregate of 705 shares of Bank common stock, as of September 27, 1996,
and the existing Director stock options for an aggregate of 6,124 shares of
Bank common stock, as of September 27, 1996 (collectively, the "Stock
Options"). The Stock Options were validly authorized and issued by 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.
(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 August 31, 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 June 30, 1996 Call Reports being hereinafter referred to as the
"Bank's June 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, LLP,
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 June 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 June 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 June 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.
A-5
<PAGE>
(h) Since June 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 except
shares of capital stock issued or issuable pursuant to the Stock Options.
(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 June 30, 1996 Call Reports, and there is no reason
to believe that any such liability will be asserted in connection with such
returns except as noted in the Bank's December 31, 1995 Financial Statements
and June 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 tax returns have been
audited by the Internal Revenue Service ("IRS") through the years 1992 and
1993; the IRS examinations for the years 1992 and 1993 have been concluded
without significant adjustment to the returns. The Bank's federal and
Maryland tax returns for the years 1994 and 1995 have been 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.
(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
A-6
<PAGE>
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.
(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 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) 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 June 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
A-7
<PAGE>
any private party is required under any contract, lease, mortgage or other
instrument to which the Bank is a party, except for the lease of banking
premises at White Marlin Mall. 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 are of record or that may be
observed by an inspection of the property, and such utility and other
easements and encumbrances as do not materially adversely affect the fair
market value of the real property. The leases for Bank offices located in
South Ocean City and White Marlin Mall, Maryland are valid and in full force
and effect; neither the Bank nor, to the knowledge of the Bank, any of its
lessors has breached any provision of, or is in default in any respect under
the terms of either such lease.
(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. 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.
A-8
<PAGE>
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;
(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) except pursuant to the Stock Options, 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.
A-9
<PAGE>
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 $680,887, or for the six month period ending
June 30, 1996 was less than $285,000, or for the nine month period ending
September 30, 1996 is less than $490,000, or for the year ending December 31,
1996 is less than $700,000, or if the Effective Date is after March 31, 1997,
for the three month period ending March 31, 1997 is less than $175,000, or if
the Effective Date is after June 30, 1997, for the six month period ending June
30, 1997 is less than $360,000, or if the Effective Date is after September 30,
1997, for the nine month period ending September 30, 1997 is less than $540,000
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 $5,077,511, or at June 30, 1996 aggregated less than
$5,300,000, or at September 30, 1996 aggregates less than $5,500,000, or at
December 31, 1996 aggregates less than $5,600,000, or if the effective date is
after March 31, 1997, at March 31, 1997 aggregates less than $5,750,000, or if
the Effective Date is after June 30, 1997, at June 30, 1997 aggregates less than
$5,950,000, or if the Effective Date is after September 30, 1997, at September
30, 1997 aggregates less than $6,130,000; 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 June 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 June
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 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 advice of Rowles & Company, LLP, independent certified public
accountants, including a "Market Valuation Report from Rowles & Company, LLP."
Accordingly, in view of the commitments of the parties and the time and expense
required to consummate
A-10
<PAGE>
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 a financial
advisor of the Bank, 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.
(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.
A-11
<PAGE>
(g) That since June 30, 1996, the Bank shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except for a dividend not exceeding the greater of seventy-five
cents ($.75) per share or 20% of the Bank's net income (determined in
accordance with generally accepted accounting principles, consistently
applied) for the year 1996 that may be declared in December 1996 and paid in
January 1997.
(h) That since June 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 and except for common stock of the Bank issued upon exercise
of Stock Options.
(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 August 31, 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.
(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, 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
A-12
<PAGE>
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 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 and payments made
pursuant to Section 1.2(b)):
(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;
(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 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.
Condition (e) may be waived by the Bank.
A-13
<PAGE>
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
profit sharing plan will be merged with and into the Corporation's 401(k) plan.
The Corporation will consult with the Bank with respect to whether the Bank's
profit sharing plan will be so merged with and into the Corporation's 401(k)
plan or terminated, but will thereafter, in its discretion, determine whether
the Bank's plan will be so merged or terminated. 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 after
consultation with the Bank, 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.
(c) EMPLOYEE STOCK PURCHASE PLAN. Effective as of the Effective Date, the
Bank's employee stock purchase plan will be terminated and all unexercised and
theretofore unexpired Stock Options will be disposed of pursuant to Section
1.2(b) hereof.
(d) DIRECTOR STOCK PURCHASE PLAN. Effective as of the Effective Date, the
Bank's director stock purchase plan will be terminated and all unexercised and
theretofore unexpired Stock Options will be disposed of pursuant to Section
1.2(b) hereof.
(e) 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.
A-14
<PAGE>
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 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
A-15
<PAGE>
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 bylaws of Peninsula in effect immediately prior to the Effective
Date shall be the 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.
(d) Subject to any changes hereafter agreed to by the parties hereto,
all of the directors of Peninsula as of the Effective Date, and three
directors of the Bank jointly determined by the parties hereto, shall be the
directors 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 two and six tenths (2.6) 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 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
A-16
<PAGE>
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.
(e) The Stock Options shall automatically terminate and be cancelled
immediately prior to the Merger becoming effective; unexercised and
theretofore unexpired Stock Options shall be subject to the provisions of
Section 1.2(b).
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.
A-17
<PAGE>
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 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 October 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.
A-18
<PAGE>
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 with respect to any
notice of termination under Section 3.6, if hand delivered or sent by telecopy,
addressed as follows:
<TABLE>
<S> <C>
If to the Corporation or Peninsula:
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-237-5309
Attention: Alan D. Yarbro, Esq.
