MARSHALL NATIONAL BANK AND TRUST
JANUARY 12, 1998
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Marshall National Bank and Trust Company to be held at the Great Room of
Greenhouse Bookstore, 8377 West Main Street, Marshall, Virginia 20115 on
February 17, 1998 at 10:30 a.m.
At the Special Meeting, you will be asked to consider and vote on the
Agreement and Plan of Affiliation and Merger, including the Agreement to Merge
attached as an exhibit thereto (the "Affiliation Agreement"), dated November 20,
1997, by and among Marshall National Bank and Trust Company ("Marshall") and
Mercantile Bankshares Corporation, a bank holding company organized under the
laws of Maryland ("Mercshares"). Marshall will merge with an interim national
bank to be formed by Mercshares (the "Merger") which will continue the business
of Marshall under the Marshall name. Stockholders of Marshall will receive
Common Stock of Mercshares, all as more fully described in the enclosed
Prospectus and Proxy Statement. Based in Baltimore, Maryland, Mercshares is a
bank holding company with approximately $7 billion in total assets at September
30, 1997 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
Marshall, par value $2.00 per share ("Marshall Common Stock"), on the date of
consummation (other than shares held by Marshall Stockholders who properly
perfect their dissenters' rights) automatically shall become and be converted
into 1.75 shares of the common stock of Mercshares, par value $2.00 per share
("Mercshares Common Stock"). Cash will be paid in lieu of fractional shares.
Based on this exchange ratio, and the current dividend rate of Mercshares Common
Stock, your annual dividend payments after the Merger would be $1.40 per share
of Marshall Common Stock now held by you, although no assurance can be given
that current dividend levels will be maintained by Mercshares. The Marshall
annual dividend for 1997 was $.70 per share. The historical net income per share
of Mercshares Common Stock to be received by you after giving effect to the
exchange ratio represents a substantial increase in historical net income per
share of Marshall Common Stock. The shares of Mercshares Common Stock you
receive pursuant to the Merger should be more readily marketable than the shares
of Marshall Common Stock you presently hold.
Your Board of Directors has retained the investment banking firm of
McKinnon & Company, Inc. ("McKinnon & Company") to act as its financial advisor
in connection with the Merger. McKinnon & Company has delivered to the Board of
Directors its written opinion that, as of this date, the terms of the
Affiliation Agreement are fair to Marshall Stockholders from a financial point
of view.
The conversion of Marshall 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 Marshall Common Stock.
Your Board of Directors unanimously approved the Affiliation Agreement and
the Merger and believes that they are in the best interests of Marshall and our
stockholders. Accordingly, the Board of Directors recommends that you vote TO
APPROVE the Affiliation Agreement and the Merger contemplated thereby.
In addition, you will be asked to consider and vote on Marshall's 1997
Employee Stock Option Plan adopted by Marshall's Board of Directors on September
11, 1997, which provides for the issuance of up to 20,000 shares of Marshall
Common Stock to key employees of Marshall (the "Option Plan"). In connection
with the approval of the proposed Option Plan, you will also be asked to
consider and vote upon an amendment to Marshall's Articles of Association in
order to provide for the related waiver of preemptive rights of Marshall's
Stockholders and the authorization of the maximum number of shares of Marshall
Common Stock that may be issued upon the exercise of options granted pursuant to
the Option Plan.
We hope you can attend the Special Meeting and we encourage you to read the
enclosed Prospectus and Proxy Statement carefully. 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.
Sincerely,
/s/ GEORGE R. THOMPSON, JR. /s/ DONALD R. YOWELL
- --------------------------- --------------------
Chairman of the Board President
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
A Special Meeting of Stockholders of Marshall National Bank and Trust
Company (each a "Marshall Stockholder") will be held at the Great Room of
Greenhouse Bookstore, 8377 West Main Street, Marshall, Virginia 20115 on
February 17, 1998 at 10:30 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 November 20, 1997, including the
Agreement to Merge attached as an exhibit thereto (the "Affiliation
Agreement") by and among Marshall National Bank and Trust Company
("Marshall") and Mercantile Bankshares Corporation, a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, and
organized under the laws of the State of Maryland ("Mercshares"), a copy of
which is included as Annex A attached to the accompanying Prospectus and
Proxy Statement, pursuant to which (i) Marshall shall merge with an interim
national bank to be formed by Mercshares which will continue the business
of Marshall under the Marshall name and (ii) each share of common stock of
Marshall, par value $2.00 per share ("Marshall Common Stock") (other than
shares held by holders of Marshall Common Stock who properly perfect their
dissenters' rights) automatically shall become and be converted into 1.75
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 consider and vote upon a proposal to approve Marshall's 1997
Employee Stock Option Plan adopted by Marshall's Board of Directors on
September 11, 1997, which provides for the issuance of up to 20,000 shares
of Marshall Common Stock to key employees of Marshall (the "Option Plan"),
including an amendment to Marshall's Articles of Association in order to
provide for the related waiver of preemptive rights of stockholders and to
authorize the maximum number of shares of Marshall Common Stock that may be
issued upon the exercise of options granted pursuant to the proposed Option
Plan.
3. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Marshall Stockholders may, if the Affiliation Agreement is approved and
consummated, exercise a right to demand payment in cash of the 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 statute.
The relevant sections of such statute are included as Annex C to the
accompanying Prospectus and Proxy Statement.
The Board of Directors has fixed January 8, 1998, as the record date for
the Special Meeting and only holders of record of Marshall 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/ DONALD R. YOWELL
--------------------
President
January 12, 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 MARSHALL RECOMMENDS THAT MARSHALL
STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE MERGER AND THE
OPTION PLAN INCLUDING THE RELATED AMENDMENT TO MARSHALL'S ARTICLES OF
ASSOCIATION.
<PAGE>
PROSPECTUS RELATING TO 677,198 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
------------------------
PROXY STATEMENT RELATING TO
A SPECIAL MEETING OF STOCKHOLDERS OF
MARSHALL NATIONAL BANK AND TRUST COMPANY
TO BE HELD ON FEBRUARY 17, 1998
This prospectus and proxy statement (the "Prospectus and Proxy Statement")
is being furnished to the holders (the "Marshall Stockholders") of common stock,
par value $2.00 per share (the "Marshall Common Stock"), of Marshall National
Bank and Trust Company ("Marshall"), in connection with the solicitation of
proxies by the Board of Directors of Marshall for use at the Special Meeting of
the Marshall Stockholders to be held at the Great Room of Greenhouse Bookstore,
8377 West Main Street, Marshall, Virginia 20115 on February 17, 1998, at
10:30 a.m., and at any and all adjournments or postponements thereof (the
"Marshall 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 pursuant to an
Agreement and Plan of Affiliation and Merger, dated November 20, 1997, including
the Agreement to Merge attached as an exhibit thereto (the "Affiliation
Agreement"), by and among Mercshares and Marshall. Marshall will be merged (the
"Merger") with an interim national bank ("Interim Bank") to be formed by
Mercshares. Upon consummation of the Merger, Marshall directors and officers
will become the directors and officers of Interim Bank, Marshall employees will
become employees of Interim Bank, and the operations of Marshall will be
continued by Interim Bank under the Marshall name. Upon consummation of the
Merger, each share of Marshall Common Stock (other than shares held by Marshall
Stockholders who properly perfect their dissenters' rights) automatically shall
become and be converted into 1.75 shares of Mercshares Common Stock. Cash will
be paid in lieu of fractional shares of Mercshares Common Stock.
This Prospectus and Proxy Statement constitutes (a) a proxy statement for
use at the Marshall Special Meeting, at which the Marshall Stockholders will be
asked to consider and vote upon (i) a proposal to approve the Affiliation
Agreement and the Merger contemplated thereby, and (ii) a proposal to approve
Marshall's 1997 Employee Stock Option Plan (the "Option Plan"), including an
amendment to Marshall's Articles of Association in order to provide for the
related waiver of the preemptive rights of stockholders and to authorize the
maximum number of shares of Marshall Common Stock that may be issued upon the
exercise of options granted pursuant to the proposed Option Plan; and (b) a
prospectus covering the issuance in connection with the Merger of up to 677,198
shares of Mercshares Common Stock.
The information presented in this Prospectus and Proxy Statement concerning
Marshall has been supplied by Marshall, 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 Marshall Stockholders on or about January 12, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
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.................................................................................................... 6
The Marshall 1997 Employee Stock Option Plan and Amendment to Marshall's Articles of Association..................... 6
SUMMARY HISTORICAL FINANCIAL DATA...................................................................................... 7
COMPARATIVE UNAUDITED PER SHARE DATA................................................................................... 8
THE MARSHALL SPECIAL MEETING........................................................................................... 9
Date, Place and Time................................................................................................. 9
Purpose of the Marshall Special Meeting.............................................................................. 9
Record Date.......................................................................................................... 9
Voting Information................................................................................................... 9
Solicitation of Proxies.............................................................................................. 10
THE MERGER............................................................................................................. 10
General.............................................................................................................. 10
Background of the Merger............................................................................................. 11
Reasons for the Merger; Recommendation of the Marshall Board of Directors............................................ 12
Opinion of Marshall Financial Advisor................................................................................ 13
Effective Date....................................................................................................... 15
Procedures for Exchange of Certificates.............................................................................. 15
Certain Federal Income Tax Consequences.............................................................................. 15
Accounting Treatment................................................................................................. 16
Resale of Mercshares Common Stock After the Merger by Controlling Persons............................................ 16
Conditions to Merger................................................................................................. 16
Treatment of Employee Benefit Plans.................................................................................. 17
Exclusive Dealing.................................................................................................... 18
Interests of Certain Persons in the Merger........................................................................... 18
Termination.......................................................................................................... 18
Appraisal Rights Of Dissenting Stockholders.......................................................................... 19
CERTAIN OTHER AGREEMENTS............................................................................................... 20
The Support Agreement................................................................................................ 20
Affiliate Undertakings............................................................................................... 20
DESCRIPTION OF MARSHALL................................................................................................ 20
General.............................................................................................................. 20
Business............................................................................................................. 20
Competition.......................................................................................................... 23
Employees............................................................................................................ 23
Properties........................................................................................................... 23
Dividends............................................................................................................ 23
Price Range of Common Stock.......................................................................................... 23
Stock Ownership of Directors and Executive Officers.................................................................. 24
SELECTED FINANCIAL INFORMATION......................................................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................................................ 26
Overview............................................................................................................. 26
Net Income........................................................................................................... 26
Net Interest Income.................................................................................................. 26
Interest Sensitivity................................................................................................. 30
Securities........................................................................................................... 31
Loan Portfolio....................................................................................................... 32
Asset Quality........................................................................................................ 33
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
PAGE
Non-Performing Assets................................................................................................ 34
Provision for Loan Losses............................................................................................ 35
Non-Interest Income.................................................................................................. 35
Non-Interest Expense................................................................................................. 35
Income Taxes......................................................................................................... 35
Deposits............................................................................................................. 36
Short-Term Borrowings................................................................................................ 36
Capital Requirements................................................................................................. 36
Liquidity............................................................................................................ 37
Impact of Inflation, Changing Prices and Monetary Policies........................................................... 37
Accounting Matters................................................................................................... 37
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF MERCSHARES COMMON STOCK
AND MARSHALL COMMON STOCK............................................................................................ 39
DESCRIPTION OF MERCSHARES CAPITAL STOCK................................................................................ 40
MARSHALL 1997 EMPLOYEE STOCK OPTION PLAN AND AMENDMENT
TO MARSHALL'S ARTICLES OF ASSOCIATION................................................................................ 41
General.............................................................................................................. 41
Purpose.............................................................................................................. 42
Administration....................................................................................................... 42
Eligibility.......................................................................................................... 42
Options.............................................................................................................. 43
Shares Subject to the Option Plan.................................................................................... 43
Certain Federal Income Tax Consequences.............................................................................. 43
Amendment of Marshall's Articles of Association...................................................................... 44
Vote Required........................................................................................................ 44
LEGAL MATTERS.......................................................................................................... 44
EXPERTS................................................................................................................ 45
INDEX TO FINANCIAL STATEMENTS.......................................................................................... F-1
ANNEX A -- AGREEMENT AND PLAN OF AFFILIATION AND MERGER AND
THE AGREEMENT TO MERGE ATTACHED AS AN EXHIBIT THERETO................................................................ A-1
ANNEX B -- OPINION OF McKINNON & COMPANY, INC.......................................................................... B-1
ANNEX C -- DISSENTERS' RIGHTS STATUTORY PROVISIONS..................................................................... C-1
</TABLE>
<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. 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 677,198 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, 1996;
2. Mercshares' Quarterly Reports on Form 10-Q for the periods ended March
31, 1997, June 30, 1997 and September 30, 1997; 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 Marshall 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 9, 1998.
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. Marshall
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, 1997, Mercshares and the Affiliates had
total assets of approximately $7 billion, deposits of approximately $5.6
billion, and loans (net) of approximately $4.9 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 September 30, 1997, there were 71,818,723 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.