General Counsel and Secretary
Copy to:
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-244-7742
Attention: Lee M. Miller, Esq.
If to the Bank:
Home Bank
309 N. Washington Street
Snow Hill, Maryland 21863-1088
Fax No. 410-632-2187
Attention: F. Dennis Parker
President
Copy to:
Raymond C. Shockley, Esq.
Williams, Hammond, Moore, Shockley & Harrison, P.A.
3509 Coastal Highway
Ocean City, Maryland 21842
</TABLE>
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.
A-19
<PAGE>
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.
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
HOME BANK
By: /s/ RALPH L. MASON, JR.
-----------------------------------(SEAL)
Ralph L. Mason, Jr.
Chairman of the Board
PENINSULA BANK
By: /s/ JEFFREY F. TURNER
-----------------------------------(SEAL)
Jeffrey F. Turner
President
A-20
<PAGE>
EXHIBIT A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER made between Home Bank, a Maryland commercial bank
(hereinafter called "Home"), 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"), Home 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 Home and of Peninsula under their respective
charters.
Section 3. The address of the principal banking office of Home is 8305
Langmaid Road, Newark, Maryland 21841-0010. 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 Home is five million dollars
($5,000,000), consisting of five hundred thousand (500,000) shares of capital
stock with a par value of ten dollars ($10.00) 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 Home 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
Home 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 Home (other
than the shares held by any objecting stockholder of Home as provided in
paragraph (d) of this Section 7) shall for all corporate purposes, and
without any action on the part of the holder thereof, automatically become
A-21
<PAGE>
and be converted into two and six tenths (2.6) 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 Home (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 Home 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 Home as evidencing the ownership of the number
of whole shares of Common Stock into which the capital stock of Home,
previously represented by such certificates, shall have been converted,
notwithstanding the failure to surrender such certificates. All certificates
for capital stock of Home 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 Home 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 Home 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 Home
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 Home object to
the Merger and demand payment in cash for their shares as aforesaid,
Mercshares 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.
A-22
<PAGE>
(e) There will be no objecting shareholders of Peninsula, which is a
wholly owned affiliate of Mercshares.
(f) All unexercised and theretofore unexpired stock options for shares
of capital stock of Home shall automatically terminate and be cancelled on
the Effective Date immediately prior to the Merger becoming effective. With
respect to such unexercised stock options having an option price per share
of Home's capital stock which is less than the then market value of two and
six tenths (2.6) shares of the Common Stock, subject to any appropriate
adjustment pursuant to Section 1.5(b) of the Plan, as hereinafter defined,
the difference shall be paid by the Corporation to the holders of such stock
options in cash as soon as practicable after the Effective Date, upon
delivery to Mercshares of such documents as it may reasonably request. For
this purpose, the then market value of the Common Stock shall be the closing
price for the Common Stock on 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 date on which there is a closing price), without
interest.
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 Home
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 October 21, 1996, by and among Home, 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 Home and/or
Peninsula, the parties hereto, without further action or approval of the
stockholders of Home 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.]
A-23
<PAGE>
IN WITNESS WHEREOF, Home 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> <C>
ATTEST: HOME BANK
- ------------------------------------------ By:
,Cashier
ATTEST: PENINSULA
BANK
- ------------------------------------------ By:
, Secretary
<CAPTION>
- ------------------------------------------ -------------------------------------------
,Cashier ---------------------------------, President
ATTEST:
- ------------------------------------------ -------------------------------------------
, 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
<CAPTION>
- ----------------------------------------- -----------------------------------------
, Secretary , Chairman of
the Board
</TABLE>
A-24
<PAGE>
ANNEX B
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.
B-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.
B-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 Home 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
(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)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<S> <C>
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 Home Bank*
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 Home Bank Special Meeting
</TABLE>
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) of this Form.
(c) No report, opinion or appraisal is required to be filed herewith
pursuant to Item 4(b) of this Form.
- ------------------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement, to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"), to
reflect in the Prospectus and Proxy Statement any facts or events arising after
the effective date of the Registration Statement (or in the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement, and to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; (2) that, for
the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering; provided, however, that paragraphs
II-3
<PAGE>
(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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Baltimore, State of
Maryland on January 6, 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
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 6, 1997
/s/ H. FURLONG BALDWIN Chief Executive Officer
- ------------------------------ (Principal Executive
H. Furlong Baldwin Officer)
/s/ TERRY L. TROUPE Chief Financial Officer and January 6, 1997
- ------------------------------ Treasurer (Principal
Terry L. Troupe Financial Officer)
/s/ JERRY F. GRAHAM Vice President and January 6, 1997
- ------------------------------ Controller (Principal
Jerry F. Graham Accounting Officer)
A Majority of The Board of Directors:
Thomas M. Bancroft, Jr., Richard O. Berndt, 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
-------------------------------------------------------------------
H. Furlong Baldwin
Date: January 6, 1997 For Himself and as Attorney-in-Fact
</TABLE>
<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 Home 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
(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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
8-K of the Registrant filed January 9, 1990, Exhibit 4-A, Commission File No. 0-5127)
<S> <C>
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 Home Bank*
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 Home Bank Special Meeting
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 3
BYLAWS
MERCANTILE BANKSHARES CORPORATION
ARTICLE I
SECTION 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation for the election of directors and the transaction of such other
business as may properly come before the meeting shall be held at the time and
on the day in April of each year as shall be fixed from time to time by the
Board of Directors or by the Executive Committee. Notice of the time and place
of such annual meeting shall be given to each stockholder in the manner provided
in Section 1 of Article X of these bylaws not less than ten days nor more than
ninety days before the meeting.