MARSHALL. Marshall is a national banking association which operates two
banking offices. At September 30, 1997, Marshall had total assets of
approximately $75.5 million, deposits of approximately $66.6 million and loans
(net) of approximately $53.5 million. Its principal executive office is located
at 8372 West Main Street, Marshall, Virginia 20115, telephone number (540)
364-1555.
As of January 8, 1998 there were 379,970 shares of Marshall Common Stock
outstanding. There is no established trading market for Marshall Common Stock;
however, Marshall Common Stock has been quoted on Nasdaq's NOTC Bulletin Board
under the symbol "MNBT" since the fourth quarter of 1996.
THE MERGER
GENERAL. At the Marshall Special Meeting described in the notice (the
"Notice") accompanying this Prospectus and Proxy Statement, Marshall
Stockholders will be asked to consider and vote upon a proposal to approve the
Affiliation Agreement, including the Agreement to Merge 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 Marshall Common Stock (other than shares held by Marshall
Stockholders who properly perfect their dissenters' rights) automatically shall
become and be converted into 1.75 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 of the Merger,"
" -- Reasons for the Merger," " -- Recommendation of the Marshall Board of
Directors" and " -- Appraisal Rights of Dissenting Stockholders."
VOTE REQUIRED. The affirmative vote of the holders of at least two-thirds
of the outstanding shares of Marshall Common Stock entitled to vote thereon will
be required to approve the Affiliation Agreement and the Merger contemplated
thereby. As of November 20, 1997, certain directors and officers of Marshall and
persons related to them owned an aggregate of 172,420 shares constituting
approximately 45% of the Marshall Common Stock. Such persons have executed
agreements with Mercshares pursuant to which each such person has agreed to
support and to vote his shares to approve the Affiliation Agreement and the
Merger contemplated thereby. BECAUSE THE REQUIRED VOTE OF MARSHALL STOCKHOLDERS
ON THE AFFILIATION AGREEMENT AND THE MERGER AND ON THE OPTION PLAN INCLUDING THE
RELATED AMENDMENT TO MARSHALL'S ARTICLES OF ASSOCIATION IS BASED UPON THE TOTAL
NUMBER OF OUTSTANDING SHARES OF MARSHALL COMMON STOCK, THE FAILURE TO SUBMIT A
PROXY CARD (OR THE FAILURE TO VOTE IN PERSON AT THE MARSHALL 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 AND THE OPTION PLAN INCLUDING THE RELATED AMENDMENT TO MARSHALL'S
ARTICLES OF ASSOCIATION. See "The Marshall Special Meeting," "Certain Other
4
<PAGE>
Agreements -- The Support Agreement" and "Marshall 1997 Employee Stock Option
Plan and Amendment to Marshall'S Articles of Association."
RECOMMENDATION OF THE MARSHALL BOARD; REASONS FOR THE MERGER. The Marshall
Board of Directors believes that the terms of the Affiliation Agreement and the
Merger are in the best interests of Marshall and the Marshall Stockholders and
has approved the Affiliation Agreement and the Merger. These determinations were
made by a unanimous vote of the Marshall Directors. In considering the terms and
conditions of the Merger, the Marshall 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 Marshall Common Stock; the financial condition
and history of performance of Mercshares; the diversification of risk associated
with ownership in an institution with a broader geographic area; the opinion of
its financial advisor as to the fairness, from a financial point of view, of the
terms of the Affiliation Agreement to the Marshall Stockholders; and the
operational and competitive benefits of the Merger.
The Marshall Board of Directors also considered that the historical
dividends per share and net income per share of the Mercshares Common Stock to
be received by the Marshall Stockholders, after giving effect to the Exchange
Ratio, represent a substantial increase in the historical dividends per share
and net income per share of Marshall Common Stock, although there can be no
assurance that pro forma amounts are indicative of future dividends or income
per share of Mercshares. Based upon the $34.125 per share closing market price
of Mercshares Common Stock on November 19, 1997 (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 Marshall's September 30, 1997
book value was 264%. THE MARSHALL BOARD OF DIRECTORS RECOMMENDS THAT MARSHALL
STOCKHOLDERS VOTE TO APPROVE THE AFFILIATION AGREEMENT AND THE MERGER
CONTEMPLATED THEREBY. See "THE MERGER -- Background of the Merger" and
" -- Reasons for the Merger; Recommendation of the Marshall Board of Directors."
OPINION OF FINANCIAL ADVISOR. The Marshall Board of Directors has received
an opinion from McKinnon & Company, Inc. ("McKinnon & Company") that the terms
of the Affiliation Agreement are fair to the Marshall Stockholders from a
financial point of view. A copy of the opinion, which sets forth the assumptions
made, matters considered and limits on the review undertaken, is attached as
Annex B to this Prospectus and Proxy Statement and is incorporated herein by
reference. See "THE MERGER -- Opinion of Marshall Financial Advisor."
CONDITIONS TO MERGER. The mutual obligation of Mercshares and Marshall to
consummate the Merger is subject to the requisite approval of the Affiliation
Agreement by the Marshall Stockholders. Additionally, the obligation of
Mercshares to consummate the Merger is subject to various conditions, including
the receipt of all appropriate regulatory approvals and that holders of not more
than 20% of the outstanding shares of Marshall Common Stock shall have voted
against the Merger or have given notice in writing at or prior to the Marshall
Special Meeting that they dissent from the Merger, pursuant to section 215a of
Title 12 of the United States Code ("12 U.S.C. (section mark) 215a"). 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 Board of Governors of the Federal Reserve System, the
Comptroller of the Currency, the Virginia State Corporation Commission and the
Maryland Commissioner of Financial Regulation. 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 12 U.S.C. (section mark) 215a, a Marshall
Stockholder who either votes against the Merger or gives notice in writing at or
prior to the Marshall Special Meeting that such Marshall Stockholder dissents
from the Merger and follows specified procedures is entitled to appraisal rights
with respect to the Merger. Under the appraisal rights provisions of 12 U.S.C.
(section mark)215a(b), the holders of the Marshall Common Stock are entitled to
dissent from the Merger and obtain payment for the value of their shares in the
event that the Merger is consummated. If (a) the Merger is approved by the
requisite holders of the Marshall Common Stock; and (b) the Merger receives all
necessary regulatory approvals and is consummated, then any Marshall Stockholder
who has voted against the Merger at the Marshal Special Meeting, or who has
given notice in writing at or prior to such meeting to Donald Yowell, President
of Marshall, or Carol C. Merewether, Corporate Secretary of Marshall, that he or
she dissents from the Merger, shall be entitled to receive in cash the value of
the shares so held, upon written request made to Marshall, accompanied by
surrender of his or her stock certificates, at any time before thirty days after
the
5
<PAGE>
date of the consummation of the Merger. See "THE MERGER -- Appraisal Rights of
Dissenting Stockholders" for a more complete discussion of Marshall
Stockholders' appraisal rights.
A Marshall 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 or her dissenters' rights. See "THE
MERGER -- Appraisal Rights of Dissenting Stockholders."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will qualify as a tax-free reorganization
for federal income tax purposes. Accordingly, (i) the Merger will qualify as a
reorganization within the meaning of Section 368(a)(2) of the Internal Revenue
Code to which Marshall, Interim Bank and Mercshares will each be a party, (ii)
no gain or loss will be recognized by Mercshares, Interim Bank or Marshall as a
result of the Merger, and (iii) no gain or loss will be recognized by the
Marshall Stockholders upon receipt by them of Mercshares Common Stock in
exchange for their shares of Marshall Common Stock. The receipt of an opinion of
counsel dated the Effective Date as to (i), (ii) and (iii) above and as to
certain other tax matters is a condition of the parties' obligations to
consummate the Merger. Marshall 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, Marshall Stockholders will become
stockholders of Mercshares, and their rights as stockholders of Mercshares will
be governed by the Maryland General Corporation Law (the "MGCL"), Mercshares'
Articles of Incorporation and Mercshares' Bylaws. The rights of Marshall
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 MARSHALL 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 Marshall Common
Stock and a description of Mercshares capital stock.
MARKET PRICE DATA
Mercshares Common Stock is publicly traded and quoted on The Nasdaq
National Market under the Symbol "MRBK." The market value of Mercshares Common
Stock on November 19, 1997, 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 $34.125 per share. This
quoted price and the Exchange Ratio yield a market value on an equivalent per
share basis of $59.72 per Marshall share. The market value of Mercshares Common
Stock on January 9, 1998, the last 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 $36.00 per share. 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 MARSHALL STOCKHOLDERS WILL RECEIVE PURSUANT TO THE
MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE DATE. MARSHALL
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR MERCSHARES COMMON
STOCK.
Marshall Common Stock is not traded on any exchange, and no established
trading market exists for Marshall Common Stock. However, since the fourth
quarter of 1996, Marshall Common Stock has been quoted on Nasdaq's NOTC Bulletin
Board. The last trade of which Marshall is aware prior to the announcement of
the proposed Merger was on November 11, 1997, at $31.00 per share. For
information concerning the price range of Marshall Common Stock, see
"DESCRIPTION OF MARSHALL -- Price Range for Common Stock."
THE MARSHALL 1997 EMPLOYEE STOCK OPTION PLAN AND AMENDMENT TO MARSHALL'S
ARTICLES OF ASSOCIATION
Marshall Stockholders are also asked to approve the Marshall 1997 Employee
Stock Option Plan (the "Option Plan"), including the related amendment to
Marshall's Articles of Association. The Option Plan was adopted by the Marshall
Board of Directors on September 11, 1997, and makes available up to 20,000
shares of Marshall Common Stock in the form of stock options to key employees of
Marshall. A total of 7,000 options have been issued to nine executives, and
these options will become exercisable immediately upon approval of the Option
Plan by Marshall Stockholders. The proposed amendment permits Marshall Common
Stock to be issued upon exercise of options granted under the Option Plan and
disallows preemptive rights with respect to the issuance of such shares. Since
these matters are related and are not effective without the other's approval,
the matters are submitted to stockholders as one item of business and must be
approved by at least two-thirds of the outstanding shares of Marshall Common
Stock. THE MARSHALL BOARD OF DIRECTORS RECOMMENDS THAT MARSHALL STOCKHOLDERS
VOTE TO APPROVE THE OPTION PLAN AND RELATED AMENDMENT TO MARSHALL'S ARTICLES OF
ASSOCIATION.
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of
Mercshares and Marshall. 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. Marshall's historical
financial data for each of the annual periods presented have been derived from
its audited historical financial statements. The selected historical financial
data for Mercshares for the nine-month periods ended September 30, 1996 and 1997
have been derived from Mercshares' unaudited Quarterly Report on Form 10-Q
previously filed with the Commission. The selected historical financial data for
Marshall for such periods have been derived from Marshall's unaudited financial
statements. In the opinions of the respective managements of Mercshares and
Marshall, 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, 1997 for each company are not necessarily
indicative of the results that may be obtained for the entire year ended
December 31, 1997. 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,
------------------------ ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MERCANTILE BANKSHARES CORPORATION
Net Interest Income................ $ 249,816 $ 230,994 $ 310,581 $ 286,788 $ 262,956 $ 246,482 $ 228,540
Provision for Loan Losses.......... 9,943 10,862 14,666 7,988 7,056 12,969 45,346
Other Operating Income............. 73,140 66,767 89,428 80,906 84,807 80,700 101,739
Income before Income Taxes......... 157,031 139,142 186,928 166,009 146,886 135,971 122,776
Net Income......................... 99,323 87,042 117,400 104,432 90,441 83,468 76,298
Cash Dividends Declared and Paid on
Common Stock..................... 40,909 34,253 46,579 41,013 34,982 30,173 26,454
Net Income Per Share of Common
Stock (1)........................ 1.39 1.22 1.64 1.46 1.25 1.16 1.11
Per Share Cash Dividends Declared
and Paid on Common Stock (1)..... .57 .48 .65 .57 .49 .43 .39
Total Assets....................... 7,072,931 6,546,631 6,642,681 6,349,103 5,938,225 5,789,620 5,459,577
Loans, Net......................... 4,873,244 4,413,196 4,484,994 4,209,872 3,846,838 3,628,780 3,401,213
Long-Term Debt..................... 50,024 49,402 49,395 25,623 31,470 32,350 15,108
MARSHALL
Net Interest Income................ $ 2,681 $ 2,409 $ 3,289 $ 3,041 $ 2,897 $ 2,576 $ 2,234
(Recovery of) Loan Losses.......... -- -- (90) (78) (98) (381) (414)
Other Operating Revenue............ 468 443 623 701 611 884 541
Income before Income Taxes......... 1,128 962 1,345 1,075 972 1,223 643
Net Income......................... 843 719 949 739 668 886 494
Cash Dividends Declared and Paid on
Common Stock..................... 114 76 247 209 190 133 57
Net Income Per Share of Common
Stock............................ 2.22 1.89 2.50 1.94 1.76 2.33 1.30
Per Share Cash Dividends Declared
and Paid on Common Stock......... .30 .20 .65 .55 .50 .35 .15
Total Assets....................... 75,525 74,961 75,244 73,851 68,182 66,512 65,933
Loans, Net......................... 53,494 46,019 48,469 42,786 38,407 30,065 32,772
</TABLE>
- ---------------
(1) In June, 1997, 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.
7
<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 Marshall, 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 Marshall on a historical
basis and on a pro forma equivalent basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
PER COMMON SHARE:
NET INCOME:
Marshall-historical.................................................................... $ 2.22 $ 2.50
Marshall pro forma equivalent (1)...................................................... $ 2.42 $ 2.85
Mercshares-historical.................................................................. $ 1.39 $ 1.64
Mercshares pro forma combined (2)...................................................... $ 1.38 $ 1.63
CASH DIVIDENDS DECLARED:
Marshall-historical.................................................................... $ 0.30 $ 0.65
Marshall pro forma equivalent (1)...................................................... $ 1.00 $ 1.14
Mercshares-historical.................................................................. $ 0.57 $ 0.65
Mercshares pro forma combined (3)...................................................... $ 0.57 $ 0.65
BOOK VALUE:
Marshall-historical.................................................................... $22.53 $ 20.50
Marshall pro forma equivalent (1)...................................................... $22.54 $ 20.86
Mercshares-historical.................................................................. $12.71 $ 11.75
Mercshares pro forma combined.......................................................... $12.88 $ 11.92
</TABLE>
- ---------------
(1) Marshall pro forma equivalent amounts represent Mercshares' pro forma
combined information multiplied by the Exchange Ratio of 1.75 shares of
Mercshares Common Stock for each share of Marshall Common Stock. Marshall
declared and paid semi-annual dividends of $.30 per share in July, 1997 and
$.40 per share in December, 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 Marshall.
(3) Pro forma combined dividends per share represent historical dividends per
share paid by Mercshares. Mercshares paid quarterly dividends of $.17 per
share in March, 1997, and $.20 per share in June, September and December,
1997. At the current quarterly rate, the annual dividends would be $.80 per
share.
8
<PAGE>
THE MARSHALL SPECIAL MEETING
DATE, PLACE AND TIME
The Marshall Special Meeting will be held at the Great Room of Greenhouse
Bookstore, 8377 West Main Street, Marshall, Virginia 20115 on February 17, 1998,
at 10:30 a.m.
PURPOSE OF THE MARSHALL SPECIAL MEETING
At the Marshall Special Meeting, Marshall 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 Marshall Common Stock
(other than shares held by Marshall Stockholders who properly perfect their
dissenters' rights) automatically shall become and be converted into 1.75 shares
of Mercshares Common Stock and cash in lieu of fractional shares of Mercshares
Common Stock, (ii) the proposal to approve Marshall's 1997 Employee Stock Option
Plan (the "Option Plan") and to amend Marshall's Articles of Association in
order to provide for the related waiver of preemptive rights of Marshall
Stockholders and to authorize the maximum number of shares of Marshall Common
Stock that may be issued upon exercise of the options, and (iii) such other
matters as may properly be brought before the Marshall Special Meeting.
The Marshall Board of Directors unanimously recommends a vote to approve
the Affiliation Agreement and the Merger contemplated thereby and the Option
Plan and the related amendment to Marshall's Articles of Association.
RECORD DATE
The Marshall Board of Directors has fixed the close of business on January
8, 1998 (the "Marshall Record Date") as the record date for determining holders
entitled to notice of and to vote at the Marshall Special Meeting. Accordingly,
only holders of record of Marshall Common Stock at the close of business on the
Marshall Record Date will be entitled to notice of, and to cast their vote at,
the Marshall Special Meeting. As of January 8, 1998, there were 379,970 shares
of Marshall Common Stock issued and outstanding held by approximately 351
holders of record.
VOTING INFORMATION
Each holder of record of shares of Marshall Common Stock on the Marshall
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 Marshall Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the shares of Marshall Common Stock outstanding on the Marshall
Record Date is necessary to constitute a quorum at the Marshall Special Meeting.
The approval of the Affiliation Agreement and the Merger requires the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Marshall Common Stock entitled to vote thereon.
As of November 20, 1997, certain directors and officers of Marshall and
persons related thereto owning an aggregate of 172,420 shares (approximately
45%) of Marshall Common Stock have executed agreements with Mercshares pursuant
to which such persons have agreed to vote their shares of Marshall Common Stock
to approve the Affiliation Agreement and the Merger. See "CERTAIN OTHER
AGREEMENTS -- The Support Agreement" and "DESCRIPTION OF MARSHALL -- Stock
Ownership of Directors and Executive Officers."
The approval of the Option Plan requires the affirmative vote of the
holders of a majority of Marshall Common Stock represented in person or by proxy
voting at the Marshall Special Meeting. The approval of the related amendment to
Marshall's Articles of Association requires the affirmative vote of holders of
at least two-thirds of the outstanding common shares of Marshall Common Stock.
Since approval of the Option Plan and approval of the Amendment to the Articles
of Association are related and are not effective without the other's approval,
these two matters will be submitted to the Marshall Stockholders as one item of
business, and, therefore, must be approved by at least two-thirds of the
outstanding shares of Marshall Common Stock.
All shares of Marshall 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 Marshall Common Stock will be voted to approve the
Affiliation Agreement and the Merger and the Option Plan and the related
amendment to Marshall's Articles of Association. Marshall does not know of any
matters other than as described in the Notice that are to come before the
Marshall Special Meeting. If any other matter or matters are properly presented
for action at the Marshall 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.
9
<PAGE>
A Marshall 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
Marshall Special Meeting to Donald R. Yowell, President of Marshall, or Carol C.
Merewether, Corporate Secretary of Marshall, by signing and returning a later
dated proxy, or by voting in person at the Marshall Special Meeting; however,
mere attendance at the Marshall Special Meeting will not in and of itself have
the effect of revoking the proxy.
Votes cast by proxy or in person at the Marshall Special Meeting will be
tabulated to determine whether or not a quorum is present. Where, as to any
matter submitted to the Marshall Stockholders for a vote, proxies are marked as
abstentions (or Marshall 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 Marshall Stockholders on the Affiliation Agreement and the
Merger and the Option Plan and the related amendment to Marshall's Articles of
Association are based upon the total number of outstanding shares of Marshall
Common Stock, the failure to submit a proxy card (or the failure to vote in
person at the Marshall 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 and the Option Plan and the
related amendment to Marshall's Articles of Association.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Marshall Board of
Directors, and Marshall will bear the costs of its solicitation of proxies.
Solicitations may be made by mail, telephone, or personally by directors,
officers and employees of Marshall, 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.
PROPOSAL 1
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, Marshall will merge with and into an
interim national bank to be formed by Mercshares which will continue the
business of Marshall under the Marshall name, and each share of Marshall Common
Stock (other than shares held by Marshall Stockholders who properly perfect
their dissenters' rights) automatically shall become and be converted into 1.75
shares of Mercshares Common Stock. Upon consummation of the Merger, Marshall
directors and officers will become the directors and officers of Interim Bank,
renamed Marshall National Bank and Trust Company. Marshall employees will become
employees of Interim Bank, the operations of Marshall will be continued by
Interim Bank, and the separate corporate existence of Marshall will cease.
Certificates for Marshall Common Stock shall be exchanged for certificates of
Mercshares Common Stock as described below.
Based upon the capitalization of Mercshares and Marshall as of September
30, 1997, the Marshall Stockholders would own approximately one percent of the
outstanding Mercshares Common Stock following consummation of the Merger. Based
upon the unaudited financial statements of Mercshares and Marshall at September
30, 1997, upon consummation of the Merger, the percentage of total assets and
the percentage of total liabilities represented by Marshall in Mercshares would
each be approximately one percent.
As discussed below in " -- Reasons for the Merger; Recommendation of the
Marshall Board of Directors," the Marshall 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, Marshall and the Marshall Stockholders. Upon
consummation of the Merger, the former Marshall Stockholders who become holders
of Mercshares Common Stock will be stockholders in a larger entity with equity
traded on The Nasdaq National Market. Each Marshall Stockholder who becomes a
holder of Mercshares Common Stock shall possess the same rights as other such
holders, and former Marshall Stockholders as a group will no longer be taking
action at the
10
<PAGE>
Marshall corporate level. See "COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF
MERCSHARES COMMON STOCK AND MARSHALL COMMON STOCK" and "DESCRIPTION OF
MERCSHARES CAPITAL STOCK."
BACKGROUND OF THE MERGER
The Marshall Board of Directors generally discusses strategic planning in
February or March of each year. In Marshall's 1996 strategic planning meeting,
the Board focused on the future of Marshall as an independent entity. This
discussion was continued in the 1997 strategic planning meeting, and the Board
decided that, considering the increasing pace of consolidation in the banking
industry, management and the Board's Executive Committee (the "Executive
Committee") needed to focus on the issue more sharply.
On June 4, 1997, the Executive Committee met with William J. McKinnon Jr.
of McKinnon & Company, to discuss stock options for senior management and also
to discuss future independence. The Executive Committee specifically discussed
five possible scenarios with Mr. McKinnon: (1) remaining independent; (2)
merging with another local bank; (3) joining with two to three other community
banks to form a bank holding company; (4) affiliating with an existing community
bank holding company; and (5) affiliating with a regional bank holding company.
The Executive Committee came to no conclusion regarding the matter but
instructed management to report on the issue at the next Board meeting and plan
further action. On June 12, 1997, at the monthly meeting of the Marshall Board,
management reported on the Executive Committee's discussions, and the Board
determined that it needed to hire an independent financial advisor to help in
focusing on these strategic matters. The Board advised management to hire
Laurence C. Pettit, Jr., Professor of the McIntyre School of Commerce, as a
consultant to help the Executive Committee complete its analysis of this issue.
Donald Yowell, President and Chief Executive Officer of Marshall, met with
Mr. Pettit on August 21, 1997. Mr. Pettit was retained and met with several
members of the Executive Committee on August 28, 1997, to discuss goals for
Marshall. Mr. Pettit and Mr. Yowell had a follow-up conference call on September
12, 1997, and on October 23, 1997, Mr. Pettit led an Executive Committee
discussion of the Marshall's future as an independent entity, an expanded entity
(through branching or acquisitions), or as a part of a multi-bank holding
company. Mr. Pettit led the committee through an analysis of the various options
and the amount of growth and profit required under each scenario to match the
short-term improvement in stock price and liquidity gained in affiliating with a
regional holding company. The Executive Committee determined that affiliating
with a bank holding company and receiving at least 2.5 times book value for the
stock should be a short-term goal. The Executive Committee also expressed
concern for Marshall's employees, and indicated that any affiliation should, if
possible, provide an opportunity for continued employment for most employees.
In July and August, 1997, various members of the Executive Committee had
met with Chief Executive Officers of several regional and local bank holding
companies to discuss affiliation possibilities. In particular, three members of
the Executive Committee met on July 29, 1997, with Mr. H. Furlong Baldwin,
Chairman and Chief Executive Officer of Mercshares. As a follow-up to that
discussion and the Executive Committee's deliberations, several Executive
Committee members met again with Mr. Baldwin on October 31, 1997, to further
investigate the general terms of an affiliation with Mercshares. The committee
members did not specifically request an offer at that time, but Mr. Baldwin
indicated that Mercshares would be willing to move forward immediately with an
offer of 1.75 shares for each share of Marshall Common Stock outstanding. Those
directors called an Executive Committee meeting for November 5, 1997, reported
the offer they had received, and discussed what that offer would mean in terms
of greater liquidity and higher dividends for shareholders. Also, the Executive
Committee discussed Mercshares' prior history of providing its community banks a
great deal of autonomy and retaining most bank employees. George Thompson, Jr.,
Chairman of the Board, summarized the strengths of the offer, and the Executive
Committee decided to proceed. Mr. Yowell contacted Mays & Valentine, L.L.P.,
counsel to Marshall, who recommended that the matter be kept confidential until
a final agreement could be negotiated, and also recommended that Marshall retain
a financial analyst to perform an analysis of the affiliation and present a
fairness opinion. Marshall immediately retained the services of McKinnon &
Company. Over the next ten days, various terms of the agreement were discussed
and negotiated among the parties. On November 18, 1997, the agreement was
presented to the Executive Committee, and Mr. McKinnon presented an oral opinion
to the Executive Committee that the offer was fair to Marshall Stockholders from
a financial point of view. Mays & Valentine, L.L.P. explained the terms of the
agreement to the Executive Committee, and the Executive Committee recommended
that the agreement be submitted to the entire Board for review. On November 20,
1997, the agreement was presented to the entire Board. Mr. McKinnon again opined
that the agreement was fair to Marshall Shareholders from a financial point of
view, and Mays & Valentine, L.L.P. again explained the primary terms of the
agreement. The Board was given time for reflection on the matter, and then the
issue was called for a vote. The Marshall Board voted unanimously to approve the
Affiliation Agreement and the Merger, and the agreement was publicly announced
on that day.
11
<PAGE>
REASONS FOR THE MERGER; RECOMMENDATION OF THE MARSHALL BOARD OF DIRECTORS
The Marshall Board of Directors has unanimously approved and recommends
that Marshall Stockholders vote to approve the Affiliation Agreement and the
Merger.