SECTION 2. Special Meetings. Special meetings of the stockholders may be
called at any time by the Board of Directors, the Chairman of the Board, the
Vice-Chairman of the Board, the President, or as otherwise provided by law.
Notice of the time, place and purpose of each special meeting of stockholders
shall be given to each stockholder in the manner provided in Section 1 of
Article X of these bylaws not less than ten days nor more than ninety days
before the meeting. No business shall be transacted at a special meeting except
that specified in the notice.
SECTION 3. Removal of Directors. At any special meeting of the stockholders
called in the manner provided for by this Article, the stockholders, by a
majority of the votes entitled to be cast by the stockholders entitled to vote
thereon, may remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies from the remainder of
his or their terms.
SECTION 4. Voting; Proxies; Record Date. At all meetings of stockholders
any stockholder shall be entitled to vote by proxy. Such proxy shall be in
writing and signed by the stockholder or by his duly authorized attorney in
fact. It shall be dated but need not be sealed, witnessed or acknowledged. The
Board of Directors may fix the record date for the determination of stockholders
entitled to vote in the manner provided in Article IX, Section 4 of these
bylaws.
SECTION 5. Quorum. If at any annual or special meeting of stockholders a
quorum shall fail to attend, those attending in person or by proxy may, by
majority of the votes entitled to be cast, adjourn the meeting from time to
time, not exceeding sixty days in all, and thereupon any business may be
transacted which might have been transacted at the meeting originally called had
the same been held at the time so called.
SECTION 6. Filing Proxies. At all meetings of stockholders, the proxies
shall be filed with and be verified by the Secretary of the Corporation or, if
the meeting shall so decide, by the Secretary of the meeting.
SECTION 7. Place of Meetings. All meetings of stockholders shall be held at
the principal office of the Corporation in the State of Maryland or at such
other place either within or without the State of Maryland as may be designated
in the notice of the meeting.
SECTION 8. Order of Business. At all meetings of stockholders, any
stockholder present and entitled to vote in person or by proxy shall be entitled
to require, by written request to the Chairman of the meeting, that the order of
business shall be as follows:
(1) Organization.
(2) Proof of notice of meeting or of waivers thereof.
(The certificate of the Secretary of the Corporation, or the affidavit of any
other person who mailed or published the notice or caused the same to be mailed
or published, being proof of service of notice.)
(3) Submission by Secretary, or by Inspectors, if any shall have been
elected or appointed, of list of stockholders entitled to vote, present in
person or by proxy.
<PAGE>
(4) If an annual meeting or a special meeting called for that purpose,
reading of unapproved minutes of preceding meetings and action thereon.
(5) Reports.
(6) The election of directors if an annual meeting or a special meeting
called to elect directors, or to remove directors and elect their
successors.
(7) Unfinished business.
(8) New Business.
(9) Adjournment.
SECTION 9. Advance Notice of Matters to be Presented at an Annual Meeting
of Stockholders.
At an annual meeting of the stockholders, commencing with the annual meeting
to be held in 1996, only such business shall be conducted as shall have been
properly brought before the meeting as set forth below. To be properly brought
before an annual meeting, such business must (1) be specified in the notice of
the meeting (or any supplement thereto) given by the Corporation pursuant to
Section 1 of Article X of these bylaws, or (2) be brought before the meeting by
or under the direction of the Board of Directors (or the Chairman or Vice
Chairman of the Board or the President), or (3) be properly brought before the
meeting by a stockholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary.
To be timely, such stockholder's notice must be delivered to or mailed and
received by the Secretary at the principal executive offices of the Corporation,
not less than 20 days nor more than 30 days prior to the meeting (or, with
respect to a proposal required to be included in the Company's proxy statement
pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, or its successor
provision, the earlier date such proposal was received); provided, however, that
in the event that less than 30 days' notice or prior disclosure by the
Corporation of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received by the Secretary not later
than the close of business on the 10th day following the earlier of the day on
which the Corporation's notice of the date of the annual meeting was mailed or
the day on which the Corporation's first public disclosure of the date of the
annual meeting was made. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and record address of the stockholder proposing such business, (iii)
the class and number of shares of the Corporation which are beneficially owned
by the stockholder, and (iv) any material interest of the stockholder in such
business.
Notwithstanding anything in these bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 9; provided, however, that nothing in this Section 9 shall
be deemed to preclude discussion by any stockholder of any business properly
brought before the annual meeting in accordance with such procedures.
The presiding officer at the meeting shall have the authority, if the facts
warrant, to determine that business was not properly brought before the meeting
in accordance with the provisions of this Section 9, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 10. Advance Notice of Nominees for Directors. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors at any meeting of stockholders held after the annual
meeting in 1995. Nominations of persons for election to the Board of Directors
of the Corporation may be made at an annual meeting of stockholders or at a
special meeting of stockholders as to which the notice of meeting provides for
election of directors, by or under the direction of the Board of Directors, or
by any nominating committee or person appointed by the Board of Directors, or by
any
3
<PAGE>
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
10. Such nominations, other than those made by or under the direction of the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary. To be timely, such stockholder's notice shall be delivered to or
mailed and received by the Secretary at the principal executive offices of the
Corporation not less than 20 days nor more than 30 days prior to the meeting;
provided, however, that in the event that less than 30 days' notice or prior
public disclosure of the date of the meeting is given or made by the Corporation
to stockholders, notice by the stockholder to be timely must be so received by
the Secretary no later than the close of business on the 10th day following the
earlier of the day on which the Corporation's notice of the date of the meeting
was mailed or the day on which the Corporation's first public disclosure of the
date of the meeting was made. Such stockholder's notice shall set forth: (a) as
to each person who the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of stock of the Corporation which
are beneficially owned by the person, and (iv) any other information relating to
the person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934 or any successor rule thereto; and (b) as to the stockholder giving the
notice, (i) the name and record address of the stockholder and (ii) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the Procedures set forth herein.
The Presiding officer at the meeting shall have the authority, if the facts
warrant, to determine that a nomination was not made in accordance with the
foregoing Procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE 11
DIRECTORS.
SECTION 1. Powers. The Board of Directors shall have the control and
management of the affairs, business and properties of the Corporation. They
shall have and exercise in the name of the Corporation and on behalf of the
Corporation all the rights and privileges legally exercisable by the
Corporation, except as otherwise provided by law, by the Charter or by these
bylaws. A director need not be a stockholder.
SECTION 2. Number. There shall be nineteen directors. The number of
directors may be decreased to not less than seven or increased to not more than
thirty from time to time by amendment of this bylaw by the stockholders or by
the Board of Directors. Each director, unless sooner removed by the
stockholders, shall serve until the next annual meeting of stockholders or until
his successor shall be elected and shall have qualified.
No person shall be eligible for election as a director, either by the
stockholders or by the Board of Directors, who at the time of such proposed
election has passed his 70th birthday.
SECTION 3. Vacancies. If the office of a director becomes vacant, or if the
number of directors is increased, such vacancy may be filled by the Board by a
vote of a majority of directors then in office although such majority is less
than a quorum. The stockholders may, however, at any time during the term of
such director, elect some other person to fill said vacancy and thereupon the
election by the Board shall be superseded and such election by the stockholders
shall be deemed a filling of the vacancy and not a removal and may be made at
any meeting called for that purpose.
4
<PAGE>
If the entire Board of Directors shall become vacant, any stockholder may
call a special meeting in the same manner that the President may call such
meeting, and directors for the unexpired term may be elected at the said special
meeting, in the manner provided for their election at annual meetings.
SECTION 4. Meetings. Four or more regular meetings of the Board of
Directors shall be held at an office of the Corporation each year. One of such
meetings shall be held on the same day as and immediately following the annual
meeting of stockholders and the remaining meetings shall be held on such days
and at such times as shall be fixed by the chief executive officer but there
shall be at least one regular meeting in each calendar quarter. Notice of the
date and time of every regular meeting shall be mailed or telegraphed or given
personally to each director not less than five days before the meeting.
SECTION 5. Special Meetings.Special meetings of the Board of Directors may
be called by the Board of Directors, the Executive Committee, the Chairman of
the Board, the Vice-Chairman of the Board or the President and shall be called
at the request of two or more directors. Notice of the time and place of any
special meeting shall be given to each director in the manner provided in
Section 2 of Article X of these bylaws not less than twenty-four hours before
the meeting.
SECTION 6. Quorum. One-third of the total number of directors, but not less
than four, shall constitute a quorum for the transaction of business. If less
than a quorum be present at any meeting duly called, a majority of those present
may adjourn the meeting from time to time with notice to absent directors.
SECTION 7. Place Of Meetings. Regular or special meetings of the Board may
be held within or without the State of Maryland as the Board may from time to
time determine. The time and place of a meeting may be fixed by the party making
the call.
SECTION 8. Rules and Regulations. The Board of Directors may adopt such
rules and regulations for the conduct of their meetings and the management of
the affairs of the Corporation as they may deem proper and not inconsistent with
the laws of the State of Maryland or these bylaws or the Charter.
SECTION 9. Compensation. The directors may receive a stated salary for
their services or a fixed sum and expenses of attendance may be allowed for
attendance at each regular or special meeting of the Board of Directors. Such
stated salary or attendance fee shall be determined by resolution of the Board
unless the stockholders have adopted a resolution relating thereto. Nothing
herein contained shall be construed to preclude a director from serving in any
other capacity and receiving compensation therefor.
ARTICLE III
COMMITTEES.
SECTION 1. Executive Committee. There shall be an Executive Committee of
such number not more than fourteen nor less than seven as the Board of Directors
may determine. The Chairman of the Board, the Vice-Chairman of the Board, the
President and the chief executive officer if an officer other than the officers
stated above, shall be members ex officio. The remaining members shall be
elected annually by the Board of Directors from among its members, preferably at
the first meeting after the annual meeting of stockholders, and shall serve
during the pleasure of the Board. The chief executive officer or such other
person as shall be designated by the Board shall act as chairman of the
committee. Additional or substitute members may be elected by the Board at any
time. In addition, the chief executive officer shall have power to make
temporary appointments to the committee of members of the Board of Directors to
serve as additional members or to act in the place and stead of members of the
committee who temporarily cannot attend its meetings. The Executive Committee
shall have and may exercise, so far as may be permitted by law, all of the
Powers of the Board of Directors during intervals between meetings thereof.