The Marshall Board of Directors believes that the terms of the Affiliation
Agreement and the Merger are in the best interests of Marshall and the Marshall
Stockholders. As explained below, this conclusion is supported by the opinion of
its independent financial advisor. In considering the terms and conditions of
the Affiliation Agreement, the Marshall Board of Directors considered a number
of factors. The Marshall 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 MERGER. In this regard, the Marshall 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
the Marshall Stockholders resulting from the Exchange Ratio represented a fair
multiple of Marshall's per share book value and earnings. The Marshall Board of
Directors also considered that, under the proposed Exchange Ratio and based on
the Marshall 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 the Marshall Stockholders, although there can be no
assurance that current dividends are indicative of future dividends. See
"COMPARATIVE UNAUDITED PER SHARE DATA." In addition, the Marshall Board of
Directors considered how the Mercshares' offer compared on a percentage basis to
Marshall's loans and deposits. See "THE MERGER -- Opinion of Marshall Financial
Advisor" for a discussion of this comparative information.
(II) THE TERMS, OTHER THAN THE FINANCIAL TERMS, AND STRUCTURE OF THE
MERGER. In this respect, the Marshall Board of Directors considered the benefits
to the customers and employees of Marshall and the communities it serves by
allowing Marshall to remain a separate bank within the Mercshares system.
Mercshares has provided certain assurances that Marshall would operate with a
substantial degree of autonomy, including maintaining substantially the same
employees, based on satisfactory performance, which was a significant
consideration for the Marshall Board of Directors. The Marshall Board of
Directors also considered that the Merger would qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code").
See "THE MERGER -- Certain Federal Income Tax Consequences."
(III) CERTAIN FINANCIAL AND OTHER INFORMATION CONCERNING MERCSHARES. In
this respect, the Marshall Board of Directors considered, among other things,
the consistent high position of Mercshares among its peer group of national and
regional financial institutions in terms of profitability, capital adequacy and
asset quality. The Marshall Board of Directors also considered that the
historical dividends per share and net income per share of Mercshares Common
Stock to be received by the Marshall Stockholders, after giving effect to the
Exchange Ratio, would represent a substantial increase in the historical
dividends per share and net income per share of the Marshall Common Stock,
although there can be no assurance that pro forma amounts are indicative of
future dividends or income per share of Mercshares. The Marshall Board of
Directors also considered the marketability of Mercshares Common Stock, which is
publicly traded and quoted on The Nasdaq National Market. The Marshall Board of
Directors further considered the diversification of risk associated with
ownership of an institution that operates 21 banks serving a broad geographic
area that encompasses most of Maryland and parts of Virginia and Delaware.
(IV) OTHER POSSIBLE AFFILIATION PARTNERS. The Marshall Board of Directors
considered, based in part on the advice of McKinnon & Company, possible
affiliation partners for Marshall other than Mercshares, the prospects of such
other possible affiliation partners, and the likelihood that such other
potential partners would be able to make an offer directly comparable to
Mercshares' offer. Based upon the foregoing considerations, none of the other
affiliation possibilities considered by the Marshall Board of Directors was
perceived by the Marshall Board of Directors to present the advantages that the
Merger would provide.
(V) OPINION OF THE BANK FINANCIAL ADVISOR. The Marshall Board of Directors
also considered the opinion of McKinnon & Company as to the fairness, from a
financial point of view, of the terms of the Affiliation Agreement to the
Marshall Stockholders. See "THE MERGER -- Opinion of Marshall Financial
Advisor."
(VI) CERTAIN OTHER CONSIDERATIONS. The Marshall Board of Directors further
determined that the addition of resources resulting from the Merger will enable
Marshall 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 Marshall
Board of Directors concluded that the Merger will help provide Marshall with the
financial resources needed to meet the competitive challenges arising from
recent and anticipated changes in the banking and financial services industry.
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THE MARSHALL BOARD OF DIRECTORS BELIEVES THAT THE AFFILIATION AGREEMENT AND
THE MERGER ARE IN THE BEST INTERESTS OF MARSHALL AND THE MARSHALL STOCKHOLDERS.
THE MARSHALL BOARD OF DIRECTORS RECOMMENDS THAT MARSHALL STOCKHOLDERS VOTE TO
APPROVE THE AFFILIATION AGREEMENT AND THE MERGER CONTEMPLATED THEREBY.
OPINION OF MARSHALL FINANCIAL ADVISOR
Marshall's Board of Directors retained the investment banking firm of
McKinnon & Company to evaluate the terms of the Affiliation Agreement, and
McKinnon & Company has rendered its opinion to the Board of Directors of
Marshall that the terms of the Affiliation Agreement are fair from a financial
point of view to the Marshall Stockholders. In developing its opinion, McKinnon
& Company reviewed and analyzed material bearing upon the financial and
operating conditions of Marshall, Mercshares, and on a pro forma basis, Marshall
and Mercshares combined, and material proposed in connection with the
Affiliation Agreement including, among other things, the following: (1) the
Affiliation Agreement; (2) the Registration Statement; (3) Marshall's and
Mercshares' financial results for fiscal years 1990 through 1996, and the first,
second and third quarters ended March 31, June 30, and September 30, 1997,
respectively, and certain documents and information deemed relevant to McKinnon
& Company's analysis; (4) discussions with senior management of Marshall and
Mercshares regarding past and current business operations of, and outlook for,
Marshall, Mercshares, including trends, the terms of the proposed Merger, and
related matters; (5) the reported price and trading activity of Marshall and
Mercshares Common Stock and financial and stock market information (when
available) for Marshall and Mercshares with similar information for certain
other companies, and securities for which are publicly traded; (6) the financial
terms of certain recent business combinations which McKinnon & Company deemed
comparable in whole or in part; (7) the relationship of prices paid to relevant
financial data such as net worth, loans, deposits and earnings in certain bank
and bank holding company affiliations and acquisitions in Maryland, North
Carolina and Virginia in recent years and the deal price relative to the
seller's price one day prior to the announcement of such deals; and (8) other
published information and other factors and information which McKinnon & Company
deemed relevant. No instruction or limitations were given or imposed in
connection with the scope of or the examination or investigations made by
McKinnon & Company in arriving at its findings. Finally, McKinnon & Company has
performed such other studies and analyses it deemed appropriate, including an
analysis of the pro forma financial impact of the Merger on Marshall and
Mercshares. A copy of McKinnon & Company's opinion, which sets forth the
assumptions made, matters considered and qualifications made on the review
undertaken, is attached as Annex B hereto and should be read in its entirety.
McKinnon & Company used the information gathered to evaluate the financial
terms of the Merger using standard valuation methods, including discounted cash
flow analysis, market comparable analysis, comparable acquisition analysis and
dilution analysis.
COMPARABLE ACQUISITION ANALYSIS.
McKinnon & Company compared the relationship of prices paid to relevant
financial data such as net worth, assets, deposits and earnings in fourteen bank
and bank holding company mergers and acquisitions in Maryland, North Carolina
and Virginia since December 31, 1996, representing all such transactions known
to McKinnon & Company to have occurred during this period involving banks and
bank holding companies, with the proposed Merger and found the consideration to
be received from Mercshares to be within the relevant pricing ranges acceptable
for such recent transactions. Among the fourteen bank and bank holding company
transactions in 1997 either closed or pending in Maryland, Virginia and North
Carolina, McKinnon & Company has developed a group of ten small transactions,
ranging in deal value from $14 million to $45 million and in asset size from $73
million to $259 million, and a group of four larger transactions each exceeding
$100 million in deal value and over $950 million in assets of the selling
institution. The ten smaller transactions included six in Virginia, three in
North Carolina and two in Maryland, while all of the larger transactions were in
Virginia. Specifically, based on the ten smaller transactions in Virginia, North
Carolina and Maryland either completed or pending in 1997, other than the
Merger, the average price to book was 219.06% in Virginia, 267.80% in North
Carolina, 238.46% in Maryland, and 237.56% overall, compared with 266.79% for
the Merger; the average price to earnings ratio was 18.36 times in Virginia,
26.09 times in North Carolina and 16.58 times in Maryland, and 20.54 times
overall, compared with 25.39 times for the Merger; the average price to deposits
was 25.57% in Virginia, 30.10% in North Carolina, 27.27% in Maryland and 27.36%
overall, compared with 35.08% for the Merger; the average price to assets was
21.59% in Virginia, 24.49% in North Carolina, 22.18% in Maryland and 22.58%
overall, compared with 30.85% for the Merger; and the average deal price over
seller's price one day prior to the announcement was 122.0% in Virginia, 126.6%
in North Carolina; and 123.8% overall, compared with 194.8% for the Merger.
Among the four larger transactions, all in Virginia, the average price to book
was 294.90% compared with 266.7% for the Merger; the average price to earnings
was 21.41 times compared with 25.39 times for the Merger, the average price to
deposits was 31.53% compared with 35.08% for the Merger; the average price to
assets was
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24.21% compared with 30.85% for the Merger and the average deal price to
seller's price one day before the announcement was 127.9% compared with 194.8%
for the Merger. For purposes of computing the information with respect to the
Merger, $60 3/8 per share of consideration for each share of the Marshall Common
Stock was used.
MARKET COMPARABLE ANALYSIS.
McKinnon & Company analyzed the performance and financial condition of
Mercshares relative to the following financial institutions: NationsBank
Corporation; First Union Corporation; Wachovia Corporation; BB&T Corp.; Crestar
Financial Corp.; First Virginia Bank, Inc.; Keystone Financial; Riggs National
Corp.; One Valley Bancorp; Susquehanna Bancshares; F&M National Corporation;
United Bankshares, Inc.; MainStreet BankGroup, Inc.; F&M Bancorp; and
Mason-Dixon Bancshares (collectively the "Bank Group"). Among the financial
information compared was information relating to equity to assets, loans to
deposits, net interest margin, non-performing assets, total assets, non-accrual
loans, loan loss reserve and asset growth rates. Additional information compared
for the trailing twelve month period ended June 30, 1997, was (i) price to book
value ratio which was 284.5% for Mercshares compared to an average of 258.2% for
the Bank Group; (ii) price to earnings ratio which was 19.3x compared to an
average of 18.3x for the Bank Group; (iii) return on average assets which was
1.96% for Mercshares compared to an average of 1.35% for the Bank Group; (iv)
return on equity which was 15.11% compared to an average for the Bank Group of
14.71%; and (v) a dividend yield of 2.29% compared to an average of 2.37% for
the Bank Group. Overall, in the opinion of McKinnon & Company, Mercshares'
operating performance and financial condition were better than the Bank Group
average, and Mercshares' market value was reasonable when compared to the Bank
Group. Accordingly, the Marshall Stockholders will receive Mercshares Common
Stock that is reasonably valued when compared to the Bank Group.
DILUTION ANALYSIS.
Based upon publicly available financial information on Marshall and
Mercshares, McKinnon & Company considered the effect of the transaction on the
book value, earnings and market value of Marshall and Mercshares. The immediate
effect on Mercshares was no impact on book value or earnings per share. The
effect on Marshall under the same assumption is to increase dividends by $.70,
or 100.00%, and to increase the market value of Marshall to $60.375 per share,
or 94.8% over the most recently quoted price prior to announcement. This
dilution analysis does not take into account the longer term benefits for the
combined companies resulting from the combination. McKinnon & Company concluded
from the analysis that the transaction would have a significant positive effect
on Marshall and the Marshall Stockholders in that dividends per share and the
market value of Mercshares Common Stock to be received by the Marshall
Stockholders, after giving effect to the Exchange Ratio, would represent a
substantial increase in the historical dividends per share and market value of
Marshall Common Stock, although there can be no assurance that pro forma amounts
are indicative of the future.
The summary set forth above includes the material factors considered, but
does not purport to be a complete description of the presentation by McKinnon &
Company to the Marshall Board of Directors or of the analyses performed by
McKinnon & Company. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Accordingly, notwithstanding the separate factors
summarized above, McKinnon & Company believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the process underlying the preparation of its
opinion. As a whole, these various analyses contributed to McKinnon & Company's
opinion that the terms of the Merger Agreement are fair from a financial point
of view to the Marshall Stockholders.
McKinnon & Company is an investment banking firm that specializes in
Virginia community banks. In nine years McKinnon & Company has been lead
managing underwriter in approximately twenty-eight public stock offerings for
Virginia community banks and thrifts and has served as financial advisor,
including providing fairness opinions to numerous Virginia community banks.
McKinnon & Company, as part of its investment banking business, is engaged in
the evaluation of businesses, particularly banks and thrifts, and their
securities, in connection with mergers and acquisitions, initial public
offerings, private placements and evaluations for estate and corporate
recapitalizations. McKinnon & Company is also a market maker in Virginia
community bank stocks listed on NASDAQ:NMS, the NASDAQ Small Cap Market and the
NOTC Bulletin Board, including Marshall on the NOTC Bulletin Board. McKinnon &
Company believes it has a thorough working knowledge of the banking industry
throughout Virginia.
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<PAGE>
Pursuant to an engagement letter dated November 17, 1997 between Marshall
and McKinnon & Company, in exchange for its services, McKinnon & Company shall
receive a fee of $10,000 and shall receive an additional fee of $25,000 at the
date of the mailing of this Prospectus and Proxy Statement to the Marshall
Stockholders regarding the proposed merger.