SECTION 2. Other Committees. The Board of Directors may also appoint from
their number other committees and, to the extent permitted by law, may delegate
to any such committee the exercise of
5
<PAGE>
powers of the Board of Directors during intervals between meetings thereof. The
Chairman of the Board, the Vice-Chairman of the Board, the President and the
chief executive officer if an officer other than the officers stated above,
shall be members ex officio of all such committees, but no officer shall be a
member of any committee designated by the Board of Directors as an Audit
Committee or Compensation Committee.
SECTION 3. Committee Meetings. All actions of any committee shall be
recorded in minutes of its meetings and all such actions shall be reported to
the next succeeding meeting of the Board of Directors. Meetings of any committee
may be held at any time and place upon the call of the Chairman of the Board,
the Vice-Chairman of the Board, the President, the chief executive officer if an
officer other than the officers stated above, or any other member of the
committee called to meet. Notice of the time and place of any special meeting of
any committee shall be given in the manner provided in Section 2 of Article X of
these bylaws not less than twelve hours before the meeting. Six members of the
Executive Committee and four members of any other committee shall constitute a
quorum unless otherwise provided by the Board of Directors for any particular
committee.
ARTICLE IV
OFFICERS.
SECTION 1. Officers and their Duties. The officers of the Corporation shall
consist of the Chairman of the Board, the Vice-Chairman of the Board, the
President, the Secretary, the Treasurer and whenever deemed advisable by the
Board one or more executive vice presidents, assistant secretaries, assistant
treasurers or other officers. All of said officers shall be chosen by the Board
of Directors and shall hold office only during the pleasure of the Board or
until their successors are chosen and qualify. The Chairman of the Board, the
Vice-Chairman of the Board and the President shall be chosen from among the
directors. Any two offices except those of Chairman of the Board and
Vice-Chairman of the Board, and President and Vice President may be held by the
same person, but no officer shall execute, acknowledge or verify any instrument
in more than one capacity, when such instrument is required to be executed,
acknowledged, or verified by any two or more officers. The Board of Directors
may from time to time appoint such other agents and employees, with such powers
and duties as they may deem proper.
The Board of Directors shall, from time to time, designate from among the
officers, a chief executive officer who shall direct the management of the
Corporation under the supervision of the Board of Directors or the appropriate
committees thereof and, subject to the same supervision, may also assign to the
other officers of the Corporation duties in addition to those prescribed by
these bylaws or assigned to them by the Board of Directors. The Board of
Directors may, from time to time, designate from among the officers, the officer
or officers who shall act as chief executive officer in case of the absence or
inability to act of the then designated chief executive officer.
SECTION 2. Chairman of the Board. The Chairman of the Board shall preside
at all meetings of stockholders and of the Board of Directors and shall perform
such other duties as may be assigned to him by the Board of Directors
SECTION 3. Vice-Chairman of the Board. In the absence of the Chairman of
the Board, the Vice-Chairman of the Board shall act in the place of the Chairman
of the Board and assume his duties and be vested with all his powers and
authorities. He shall perform such other duties as may be assigned to him by the
Board of Directors.
SECTION 4. President. In the absence of the Chairman of the Board and the
Vice-Chairman of the Board, the President shall act in the place of the Chairman
of the Board and assume his duties and be vested with all his powers and
authorities. He shall perform such other duties as may be assigned to him by the
Board of Directors.
6
<PAGE>
SECTION 5. Vice-Presidents. The executive vice-presidents and
vice-presidents shall perform such duties as the Board of Directors may direct.
SECTION 6. Treasurer. The Treasurer shall perform such duties as may be
assigned to him by the Board of Directors.
SECTION 7. Secretary. The Secretary shall keep the minutes of the meetings
of the stockholders and of the Board of Directors, and shall attend to the
giving and serving of all notices of the Corporation required by law or these
bylaws. He shall maintain at all times in the principal office of the
Corporation at least one copy of the bylaws with all amendments to date and
shall make the same, together with the minutes of the meetings of the
stockholders, the annual statement of the affairs of the Corporation and any
voting trust agreement on file at the office of the Corporation, available for
inspection by any officer, director or stockholder during reasonable business
hours. He shall perform such other duties as may be assigned to him by the Board
of Directors.
SECTION 8. Assistant Treasurer and Assistant Secretary. The assistant
treasurers and assistant secretaries shall perform such duties as may from time
to time be assigned to them by the Board of Directors.
SECTION 9. Substitutes. The Board of Directors may from time to time in the
absence of any one of said officers or at any other time designate any other
person or persons, on behalf of the Corporation, to sign any contracts, deeds,
notes, or other instruments in the place or stead of any of said officers, and
may designate any person to fill any one of said offices, temporarily or for any
particular purpose; and any instruments so signed in accordance with a
resolution of the Board shall be the valid act of this Corporation as fully as
if executed by any regular officer.
ARTICLE V
RESIGNATION OF DIRECTOR OR OFFICER.
Any director or officer may resign his office at any time. Such resignation
shall be made in writing and shall take effect from the time of its receipt by
the Corporation unless some other time be fixed in the resignation, and then
from that time. The acceptance of a resignation shall not be required to make it
effective unless the resignation so provides.
ARTICLE VI
COMMERCIAL PAPER, ETC.
All bills, notes, checks, drafts and commercial paper of all kinds to be
executed by the Corporation as maker, acceptor, endorser, or otherwise, and all
assignments and transfers of stock, contracts or written obligations of the
Corporation, and all negotiable instruments shall be made in the name of the
Corporation and shall be signed by the President, the Treasurer or such other
person or persons as the Board of Directors may from time to time designate.
ARTICLE VII
FISCAL YEAR.
The fiscal year of the Corporation shall cover such period of twelve months
as the Board of Directors may determine. In the absence of any such
determination the accounts of the Corporation shall be kept on a calendar year
basis.
7
<PAGE>
ARTICLE VIII
SEAL.
The seal of the Corporation shall be a circle inscribed with the name of the
Corporation and the year and State in which it is incorporated.
ARTICLE IX
MISCELLANEOUS PROVISIONS--STOCK.
SECTION 1. Issue. All certificates of stock shall be signed by the Chairman
of the Board, the Vice-Chairman of the Board, the President, or any
Vice-President and countersigned by the Treasurer or Assistant Treasurer or
Secretary or Assistant Secretary, any of which may be facsimile signatures if
the certificate is countersigned by the Transfer Agent, and sealed with the seal
of the Corporation.
SECTION 2. Transfers. No transfers of stock shall be recognized or binding
upon the Corporation until recorded on the books of the Corporation upon
surrender and cancellation of certificates for a like number of shares.
SECTION 3. Form of Certificates; Procedure. The Board of Directors shall
have power and authority to determine the form of stock certificates (except in
so far as prescribed by law), and to make all such rules and regulations, as
they may deem expedient concerning the issue, transfer and registration of said
certificates, and to appoint one or more transfer agents or registrars to
countersign and register the same.
SECTION 4. Record Dates for Dividends and Stockholders' Meetings. The Board
of Directors may fix the time, not exceeding twenty days preceding the date of
any meeting of stockholders, any dividend payment date or any date for the
allotment of rights, during which the books of the Corporation shall be closed
against transfers of stock, or the Board of Directors may fix a date not
exceeding ninety days preceding the date of any meeting of stockholders, any
dividend payment date or any date for the allotment of rights, as a record date
for the determination of the stockholders entitled to notice of and to vote at
such meeting, or entitled to receive such dividends or rights, as the case may
be, and only stockholders of record on such date shall be entitled to notice of
and to vote at such meeting or to receive such dividends or rights, as the case
may be. In the case of a meeting of stockholders the record date shall be fixed
not less than ten days prior to the date of the meeting.
SECTION 5. Lost and Destroyed Certificates. The holder of any shares of
this Corporation shall immediately notify it of any loss or destruction of the
stock certificate representing such shares. A new certificate may be issued upon
satisfactory proof of the loss, or destruction, and delivery to this Corporation
of a bond which shall be in such form, contain such terms and provisions, and
have such surety or sureties as the officers of the Corporation may direct.
ARTICLE X
NOTICE.
SECTION 1. Notice to Stockholders. Whenever by law or these bylaws notice
is required to be given to any stockholder, such notice may be given to each
stockholder by leaving the same with him or at his residence or usual place of
business, or by mailing it, postage prepaid, and addressed to him at his address
as it appears on the books of the Corporation. Such leaving or mailing of notice
shall be deemed the time of giving such notice.
SECTION 2. Notice to Directors and Officers. Whenever by law or these
bylaws notice is required to be given to any director or officer, such notice
may be given in any one of the following ways: by personal
8
<PAGE>
notice to such director or officer, by telephone communication with such
director or officer personally, by wire addressed to such director or officer at
his then address or at his address as it appears on the books of the
Corporation, or by depositing the same in writing in the post office or in a
letter box in a post-paid, sealed wrapper addressed to such director or officer
at his then address or at his address as it appears on the books of the
Corporation; and the time when such notice shall be mailed or consigned to a
telegraph company for delivery shall be deemed to be the time of the giving of
such notice.
SECTION 3. Waiver Of Notice. Notice to any stockholder or director of the
time, place and purpose of any meeting of stockholders or directors required by
these bylaws may be dispensed with if such stockholder shall either attend in
person or by proxy, or if such director shall attend in person, or if such
absent stockholder or director shall, in writing filed with the records of the
meeting either before or after the holding thereof, waive such notice.
ARTICLE XI
VOTING OF STOCK IN OTHER CORPORATIONS.
Any stock in other corporations, which may from time to time be held by the
Corporation may be represented and voted at any meeting of stockholders of such
other corporations by the Chairman of the Board, Vice Chairman of the Board,
President, or a Vice President or by proxy or proxies appointed by any one of
said officers or otherwise pursuant to authorization thereunto given by a
resolution of the Board of Directors adopted by a vote of the majority of the
Directors.
ARTICLE XII
AMENDMENTS.
These bylaws may be added to, altered, amended, repealed or suspended by a
majority vote of the entire Board of Directors at any regular meeting of the
Board or at any special meeting called for that purpose. Any action of the Board
of Directors in adding to, altering, amending, repealing or suspending these
bylaws shall be reported to the stockholders at the next annual meeting and may
be changed or rescinded by majority vote of all of the stock then outstanding
and entitled to vote. In no event shall the Board of Directors have any power to
amend this Article.
9
<PAGE>
EXHIBIT 5
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK AND TRUST BUILDING
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
January 6, 1997
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21203
Gentlemen:
We have acted as counsel for Mercantile Bankshares Corporation (the
"Corporation") in connection with the merger of Home Bank with and into
Peninsula Bank, a wholly owned subsidiary of the Corporation, pursuant to an
Agreement and Plan of Affiliation and Merger, dated October 21, 1996 (the
"Agreement"), among the Corporation, Home Bank and Peninsula Bank. We have also
acted as counsel to the Corporation in connection with the Corporation's
Registration Statement on Form S-4 (such Registration Statement, including all
exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), relating to the issuance of up to
475,218 shares of common stock (par value $2.00 per share) of the Corporation
(the "Shares") pursuant to the Agreement.