EFFECTIVE DATE
When permitted pursuant to the application with the Comptroller of the
Currency, Interim Bank, Mercshares and Marshall will execute and deliver an
Agreement to Merge substantially in the form attached as Exhibit A to the
Affiliation Agreement (the "Agreement to Merge"). The Merger shall become
effective on such date and time (the "Effective Time") as are set forth in the
Certificate of Merger issued by the Comptroller of the Currency. Mercshares and
Marshall contemplate that the Merger will be made effective on the first
business day of a month, or such other date as may be determined by Mercshares
following the approval of the Affiliation Agreement by the Marshall
Stockholders.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
On and after the Effective Date, certificates for shares of Marshall Common
Stock shall represent the right to receive certificates representing the number
of whole shares of Mercshares Common Stock and cash in lieu of fractional shares
represented thereby, as described herein. Certificates representing shares of
Marshall Common Stock may be exchanged after the Effective Date by surrendering
such certificates to The Bank of New York, acting as exchange agent, or such
other or additional exchange agent as Mercshares may select (the "Exchange
Agent"), in exchange for new certificates representing the appropriate number of
whole shares of Mercshares Common Stock determined by the Exchange Ratio and for
cash in lieu of any fractional shares.
No certificates for fractional shares of Mercshares Common Stock shall be
issued but, in lieu thereof, and solely as a mechanism for rounding
shareholdings to whole shares, Mercshares will pay cash for such fractional
shares on the basis of the closing price for Mercshares Common Stock (as
reported by The Nasdaq National Market) on the Effective Date (or if no closing
price is reported on that date, then the closing price on the next preceding day
on which there is a closing price), without interest, upon surrender of
certificates for Marshall 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, Marshall 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 Marshall 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 Marshall 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.
MARSHALL STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. MARSHALL 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 Mays & Valentine, L.L.P., counsel to Marshall:
(i) the Merger will qualify as a tax-free reorganization within the meaning
of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended (the "Code"), to which Marshall, Interim Bank and Mercshares will
each be a party;
(ii) no gain or loss will be recognized by Mercshares, Interim Bank or
Marshall in the Merger;
(iii) no gain or loss will be recognized by the Marshall Stockholders upon
receipt by them of Mercshares Common Stock in exchange for Marshall Common Stock
pursuant to the Merger;
(iv) provided that the Marshall Common Stock is held as a capital asset,
the tax basis of the Mercshares Common Stock received by the Marshall
Stockholders will be the same as the tax basis of the Marshall Common Stock
surrendered and exchanged therefor; and
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<PAGE>
(v) provided that the Marshall Common Stock is held as a capital asset, the
holding period of the Mercshares Common Stock received by the Marshall
Stockholders will include the holding period during which the Marshall Common
Stock surrendered in exchange therefor was held.
The obligation of Marshall to consummate the Merger is subject to the
receipt of an opinion of Mays & Valentine, L.L.P., counsel to Marshall (or such
other counsel as may be acceptable to Mercshares and Marshall, in their
reasonable discretion), 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 Marshall 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 Marshall Stockholders. The
receipt of such cash generally will be treated as a sale or exchange of the
stock resulting in capital gain or loss measured by the difference between the
cash received and an allocable portion of the basis of the stock relinquished.
The receipt of such cash may be treated as a dividend and taxed as ordinary
income in certain limited situations.
The discussion set forth above is included for general information only. It
does not address the state, local or foreign tax aspects of the Merger. In
addition, it does not discuss the federal income tax considerations that may be
relevant to certain persons, and may not apply to certain holders subject to
special tax rules, including dealers in securities and foreign holders. The
discussion is based upon currently existing provisions of the Code, existing
Treasury regulations thereunder and current administrative rulings and court
decisions. All of the foregoing are subject to change and any such change could
affect the continuing validity of this discussion.
Each Marshall 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 $14,548,000, which would be amortized over an estimated
period of not more than 15 years. See "COMPARATIVE UNAUDITED PER SHARE DATA."
RESALE OF MERCSHARES COMMON STOCK AFTER THE MERGER BY CONTROLLING PERSONS
Under Federal securities laws there are certain potential limitations on
the sale of Mercshares Common Stock received in the Merger that will affect
certain Marshall Stockholders who may be controlling persons of Marshall.
Mercshares and Marshall believe that the only Marshall Stockholders who may be
deemed controlling persons subject to these limitations are the directors and
certain officers of Marshall 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 at least
two-thirds of the outstanding shares of Marshall 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 Marshall 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) Marshall shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except for a regular semi-annual cash dividend not to exceed $0.40
per share to be declared in December, 1997, and regular cash dividends for any
full calendar quarter occurring before the Effective Date that begins after
December 31, 1997 at an effective quarterly rate of not more than $0.19 per
share; provided however, that if the Effective Date occurs after June 30, 1998,
Mercshares will discuss with Marshall whether an increase in such dividend for
the calendar quarter beginning July 1, 1998, may be appropriate; (3) Marshall
shall not have changed its authorized, issued or outstanding capital stock,
issued any rights with respect thereto, or made any distributions of its
earnings or assets other than as provided in the Affiliation Agreement; (4) the
absence of any material adverse change in the balance sheet, income statement,
financial position, results of operations or business of Marshall; (5)
compliance by Marshall with certain conditions, including limits on unapproved
increases in compensation of directors, officers or employees of Marshall or
unapproved alterations in benefits received by such individuals;
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(6) absence of any change in Marshall's investment practices and policies; (7)
absence of either a vote against the Merger or notice in writing at or prior to
the Marshall Special Meeting that such holders dissent from the Merger by
holders of an aggregate of more than 20% of the outstanding shares of Marshall
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) Marshall 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, Interim Bank and Marshall 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 Marshall; (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
Interim Bank to conduct after the Effective Date all and every part of the
business and activities conducted by Marshall prior to the Effective Date in the
manner in which such activities and business were then conducted by Marshall 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 Marshall 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 Marshall 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; (4)
receipt of an opinion of McKinnon & Company, dated contemporaneously with the
date of this Prospectus and Proxy Statement, to the effect that with the
consideration to be received in the Merger is fair to the Marshall Stockholders
from a financial point of view; and (5) the accuracy and satisfaction of various
financial and legal representations and conditions with respect to Mercshares.
Marshall may in its discretion waive conditions (4) and (5).
TREATMENT OF EMPLOYEE BENEFIT PLANS
Pursuant to the Affiliation Agreement and at the option of Mercshares,
Marshall's 401(k) and defined benefit pension plans may be terminated, frozen or
merged with and into Mercshares' 401(k) and cash balance pension plans,
respectively. Until such termination, freeze or merger, employees of Marshall
will continue to be eligible to participate in Marshall's 401(k) and pension
plans, subject to such changes in the plans as are required by law and are
deemed advisable by Mercshares. Upon such termination, freeze or merger,
employees of Marshall will be eligible to participate in Mercshares' 401(k) and
cash balance pension plans according to each plan's applicable provisions, and
will be given credit for service with Marshall for purposes of eligibility to
participate and vesting, and in the case only of a merger of Marshall's pension
plan with and into Mercshares' cash balance pension plan, benefit accrual.
In addition, upon the adoption (by merger or otherwise) of Mercshares' cash
balance pension plan by Marshall for the benefit of its employees, such
employees will be given credit under such plan for service with Marshall prior
to such adoption (including service with Marshall prior to the Effective Date)
for purposes of calculating the employees' accrual rates under such plans.
Furthermore, such employees will receive benefit accruals under such plan (base,
excess and supplemental credits), as applicable, based upon the employees'
respective ages as of the date of such adoption. In the event Marshall's pension
plan is not continued and Marshall's employees become participants in
Mercshares' cash balance pension plan, those individuals who were Marshall
employees as of the Effective Date will receive retirement benefits under
Mercshares' retirement plans or otherwise which are comparable to those they
would have received had Marshall's 401(k) and pension plans continued in effect.
Except with respect to Marshall's 401(k) and pension plans, which will be
treated as above, and executive plans, programs and arrangements, eligibility
for participation in which is determined in the discretion of Mercshares, after
the Effective Date, Marshall employees shall, to the extent that any of
Marshall's other employee benefit plans and programs are not continued, be
entitled to participate in Mercshares' employee benefit plans and programs on
substantially the same basis as similarly situated employees of Mercshares.
Except as set forth above with respect to Mercshares' 401(k) and cash balance
pension plans, Mercshares has agreed to treat service with Marshall before the
Effective Date as service with Mercshares for purposes of all such employee
benefit and seniority-based plans and programs.
As of the Effective Date, Marshall's stock option plan 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 Marshall Common Stock which is less
than the market value of 1.75 shares of Mercshares Common Stock, Mercshares
shall pay
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the difference to holders in cash as soon as practicable after the Effective
Date, upon delivery to Mercshares of such documents as it may reasonably
request. For such purposes, the market value of Mercshares Common Stock shall be
equal to the closing price for Mercshares 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.
Officers and key employees of Marshall, as a group, hold the following
options:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- ---------------- -------------- -------------------
<S> <C> <C>
7,000 $28.00 September 10, 2007
</TABLE>
EXCLUSIVE DEALING
Marshall has agreed that while the Affiliation Agreement is in effect,
neither Marshall 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 Marshall Stockholders or enter into any agreement or participate in
discussions or negotiations with, or furnish any information to, any person in
connection with any potential Acquisition Proposal, unless an unsolicited
Acquisition Proposal is made and the Marshall 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 Marshall,
that its fiduciary obligations require consideration of such Acquisition
Proposal because it may be in the best interests of the Marshall Stockholders
and is more favorable to the Marshall 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 Marshall, (B) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of assets of
Marshall representing 10% or more of the assets of Marshall, (C) issue, sale or
other disposition of securities (or options, rights or warrants to purchase, or
securities convertible into, such securities) representing 10% or more of the
voting power of Marshall, or (D) any transaction in which any person or group
shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act), or the right to acquire beneficial ownership, of 20% or more
of the outstanding Marshall Common Stock.
Marshall has agreed that it will promptly advise Mercshares of, and
communicate to Mercshares the terms of, any such inquiry or proposal addressed
to Marshall or of which Marshall or its respective officers, directors,
employees, agents, or representatives (including, without limitation, any
investment banker) has knowledge.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Affiliation Agreement provides that Marshall may extend the term of the
employment contract of its President, Donald R. Yowell, dated December 9, 1993
(the "Employment Contract"), until December 31, 2003, subject to the other terms
of the Employment Contract. At a meeting held on November 20, 1997 at which the
Marshall Board of Directors approved the Affiliation Agreement and Merger, the
Marshall Board of Directors also unanimously approved such extension of the
Employment Contract.
The normal policy of Mercshares' Affiliated Banks is that directors do not
stand for re-election after reaching the age of 70, subject to exceptions made
at the time of affiliation to allow Board continuity. An exception will be made
for William H. deButts, Jr., Thomas W. diZerega, Harvey L. Pearson and George R.
Thompson, Jr. so that they will be permitted to serve until the bank annual
meeting following each of their 74th birthdays.
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 Marshall Stockholders, by the mutual consent of
Marshall and Mercshares; (b) by Mercshares if at any time Mercshares receives
information from any regulatory authority, which by law is required to approve
or otherwise act upon 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 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 such transactions will be so
challenged; (c) by Mercshares if the Marshall Board of Directors recommends to
the Marshall Stockholders, or Marshall accepts, an Acquisition Proposal, or by
Marshall if, in compliance with the provisions of the Affiliation Agreement, the
Marshall Board of Directors recommends to the Marshall Stockholders, or Marshall
accepts, an
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Acquisition Proposal; and (d) by Mercshares or Marshall if the Merger is not
consummated by November 30, 1998. The Affiliation Agreement provides that in the
case of a termination under (c) above, Marshall shall pay Mercshares a
termination fee of $300,000. The Affiliation Agreement also provides that if the
Affiliation Agreement is terminated by Mercshares by reason of a material breach
by Marshall, or by Marshall by reason of a material breach by Mercshares, and
such breach involves an intentional, willful or grossly negligent
misrepresentation or breach of covenant, the breaching party shall be liable to
the nonbreaching party for all costs and expenses reasonably incurred by such
nonbreaching party.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Pursuant to 12 U.S.C. (section mark) 215a(b), the holders of the Marshall
Common Stock are entitled to dissent from the Merger and obtain payment for the
value of their shares in the event that the Merger is consummated. If (a) the
Merger is approved by the requisite number of holders of the Marshall Common
Stock; and (b) the Merger receives all necessary regulatory approvals and is
consummated, then any stockholder of Marshall who has voted against the Merger
at the Marshall Special Meeting, or who has given notice in writing at or prior
to such meeting to Donald Yowell, President of Marshall, or Carol C. Merewether,
Corporate Secretary of Marshall, that he or she dissents from the Merger, shall
be entitled to receive the value of the shares so held in cash, upon written
request made to Marshall, accompanied by surrender of his or her stock
certificates, at any time before thirty days after the date of consummation of
the Merger.