In connection with this opinion, we have considered such questions of law as
we have deemed necessary as a basis for the opinions set forth below, and we
have examined and are familiar with originals or copies, certified or otherwise
identified to our satisfaction, of the following: (i) the Registration
Statement; (ii) the Articles of Incorporation and By-Laws of the Corporation, as
amended and as currently in effect; (iii) certain resolutions of the Board of
Directors of the Corporation relating to the issuance of the Shares and the
other transactions contemplated by the Registration Statement; (iv) the
Agreement; and (v) such other documents as we have deemed necessary or
appropriate as a basis for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies. As to any facts material to this
opinion that we did not independently establish or verify, we have relied upon
statements and representations of officers and other representatives of the
Corporation and others.
Based upon the foregoing, we are of the opinion that when sold, issued and
paid for as contemplated in the Registration Statement, the Shares will be
validly issued and will be fully paid and nonassessable.
The law covered by the opinion set forth above is limited to the law of the
State of Maryland.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5 to the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act, or the Rules and Regulations of
the Commission thereunder.
Very truly yours,
/s/ VENABLE, BAETJER AND HOWARD, LLP
<PAGE>
EXHIBIT 8
Venable Baetjer and Howard, LLP
1800 Mercantile Bank and Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
, 1997
Home Bank
309 N. Washington Street
Snow Hill, Maryland 21863-1088
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21201
Re: MERGER OF HOME BANK INTO PENINSULA BANK
Dear Sirs:
We have acted as counsel to Mercantile Bankshares Corporation, a bank
holding company organized under the laws of the State of Maryland
("Mercshares"), in connection with the proposed merger (the "Merger") of Home
Bank, a Maryland commercial bank ("Home Bank"), into Peninsula Bank, a Maryland
commercial bank ("Peninsula"), a wholly-owned subsidiary of Mercshares. The
Merger will be effected pursuant to an Agreement and Plan of Affiliation and
Merger dated October 21, 1996, by and among Home Bank, Peninsula and Mercshares
(the "Merger Agreement"). Capitalized terms used herein without definition have
the respective meaning assigned to such terms in the Merger Agreement.
In our capacity as counsel to Mercshares, our opinion has been requested
with respect to certain of the federal income tax consequences of the Merger. In
rendering this opinion, we have examined (i) the Merger Agreement, (ii) the
Registration Statement on Form S-4 (the "Registration Statement") and the Proxy
Statement-Prospectus included therein that was filed with the U.S. Securities
and Exchange Commission, (iii) the Officer's Certificate of Mercshares and the
Officer's Certificate of Home Bank (collectively the "Officer's Certificates"),
and (iv) such other documents, instruments and information as we have deemed
appropriate ((i-iv) collectively constituting the "Documents").
In rendering this opinion, we have assumed, without independent
verification:
(i) the genuineness of all signatures,
(ii) the authenticity of any Document submitted to us as an original,
(iii) the conformity to the originals of all documents submitted to us as
certified, photostatic or conformed copies, and the authenticity of the
originals of all such Documents,
(iv) each natural person executing any such instrument, document, or
agreement is legally competent to do so,
(v) the accuracy of the facts set forth in the Registration Statement
and the representations contained in the Merger Agreement and the Officer's
Certificates, and
(vi) that the Merger will be effective under applicable state law.
We also have assumed that the Merger will be consummated in the manner
described in the Merger Agreement, and that as of the Effective Time, there will
be no plan or intention (either present or pre-existing) on the part of the Home
Bank stockholders to sell, exchange, transfer by gift or otherwise dispose of a
number of shares of Mercshares stock received in the Merger that would reduce
the Home Bank stockholders' ownership of Mercshares stock to a number of shares
having a value, as of the Effective Time, of less than fifty percent (50%) of
the value of all the issued and outstanding shares of stock of
<PAGE>
Home Bank immediately prior to the Merger. Finally, we have assumed that to the
extent any expenses relating to the Merger (or the "plan of reorganization"
within the meaning of Treas. Reg. Section1.368-1(e) with respect to the Merger)
are funded directly or indirectly by a party other than the incurring party,
such expenses will be within the guidelines established in REV. RUL. 73-54,
1973-1 C.B. 187.
In rendering our opinions set forth below, we have referred solely to the
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing, proposed and temporary regulations promulgated thereunder,
current administrative rulings, procedures and published positions of the
Internal Revenue Service (the "IRS") (collectively, the "Tax Laws"), all of
which are subject to change, either prospectively or retroactively, at any time.
No assurance can be provided as to the effect of any such change upon our
conclusions reached herein. We assume no obligation to supplement this opinion
if any applicable laws change after the date hereof or if we become aware of any
facts that might change the opinions expressed herein after the date hereof.
On the basis of and subject to the foregoing, we are of the opinion that:
1. Provided that the Merger of Home Bank and Peninsula qualifies as a
statutory merger under the applicable laws of the State of Maryland, the
Merger will constitute a reorganization within the meaning of Section
368(a)(2)(D) of the Code, and Home Bank and Peninsula will each be a "party
to the reorganization" within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Peninsula, Mercshares or Home
Bank as a result of the Merger.
3. No gain or loss will be recognized by the Home Bank stockholders who
receive solely Mercshares Common Stock in exchange for their Home Bank
stock.