The value of the shares of any dissenting stockholder shall be ascertained,
as of the Effective Date of the Merger, by an appraisal made by a committee of
three persons, composed of (1) one appraiser selected by the vote of the holders
of a majority of the stock, the owners of which are entitled to payment in cash;
(2) one appraiser selected by the directors of Marshall; and (3) one appraiser
selected by the two appraisers so selected. The valuation agreed upon by any two
of the appraisers shall govern. If the value so fixed shall not be satisfactory
to any dissenting stockholder who has requested the payment, that stockholder
may, within five days after being notified of the appraised value of the shares,
appeal to the Comptroller of the Currency, who shall cause a reappraisal to be
made. Any such reappraisal shall be final and binding as to the value of the
shares of the appellant.
If, within 90 days from the date of consummation of the Merger, for any
reason one or more of the appraisers is not selected as provided above, or the
appraisers fail to determine the value of such shares, the Comptroller of the
Currency shall, upon written request of any interested party, cause an appraisal
to be made which shall be final and binding on all parties. The expenses of the
Comptroller of the Currency in making the reappraisal or the appraisal, as the
case may be, shall be paid by Interim Bank as the resultant bank and renamed as
Marshall National Bank and Trust Company. The value of the shares ascertained
shall be promptly paid to the dissenting stockholders by Interim Bank.
Under the statute, the shares of stock of the surviving corporation which
would have been delivered to dissenting stockholders had they not requested
payment shall be sold at an advertised public auction. If the price received is
greater than the amount paid to any dissenting stockholder, the excess of such
sales price shall be paid to the dissenting stockholder. Under the Affiliation
Agreement, only shares of Mercshares Common Stock are to be issued to the
Marshall Stockholders, and no shares of the common stock of Interim Bank are to
be issued. Mercshares therefore intends to take the position that this provision
does not apply to the Merger.
The foregoing discussion describes the provisions of the National Bank Act,
12 U.S.C. (section mark) 215a(b), deemed material by Marshall; however,
stockholders are urged to review the section in its entirety, which is included
as Annex C to this Prospectus and Proxy Statement. Any stockholder who intends
to dissent from the Merger should review the text of those provisions carefully
and should also consult with his or her attorney. NO FURTHER NOTICE OF THE
EVENTS GIVING RISE TO DISSENTER'S RIGHTS OR ANY STEPS ASSOCIATED THEREWITH WILL
BE FURNISHED TO MARSHALL STOCKHOLDERS, EXCEPT AS INDICATED ABOVE OR OTHERWISE
REQUIRED BY LAW.
Any dissenting stockholder who exercises his or her right to be paid the
value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for his or her shares. The amount
of gain or loss and its character as ordinary income or capital gain will be
determined in accordance with applicable provisions of the Internal Revenue
Code. See "THE MERGER -- Certain Federal Income Tax Consequences."
19
<PAGE>
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
certain directors and officers of Marshall and persons related to them who owned
an aggregate of 172,420 shares as of November 20, 1997 (approximately 45%) of
the outstanding Marshall Common Stock (the "Supporting Marshall Affiliates")
each entered into a Support Agreement (the "Support Agreement") with Mercshares.
Pursuant to the Support Agreement, each of the Supporting Marshall 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 Marshall
Common Stock owned or acquired by such Supporting Marshall Affiliate during the
term of the Support Agreement; (b) subject to the provisions of Section 1.11 of
the Affiliation Agreement with respect to the fiduciary obligations as directors
of Marshall, 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 Marshall, and to
use all commercially reasonable efforts to assure that Marshall takes no such
steps; (c) to promptly advise Mercshares of any such inquiry or proposal of
which such Supporting Marshall Affiliate has knowledge; (d) to vote his or her
shares of Marshall 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, subject to the provisions
of Section 1.11 of the Affiliation Agreement with respect to the fiduciary
obligations as directors of Marshall. The terms of the Support Agreement expire
upon the termination of the Affiliation Agreement.
AFFILIATE UNDERTAKINGS
In connection with the execution and delivery of the Affiliation Agreement,
the Supporting Marshall 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 Marshall Stockholders. See "THE
MERGER -- Resale of Mercshares Common Stock After the Merger by Controlling
Persons."
DESCRIPTION OF MARSHALL
GENERAL
In 1905, Marshall was organized under the name of The Bank of Marshall as a
Virginia state chartered bank. It was converted to its present national charter
in 1912. In 1927, Marshall added a Trust Department and formally changed its
name to Marshall National Bank and Trust Company. At September 30, 1997,
Marshall had 351 record holders of its capital stock.
As of September 30, 1997, Marshall had total assets of approximately $75.5
million, total deposits of approximately $66.6 million, and total stockholders'
equity of approximately $8.5 million.
Marshall is a community-oriented institution and provides deposit, loan and
other general banking services to individuals, businesses, institutions and
local government entities, including demand and time deposit accounts,
commercial and consumer loans, residential mortgages and home equity loans, and
safe deposit boxes.
Marshall 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.
Marshall's main executive office is located in Marshall, Virginia. Marshall
operates a total of two banking locations, including a branch in Warrenton,
Virginia. The main office is owned by Marshall, and Marshall owns the Warrenton
branch building and improvements but leases the site upon which it is located.
BUSINESS
SERVICES OF THE BANK
Marshall provides service-intensive commercial and retail banking services
to small and medium sized businesses and to individuals. It also offers a full
range of trust services for individuals. The following types of services are
offered by Marshall:
20
<PAGE>
COMMERCIAL SERVICES
(Bullet) Loans, including working capital loans and lines of credit,
demand, term and time loans, loans for real estate land
acquisition, development and construction, equipment and inventory
financing, and loans for agricultural purposes
(Bullet) Commercial checking, money market, savings accounts and
certificates of deposit
(Bullet) Automated Clearing House (ACH) origination
(Bullet) Merchant Bank Card Services
(Bullet) Night Depository
(Bullet) Loans/Lease Collection Services
(Bullet) Purchase and Management of Receivables
RETAIL SERVICES
(Bullet) Transaction accounts, including checking and NOW accounts.
(Bullet) Savings accounts
(Bullet) Money market deposit accounts
(Bullet) Certificates of deposit
(Bullet) Individual retirement accounts
(Bullet) Christmas clubs
(Bullet) Installment and home equity loans and lines of credit
(Bullet) Residential construction and first mortgage loans
(Bullet) 24-hour automated teller machines with access to the HONOR and
CIRRUS systems
(Bullet) Travelers checks and safe deposit boxes
(Bullet) Wire transfer services
TRUST SERVICES
(Bullet) Estate Settlement
(Bullet) Personal Trust Administration
(Bullet) Guardian and Committee Supervisor
(Bullet) Investment Management
(Bullet) Bookkeeping, Custody and Safeguarding of Assets
(Bullet) Investment or Custodial Agent for Individual Fiduciaries
(Bullet) Student Loans, Administered Under Trusts for that Purpose
LENDING ACTIVITIES
At September 30, 1997, Marshall's gross loan portfolio (excluding
non-accrual loans) totaled approximately $53.5 million, representing 70.9% of
its total assets of $75.5 million. The principal categories of loans in
Marshall's portfolio are residential real estate mortgage, consumer, commercial,
real estate development and construction, and commercial real estate.
21
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth Marshall's loans
by major categories as of September 30, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-----------------
AMOUNT PERCENT
------- ------
<S> <C> <C>
(IN THOUSANDS)
Real Estate:
Development and construction........................................................................... $ 4,598 8.51%
Secured by farmland.................................................................................... 3,888 7.20%
Secured by 1-4 family residential properties........................................................... 24,860 46.02%
Other Real Estate...................................................................................... 10,078 18.66%
Loans to finance agricultural production................................................................. 655 1.20%
Commercial and industrial loans.......................................................................... 7,271 13.46%
Consumer loans........................................................................................... 2,607 4.83%
All other loans.......................................................................................... 63 0.12%
-------
Totals................................................................................................... $54,020 100%
------- ------
------- ------
</TABLE>
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. Marshall originates mortgage loans
with a three or five-year fixed rate period, after which the loans are typically
renewed for another fixed rate period. At September 30, 1997, $24.9 million or
46.02% of Marshall's total loan portfolio consisted of this type of residential
mortgage loans. Marshall has advanced approximately $3.9 million, or 7.2%, of
the September 30, 1997 total loan portfolio to farmers.
Marshall requires fire and extended coverage casualty insurance protecting
the properties securing its mortgage loans. Marshall does not escrow funds for
real estate taxes or hazard insurance. The properties securing all of Marshall's
residential mortgage loans are appraised by appraisers approved by Marshall's
board of directors.
Home equity loans are originated by Marshall typically for up to 80% of the
appraised value, less the amount of any existing prior liens on the property.
Home equity loans generally consist of a ten-year revolving advance period.
Interest rates are adjusted monthly and are tied to the Wall Street Journal's
published prime rate on the first day of each month. Marshall secures these
loans with mortgages on the homes (generally a second mortgage). As of September
30, 1997, approximately $891 thousand, or 1.65%, of Marshall's total loan
portfolio consisted of home equity loans.
COMMERCIAL LOANS. Commercial loans are made for business purposes and may
be secured by real estate, accounts receivable, inventory, equipment, stocks,
cash, or other assets. At September 30, 1997, approximately $7.3 million, or
13.46%, of Marshall's' total loan portfolio consisted of commercial business
loans. The financial condition and cash flows of commercial borrowers are
closely monitored by the submission of corporate financial statements, personal
financial statements and income tax returns. The frequency of submissions of
required information depends on the size and complexity of the credit and the
collateral which secures the loan.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. Marshall provides interim
residential real estate development and construction loans to builders,
developers, and persons who will ultimately occupy the single family dwellings.
The real estate development and construction loan portfolio primarily represents
loans for the construction of owner occupied single family dwellings.
Marshall makes residential real estate development and construction loans
generally to provide interim financing on property during the construction
period. These loans are generally made for 80% or less of the appraised value of
the property. Residential real estate development and construction loan funds
are disbursed periodically as stages of completion are attained based upon site
inspections.
Marshall has limited losses in this area of lending through careful
monitoring of development and construction loans with on-site inspections and
control of disbursements on loans in process. Further, to assure that reliance
is not placed solely upon the value of the underlying collateral, Marshall
considers the financial condition and reputation of the borrower and any
guarantors, the amount of the borrower's equity in the project, independent
appraisals, cost estimates and pre-construction sale information.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. Marshall also originates mortgage
loans secured by commercial real estate. At September 30, 1997, $10.1 million,
or 18.66%, of Marshall's total loan portfolio consisted of commercial mortgage
loans. Such loans are primarily secured by retail buildings, warehouses and
general purpose business space. Although terms vary,
22
<PAGE>
Marshall's commercial mortgages generally have maturities of three years or
less. Marshall seeks to reduce the risks associated with commercial mortgage
lending by generally lending in its market area, using conservative
loan-to-value ratios and obtaining periodic financial statements and tax returns
from borrowers to perform annual term loan reviews.
CONSUMER LOANS. Marshall offers a variety of consumer loans to provide a
full range of financial services to its customers and because such loans
generally have higher interest rates than other loans. At September 30, 1997,
$2.6 million, or 4.83%, of Marshall'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,
Marshall faces strong competition in all areas of its operations. Marshall
competes principally with approximately six other commercial banks which operate
in the vicinity of its offices, many of which have resources substantially
greater than its own. Marshall also encounters competition from thrift
institutions, consumer loan companies, brokerage firms, investment companies,
credit unions and other financial institutions. This competition comes from
institutions operating in the Fauquier County area, which include community
commercial banks, savings banks, thrifts, and credit unions as well as branches
of large regional banks such as F&M National Corporation, Crestar, Jefferson
National and First Virginia Bank. Marshall's most direct competition for
deposits comes from these financial institutions as well as mutual funds and
stockbrokers. Marshall competes with banking entities, mortgage banking
companies, and other institutional lenders for loans. The competition for loans
varies from time to time based on such factors as the general availability of
lending funds, the demand for loans, general and local economic conditions,
current interest rate levels, and other factors which are not readily
predictable.
EMPLOYEES
As of September 30, 1997, Marshall had 46 employees, of which 17 were
officers, 26 were full-time employees and three were part-time employees.
PROPERTIES
Marshall's main banking office is located at 8372 West Main Street in
Marshall, Virginia. Marshall owns 1.8532 acres housing the main office building,
two commercial properties leased to a restaurant, and one residence leased to an
individual. Marshall's other branch is located at 615 Branch Drive in Warrenton,
Virginia, and Marshall leases the real estate on which it is located. Other real
estate owned by Marshall includes seven lots, all of which are for sale and
three of which are under contract.
DIVIDENDS
Marshall has declared and paid cash dividends on Marshall Common Stock of
$0.55 per share for 1995, $0.65 per share for 1996 and $0.70 for 1997. Any
future determination as to payment of cash dividends will be at the discretion
of Marshall's Board of Directors and will, subject to the Affiliation Agreement,
depend on Marshall's results of operations, financial condition, capital and
regulatory requirements and other factors deemed relevant by Marshall Board of
Directors. Since the execution of the Affiliation Agreement, Marshall has also
been subject to certain restrictions on the declaration and payment of
dividends. See "THE MERGER -- Conditions to Merger."
As a depository institution whose deposits are insured by the FDIC,
Marshall may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. Marshall currently is not in
default under any of its obligations to the FDIC. In addition, FDIC regulations
also impose certain minimum capital requirements which affect the amount of cash
available for the payment of dividends by regulated banking institutions such as
Marshall. Marshall is also subject to limitations imposed by FDIC regulations
with respect to any dividends, including cash dividends, payments to repurchase
or otherwise acquire its shares, payments to shareholders of another institution
in a cash-out merger, and other distributions charged against capital. Under
applicable federal laws, the Comptroller of the Currency restricts, without
prior approval, the total dividend payments of Marshall in any calendar to the
net profits of that year, as defined, combined with the net profits for the two
preceding years. As of September 30, 1997, Marshall had the capacity to pay up
to $1,906,909 in dividends.
PRICE RANGE OF COMMON STOCK
Trades in Marshall Common Stock have been rare. At September 30, 1997,
there were approximately 351 holders of record of the Common Stock. The most
recent trade of which Marshall is aware occurred on November 26, 1997, and was
for 700 shares at $53.50 per share (which trade was after the announcement of
the proposed Merger). The following table sets forth the range of high and low
sales prices for Marshall Common Stock for all trades reported to Marshall
during the fiscal quarters indicated. Due to the limited number of trades such
reported trade prices may not be meaningful. For the first three quarters of
1996, Marshall Common Stock was traded at Marshall's main office. In the fourth
quarter of 1996 Marshall Common Stock became quoted on the Nasdaq's NOTC
Bulletin Board under the symbol "MNBT".
23
<PAGE>
<TABLE>
<CAPTION>
STOCK PRICES(1)
----------------
HIGH LOW
------ ------
<S> <C> <C>
1996
1st Quarter................................................................................................ $27.00 $27.00
2nd Quarter................................................................................................ 27.00 27.00
3rd Quarter................................................................................................ 27.00 27.00
4th Quarter................................................................................................ 26.50 24.50
1997
1st Quarter................................................................................................ 26.50 24.50
2nd Quarter................................................................................................ 27.50 26.25
3rd Quarter................................................................................................ 28.00 28.00
4th Quarter through December 30, 1997...................................................................... 53.50 29.50
</TABLE>
- ---------------
(1) The last trade of which Marshall is aware prior to the announcement of the
proposed Merger was for 300 shares at $31.00 per share on November 11, 1997.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the number of shares of Marshall Common Stock
beneficially owned by directors and executive officers of Marshall, and each
person known by Marshall to beneficially own more than five per cent of Marshall
Common Stock, as of December 31, 1997. Unless otherwise indicated, the
individuals named below have sole voting and investment power over all shares
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OF MARSHALL
COMMON STOCK BENEFICIALLY
OWNED
---------------------------
NAME AND ADDRESS (1) NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
George R. Thompson, Jr., Director (2)............................................................. 125,790 32.51%
Thomas W. di Zerega, Director (3)................................................................. 28,000 7.24
Randolph S. E. Carter, Director................................................................... 585 *
William Hunter de Butts, Jr., Director............................................................ 4,692 1.21
Thomas B. Glascock, Director...................................................................... 2,190 *
Harvey L. Pearson, Director (4)................................................................... 4,005 1.03
Richard C. Riemenschneider, Director.............................................................. 2,190 *
George N. Slater, Director, Sr. Executive Vice President and Trust Officer (5).................... 1,300 *
Evelyn D. Trumbo, Director (6).................................................................... 1,250 *
Lewis S. Wiley, Director.......................................................................... 1,243 *
Donald R. Yowell, Director, President and Chief Executive Officer (7)............................. 3,140 *
Michael A. Ewing, Senior Vice President and Senior Credit Officer (8)............................. 1,096 *
Anita L. Shull, Senior Vice President and Chief Financial Officer (9)............................. 1,150 *
Joseph L. Rutherford, Vice President and Cashier (10)............................................. 810 *
Barbara B. Gilbert, Vice President and Auditor (11)............................................... 2,100 *
Carol C. Merewether, Vice President and Corporate Secretary (12).................................. 910 *
All directors and executive officers as a group (16 persons) (13)................................. 180,451 46.63
</TABLE>
- ---------------
* Indicates holdings of less than one percent.
(1) Each stockholder's address is at Marshall's principal executive office
unless otherwise noted.
(2) Includes 598 shares for which Mr. Thompson is custodian for his children
and 74,805 shares owned by a trust of which Mr. Thompson serves as trustee.
(3) Includes 6,700 shares owned by a self-directed individual retirement
account of which Mr. di Zerega is beneficial owner and has sole power to
vote.
(4) Includes 1,235 shares owned jointly with spouse.
(5) Includes 800 shares issuable upon the exercise of options that are
exercisable upon approval of the Option Plan by the Marshall Stockholders.
(6) Includes 250 shares owned jointly with spouse.
(7) Includes 1,600 shares issuable upon the exercise of options that are
exercisable upon approval of the Option Plan by the Marshall Stockholders.
(8) Includes 25 shares for which Mr. Ewing is custodian for his children and
800 shares issuable upon the exercise of options that are exercisable upon
approval of the Option Plan by the Marshall Stockholders.
(9) Includes 350 shares owned jointly with spouse and 800 shares issuable upon
the exercise of options that are exercisable upon approval of the Option
Plan by the Marshall Stockholders.
(10) Includes 10 shares owned jointly with spouse and 800 shares issuable upon
the exercise of options that are exercisable upon approval of the Option
Plan by the Marshall Stockholders.
(11) Includes 600 shares issuable upon the exercise of options that are
exercisable upon approval of the Option Plan by the Marshall Stockholders.
(12) Includes 800 shares issuable upon the exercise of options that are
exercisable upon approval of the Option Plan by the Marshall Stockholders.
(13) Includes shares owned as described in notes (1) through (12).
24
<PAGE>
SELECTED FINANCIAL INFORMATION
The income statement data, per share data, and balance sheet data contained
in the following summary financial data for the five years ended December 31,
1996 are derived from the audited historical financial statements of Marshall.
The financial data for the nine months ended September 30, 1997 and 1996 are
derived from unaudited financial statements. The summary financial data should
be read in conjunction with the historical financial statements and the notes
thereto of Marshall included elsewhere in this Prospectus and Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Net interest income...................... $ 2,681 $ 2,409 $ 3,289 $ 3,041 $ 2,897 $ 2,576 $ 2,234
(Recovery of) Loan losses................ -- -- (90) (78) (98) (381) (414)
Noninterest income....................... 468 443 623 701 611 884 541
Noninterest expense...................... 2,021 1,890 2,657 2,744 2,634 2,618 2,546
Income tax expense....................... 285 243 396 337 304 337 148
Net income............................... $ 843 $ 719 $ 949 $ 739 $ 668 $ 886 $ 494
Per Share Data:
Net income............................... $ 2.22 $ 1.89 $ 2.50 $ 1.94 $ 1.76 $ 2.33 $ 1.30
Cash dividends........................... 0.30 0.20 0.65 0.55 0.50 0.35 0.15
Book value at period end................. 22.53 20.21 20.50 18.68 16.70 16.22 14.24
Average shares outstanding............... 380 380 380 380 380 380 380
Balance Sheet Data at period end:
Total assets............................. $75,525 $74,961 $75,244 $73,851 $68,182 $68,512 $65,933
Loans, net............................... 53,494 46,019 48,469 42,786 38,407 30,065 32,772
Securities............................... 16,999 22,031 20,305 20,969 22,056 21,242 17,441
Deposits................................. 66,597 66,884 67,198 66,483 61,568 59,955 60,155
Stockholders' equity..................... 8,561 7,679 7,790 7,098 6,346 6,162 5,409
Performance Ratios:(1)
Return on average assets................. 1.48% 1.28% 1.25% 0.99% 0.89% 1.27% 0.74%
Return on average equity................. 13.73% 12.94% 12.64% 10.68% 10.47% 15.32% 9.51%
Net interest margin...................... 5.00% 4.59% 4.70% 4.61% 4.72% 4.24% 3.72%
Asset Quality Ratios:(1)
Allowance for loan losses to period end
loans.................................. 0.97% 1.25% 1.03% 1.19% 1.50% 2.27% 3.02%
Allowance for loan losses to nonaccrual
loans.................................. 114.85% 87.41% 97.68% 66.97% 91.81% 76.51% 45.63%
Nonperforming assets to period end loans
and other real estate owned(2)......... 1.18% 1.98% 1.47% 2.65% 2.97% 4.83% 8.15%
Net charge-offs (recoveries) to average
loans.................................. (0.04)% (0.15)% (0.17)% (0.03)% 0.05% (0.18)% 1.39%
Capital and Liquidity Ratios:
Leverage................................. 11.31% 10.40% 10.51% 9.89% 9.84% 9.28% 8.19%
Risk based:
Tier 1 capital........................... 17.15% 18.41% 17.48% 18.28% 18.56% 19.79% 16.50%
Total capital............................ 18.20% 19.66% 18.60% 19.53% 19.81% 21.04% 17.75%
</TABLE>
- ---------------
(1) Annualized for the nine months ended September 30, 1997 and 1996.
(2) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the financial condition and results of operations of Marshall. The
review should be read in conjunction with Marshall's financial statements and
accompanying notes included elsewhere in this Prospectus and Proxy Statement.
OVERVIEW
As of September 30, 1997, Marshall had total assets of $75.5 million, total
loans of $53.5 million, total deposits of $66.6 million, and total stockholders'
equity of $8.6 million. Marshall's return on average equity for the nine months
ended September 30, 1997, (on an annualized basis) was 13.73% compared to 12.94%
for the same period in 1996. Marshall's return on average assets for the first
nine months of 1997 (on an annualized basis) increased to 1.48% from 1.28% in
the prior year comparable period.
Marshall had net income for the nine months ended September 30, 1997, of
$843 thousand compared to $719 thousand during the same period in 1996,
representing an increase of 17.3%. Earnings per share for the first nine months
of 1997 increased to $2.22 from $1.89 in the prior year. The increase in
earnings was attributable to higher net interest margin produced by higher
average yield on earning assets and a lower average cost of interest-bearing
liabilities. Net interest income for the nine months ended September 30, 1997,
increased 11.3%, and non-interest income increased 5.7%, while non-interest
expenses increased only 7% over the comparable period in 1996.
Marshall's loan portfolio has grown 16.3% since September 30, 1996, with
prior years' growth for years ended December 31, 1996, 1995 and 1994, at 13.3%,
11.4% and 27.9%, respectively. Despite the strong growth in Marshall's
portfolio, Marshall's level of nonperforming assets continues to decline. At
September 30, 1997, Marshall has reduced its ratio of non-performing assets to
total loans to 1.18% and a ratio of net charge-offs to average total loans to
below 0% as recoveries exceed charge-offs. Marshall incurred net recoveries
during the nine month period ending September 30, 1997 of $21 thousand, compared
to recoveries of $66 thousand for the same period in 1996. Marshall's allowance
for loan losses at September 30, 1997, represented .97% of total period-end
loans compared to 1.03% for the year ended December 31, 1996.
NET INCOME
Net income was $843 thousand, or $2.22 per common share, for the first nine
months of 1997, compared to net income of $719 thousand, or $1.89 per common
share, for the first nine months of 1996. The increase in net income resulted
from a $272 thousand increase in net interest income and a $25 thousand increase
in non-interest income, which was partially offset by a $131 thousand increase
in non-interest expense and a $42 thousand increase in income tax expense.
Net income was $949 thousand, or $2.50 per share of Marshall Common Stock
for 1996, a 28.5% increase compared to net income of $739 thousand or $1.94 per
common share for 1995. The increase in net income in 1996 compared to 1995
resulted principally from an increase of $248 thousand in net interest income,
$12 thousand in recovery from loan losses and a decline of $87 thousand in
non-interest expense, which was offset by a decrease in non-interest income of
$78 thousand and $59 thousand increase in income tax expense. The decline in
non-interest expense in 1996 was a result of reducing operating costs.
Net income was $739 thousand or $1.94 per common share for 1995, a 10.7%
increase compared to $668 thousand or $1.76 per common share for 1994. The
increase in income from 1994 to 1995 resulted from a $144 thousand increase in
net interest income and a $90 thousand increase in non-interest income which was
partially offset by a $110 thousand increase in non-interest expense, $33
thousand increase in income tax expense, and a decline in recovery from loan
losses of $20 thousand.
NET INTEREST INCOME
Net interest income is the major component of Marshall's earnings and is
equal to the amount by which interest income exceeds interest expense.
Marshall's earning assets are composed primarily of loans and securities, while
deposits and short-term borrowings represent the major portion of
interest-bearing liabilities. Changes in the volume and mix of these assets and
liabilities, as well as changes in the yields earned and rates paid, determine
changes in net interest income. Net interest margin is calculated by dividing
tax-equivalent net interest income by average earning assets, and represents
Marshall's net yield on its earning assets.