4. Provided that the Home Bank stock is held as a capital asset at the
Effective Time, the basis of the Mercshares Common Stock received by the
Home Bank stockholders will be the basis of the Home Bank stock surrendered
in exchange for such Common Stock decreased by the amount of any cash
received by the Home Bank stockholder and increased by the amount of gain
recognized by the Home Bank stockholder.
5. Provided the Home Bank capital stock is held as a capital asset at
the Effective Time, the holding period of the Mercshares Common Stock
received by the Home Bank stockholders will include the holding period of
the Home Bank stock surrendered in exchange for such Common Stock.
6. The payment of cash to a Home Bank stockholder in lieu of a
fractional share interest in Mercshares Common Stock will be treated as
received by such holder as a distribution in redemption of such fractional
share interest. Gain or loss will be realized and calculated based on the
difference between the amount of cash received by the Home Bank stockholder
and the basis of such fractional share. If the fractional share of Home Bank
stock surrendered for the Mercshares Common Stock is held by such
stockholder as a capital asset at the Effective Time, any gain or loss
resulting to such former holder from such redemption will be capital gain or
loss.
7. In the case of any Home Bank stockholder who exercises his or her
appraisal rights under the applicable provisions of the Maryland Financial
Institutions Article and Maryland General Corporation Law and receives
solely cash in exchange for his Home Bank stock, such cash will be treated
as being received by such stockholder as a distribution in redemption of his
Home Bank stock. Gain or loss will be realized and calculated based on the
difference between the amount of cash received by any such Home Bank
stockholder and his basis in his Home Bank stock exchanged therefor. If the
shares of stock held by such stockholder are held as capital assets on the
date of such exchange, any gain or loss resulting to such stockholder from
such redemption will be capital gain or loss.
2
<PAGE>
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Agreement and without waiver or
breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
The conclusions, predictions, statements and analysis presented herein and
in the Proxy Statement-Prospectus are not binding upon the IRS, and this opinion
should not be construed as a guarantee that the IRS might not differ with the
conclusions, predictions, statements and analysis presented herein and in the
Registration Statement, or raise other questions or issues upon audit, or that
such action taken by the U.S. IRS will not be judicially sustained.
Our opinion regarding the tax consequences of the Merger are limited solely
to those expressed in this opinion and are provided for the benefit of
Mercshares and the Home Bank stockholders and may not be relied upon by others
without our written consent.
Very truly yours,
3
<PAGE>
EXHIBIT 24
MERCANTILE BANKSHARES CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Directors of MERCANTILE
BANKSHARES CORPORATION, a Maryland Corporation, hereby constitute and appoint H.
FURLONG BALDWIN and EDWARD K. DUNN, JR., or either of them acting alone, the
true and lawful agents and attorneys in fact of the undersigned in each case
with full power and authority in either of said agents and attorneys in fact, to
sign for the undersigned and in their respective names as Directors of the
Corporation the Registration Statement of the Corporation to be filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the offer and sale of shares to stockholders of Home Bank, and
any amendment or amendments to such Registration Statement hereby ratifying and
confirming all acts taken by such agents and attorneys in fact, or either of
them, as herein authorized. This Power of Attorney may be executed in one or
more counterparts.
Dated: January 3, 1997
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------ ----------
<S> <C>
/s/ ROBERT A. KINSLEY Director
--------------------------------------
Robert A. Kinsley
/s/ CHRISTIAN H. POINDEXTER Director
--------------------------------------
Christian H. Poindexter
/s/ FREEMAN A. HRABOWSKI Director
--------------------------------------
Freeman A. Hrabowski
/s/ WILLIAM J. MCCARTHY Director
--------------------------------------
William J. McCarthy
/s/ ROBERT D. KUNISCH Director
--------------------------------------
Robert D. Kunisch
/s/ CALMAN J. ZAMOISKI, JR. Director
--------------------------------------
Calman J. Zamoiski, Jr.
/s/ WILLIAM C. RICHARDSON Director
--------------------------------------
William C. Richardson
/s/ BISHOP L. ROBINSON Director
--------------------------------------
Bishop L. Robinson
/s/ THOMAS M. BANCROFT, JR. Director
--------------------------------------
Thomas M. Bancroft, Jr.
/s/ B. LARRY JENKINS Director
--------------------------------------
B. Larry Jenkins
/s/ RICHARD O. BERNDT Director
--------------------------------------
Richard O. Berndt
</TABLE>
<PAGE>
EXHIBIT 99
HOME BANK
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Home Bank. ("Home Bank") hereby appoints
Ralph Mason and Michael Turner, and either of them, as lawful attorneys and
proxies of the undersigned, with several power of substitution, to vote all
shares of the common stock of Home Bank which the undersigned is entitled to
vote at the Special Meeting of the Stockholders of Home Bank to be held on
February [ ], 1997 at [time] [ ].m., or at any adjournment thereof as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
<TABLE>
<S> <C> <C> <C>
1. To approve the Agreement and Plan of Affiliation and Merger, dated October 21, 1996, including the Agreement
of Merger provided for therein and the Agreement of Merger attached as an exhibit thereto (the "Agreement")
by and among Home 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) Home Bank
shall merge with and into Peninsula and (ii) each share of common stock of Home Bank, par value $10.00 per
share ("Home Bank Common Stock") (other than shares held by holders of Home Bank Common Stock who perfect
their dissenters' rights) automatically shall become and be converted into 2.6 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.