26
<PAGE>
Net interest income was $2.7 million for the first nine months of 1997,
11.3% greater than the $2.4 million reported during the comparable period of
1996. This improvement is primarily attributable to volume increases in the loan
portfolio resulting from the stronger loan demand, and improvement in the yield
on securities. The average balance of the loan portfolio was $51.6 million for
the nine months ended September 30, 1997, up 15.2% or $6.9 million, over the
same period in 1996. The average balance of the securities portfolio was $18.6
million for the nine months ended September 30, 1997, down 16.6% or $3.7 million
over the comparable period in 1996. The volume increases in the loan portfolio
and the improved yield on securities have increased Marshall's yield on earning
assets to 8.04% through the first nine months in 1997 compared to 7.85% during
the same period in 1996. During the same comparative periods, Marshall's cost of
funds decreased from 3.86% to 3.83%.
The increase in yield on earning assets and decrease in cost of funds
resulted in an increase in Marshall's net interest margin from 4.70% for the
year ended 1996 to 5.0% for the first nine months in 1997. Net interest margin
increased in 1996 to 4.70% from 4.61% in 1995.
Marshall's net interest margin is affected by changes in the amount and mix
of earning assets and interest-bearing liabilities, referred to as a "volume
change." It is also affected by changes in yields earned on earning assets and
rates paid on interest-bearing deposits and other borrowed funds, referred to as
a "rate change." The following table sets forth for each category of earning
assets and interest-bearing liabilities, the average amounts outstanding, the
interest earned or incurred on such amounts and the average rate earned or
incurred for the nine months ended September 30, 1997, and for the years ended
December 31, 1996, 1995, and 1994. The table also sets forth the average rate
earned on total earning assets, the average rate paid on total interest-bearing
liabilities, and the net interest margin on average total earning assets for the
same periods.
27
<PAGE>
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES AND AVERAGE YIELDS AND RATES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997
----------------------------- 1996
AVERAGE -----------------------------
INTEREST YIELD/ INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ YIELD/
BALANCE EXPENSE (1) BALANCE EXPENSE RATE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest bearing assets:
Investment securities, taxable................................... $13,718 $ 623 6.05% $18,058 $ 1,060 5.87%
Investment securities, nontaxable (3)............................ 4,913 176 7.24% 4,087 200 7.41%
Loans (2)........................................................ 51,550 3,458 8.95% 45,419 4,089 9.00%
Federal funds sold............................................... 1,268 51 5.36% 2.449 147 6.00%
------- ------- ------- -------
Total earning assets........................................ 71,449 4,306 8.04% 70,013 5,496 7.85%
------- ------- ------- -------
NON-EARNING ASSETS:
Cash and due from banks.......................................... 2,564 2,815
Other assets..................................................... 2,010 1,937
------- -------
Total non-earning assets.................................... 4,574 4,752
------- -------
Total Assets..................................................... $76,023 $74,765
------- -------
------- -------
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand (NOW) deposits......................... $ 8,198 $ 122 1.99% $ 8,609 $ 190 2.21%
Money market deposits.......................................... 10,790 221 2.73% 12,175 336 2.76%
Savings deposits............................................... 7,940 145 2.44% 7,932 201 2.53%
Time deposits > $100,000....................................... 3,745 145 5.16% 3,042 153 5.03%
Time deposits < $100,000....................................... 25,922 982 5.05% 25,374 1,327 5.23%
Federal funds purchased........................................ 167 12 9.59% 0 0 0.00%
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities.......................... 56,762 1,627 3.83% 57,132 2,207 3.86%
------- ------- ------- ------- ------- -------
NON-INTEREST BEARING LIABILITIES:
Demand deposits and other liabilities............................ 11,076 10,123
------- -------
Total Liabilities........................................... 67,838 67,255
Stockholders' equity............................................. 8,185 7,510
------- -------
Total liabilities and stockholders' equity.................. $76,023 $74,765
------- -------
------- -------
Interest rate spread............................................. 4.21% 3.99%
Net interest margin.............................................. $ 2,681 5.00% $ 3,289 4.70%
------- -------
------- -------
</TABLE>
- ---------------
(1) September 30, 1997 average yield/rate has been annualized for the nine
months ended September 30, 1997.
(2) Non-accrual loans have been included in the average balances.
(3) Non-taxable securities yields are on a tax-equivalent basis.
(4) Average balances are calculated using month-end balances.
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
- -----------------------------
1995 1994
- ----------------------------- -----------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- -------- ------- ------- ------- ------- -------
$ 19,116 $ 1,091 5.71% $20,079 $ 1,114 5.55%
2,389 124 7.86% 2,452 152 9.39%
41,386 3,730 9.01% 34,625 3,126 9.03%
3,103 178 5.74% 4,201 189 4.50%
- -------- ------- ------- -------
65,994 5,123 7.65% 61,357 4,581 7.47%
- -------- ------- ------- -------
2,106 2,937
1,662 2,334
- -------- -------
3,768 5,271
- -------- -------
$ 69,762 $66,628
- -------- -------
- -------- -------
$ 6,565 $ 163 2.48% $ 6,933 $ 175 2.52%
11,940 365 3.06% 14,024 380 2.71%
8,262 239 2.89% 8,282 231 2.79%
2,668 126 4.72% 1,993 95 4.77%
23,442 1,189 5.07% 20,573 803 3.90%
0 0 0.00% 0 0 0.00%
- -------- ------- ------- ------- ------- -------
52,877 2,082 3.94% 51,805 1,684 3.25%
- -------- ------- ------- ------- ------- -------
9,968 8,445
- -------- -------
62,845 60,250
6,917 6,378
- -------- -------
$ 69,762 $66,628
- -------- -------
- -------- -------
3.82% 4.22%
$ 3,041 4.61% $ 2,897 4.72%
------- -------
------- -------
</TABLE>
29
<PAGE>
The following table describes the impact on the interest income of Marshall
resulting from changes in average balances and average rates for the periods
indicated.
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO COMPARED TO
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO TO
------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
---- ------ ----- ---- ------ ---- ----- ------ ----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans, net............................ $ 7 $ 459 $ 466 $ (4) $363 $359 $ (7) $ 611 $604
Investment securities, taxable........ 37 (212 ) (175) 32 (63) (31) 35 (58 ) (23)
Investment securities, nontaxable..... (4) 35 31 (7) 83 76 (24) (4 ) (28)
Federal funds sold.................... (8) (70 ) (78) 8 (39) (31) (214) 203 (11)
---- ------ ----- ---- ------ ---- ----- ------ ----
Total interest income............. 32 212 244 29 344 373 (210) 752 542
---- ------ ----- ---- ------ ---- ----- ------ ----
INTEREST PAID ON:
Interest checking deposits............ (18) (7 ) (25) (15) 42 27 (3) (9 ) (12)
Money market deposits................. (3) (32 ) (35) (36) 7 (29) 100 (115 ) (15)
Savings deposits...................... 0 (1 ) (1) (29) (9) (38) 9 (1 ) 8
Time deposits > $100,000.............. (9) 25 16 9 18 27 (1) 32 31
Time deposits < $100,000.............. (20) 25 5 38 100 138 264 122 386
Federal funds purchased............... 12 0 12 0 0 0 0 0 0
---- ------ ----- ---- ------ ---- ----- ------ ----
Total interest expense............ (38) 10 (28) (33) 158 125 369 29 398
---- ------ ----- ---- ------ ---- ----- ------ ----
Net interest income............... $ 70 $ 202 $ 272 $ 62 $186 $248 $(579) $ 723 $144
---- ------ ----- ---- ------ ---- ----- ------ ----
---- ------ ----- ---- ------ ---- ----- ------ ----
</TABLE>
INTEREST SENSITIVITY
An important element of both earnings performance and liquidity is
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
in a specific time interval. The gap can be managed by repricing assets or
liabilities, by selling investments available-for-sale, by replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities repricing in
the same time interval helps to hedge the risk and minimize the impact on net
interest income in periods of rising or falling interest rates.
Marshall evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
30
<PAGE>
The following table illustrates the interest sensitivity gap position of
Marshall as of September 30, 1997. This table presents a position that existed
at one particular day, that changes continually, and that is not necessarily
indicative of Marshall's position at any other time.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
MATURING OR REPRICING IN:
-----------------------------------------------
<S> <C> <C> <C> <C>
3 MONTHS 4-12 OVER 12
OR LESS MONTHS MONTHS TOTAL
-------- ------- ------- -------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
EARNING ASSETS:
Loans (1)............................................................. $ 10,571 $11,195 $32,254 $54,020
Securities............................................................ 1,501 2,950 12,548 16,999
Federal funds sold.................................................... 776 -- -- 776
-------- ------- ------- -------
Total interest-sensitive assets.................................. $ 12,848 $14,145 $44,802 $71,795
-------- ------- ------- -------
-------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Certificates of deposit............................................... $ 4,717 $10,131 $14,809 $29,657
Interest checking..................................................... 7,800 -- -- 7,800
Money market deposits................................................. 10,611 -- -- 10,611
Savings and Club accounts (2)......................................... -- -- 7,876 7,876
-------- ------- ------- -------
Total interest-bearing liabilities............................... $ 23,128 $10,131 $22,685 $55,944
-------- ------- ------- -------
-------- ------- ------- -------
Period gap............................................................ $(10,280) $ 4,014 $22,117
Cumulative gap........................................................ $(10,280) $(6,266) $15,851
Ratio of cumulative interest-sensitive assets to interest-sensitive
liabilities........................................................... 55.60% 81.12% 128.30%
-------- ------- -------
-------- ------- -------
Ratio of cumulative gap to total assets............................... (13.6)% (8.3)% 21.00%
-------- ------- -------
-------- ------- -------
</TABLE>
- ---------------
(1) Includes non-accrual loans.
(2) Marshall has determined that savings and club accounts are not sensitive to
changes in related market rates and, therefore, has allocated them to over
12 months.
SECURITIES
INVESTMENT SECURITIES. The carrying value of investment securities amounted
to $11.1 million at September 30, 1997, compared to $13.4 million at December
31, 1996. The comparison of amortized cost to fair value is shown in Note 2 of
the Notes to the Financial Statements. Note 2 also provides gross unrealized
gains and losses of investment securities. Investment securities consist of the
following:
PORTFOLIO OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------- -------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Book Value:
U.S. Treasury and U.S. governmental agencies............................................. $ 5,977 $ 8,735 $10,892
Securities of U.S. States and Political Subdivisions..................................... 5,118 4,666 2,887
------------- ------- -------
Total Securities.................................................................. $11,095 $13,401 $13,779
------------- ------- -------
------------- ------- -------
</TABLE>
SECURITIES AVAILABLE FOR SALE. Securities available for sale are used as
part of Marshall's interest rate risk management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk, liquidity
needs, the need to increase regulatory capital and other factors. The fair value
of securities available for sale totaled $5.9 million at September 30, 1997,
compared to $6.9 million at December 31, 1996. The comparison of fair market
value to amortized cost is shown in Note 2 of the Notes to Financial Statements.
Note 2 also provides an analysis of gross unrealized gains and losses of
securities available for sale. Securities available for sale consist of the
following:
31
<PAGE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ----------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------ ------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fair Value:
U.S. Treasury and U.S. governmental agencies............................................... $ 5,296 $6,580 $7,090
Securities of U.S. States and Political Subdivisions....................................... 254 -- --
Other Securities........................................................................... 354 324 100
------------- ------ ------
Total Securities.................................................................... $ 5,904 $6,904 $7,190
------------- ------ ------
------------- ------ ------
</TABLE>
Marshall does not hold any derivative instruments.
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at September 30, 1997. The weighted
average yields calculated on the basis of book value of the investment portfolio
and on the interest income of investments adjusted for amortization of premium
and accretion of discount.
INVESTMENT PORTFOLIO -- MATURITY AND YIELDS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
WEIGHTED AFTER ONE WEIGHTED AFTER WEIGHTED AFTER
ONE YEAR AVERAGE TO AVERAGE FIVE YRS. AVERAGE TEN
OR LESS YIELD 5 YEARS YIELD TO 10 YEARS YIELD YEARS
-------- -------- --------- -------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Agency.......................... $ 350 6.82% $ 3,000 5.74% $ 1,964 6.77% $ --
U.S. Treasury........................ 2,499 5.36% 3,524 6.25% -- 0.00% --
Municipal Issues..................... 200 5.72% 1,201 6.57% 2,817 7.20% 1,150
-------- --- --------- --- ----------- --- ------
Total Securities(1).................. $3,049 5.55% $ 7,725 6.10% $ 4,781 7.03% $1,150
-------- --- --------- --- ----------- --- ------
-------- --- --------- --- ----------- --- ------
<CAPTION>
WEIGHTED
AVERAGE
YIELD
--------
<S> <C>
U.S. Agency.......................... 0.00%
U.S. Treasury........................ 0.00%
Municipal Issues..................... 7.49%
---
Total Securities(1).................. 7.49%
---
---
</TABLE>
- ---------------
(1) Excludes Federal Reserve Bank stock, Community Banker's Bank stock, FHLB
stock and Bankers' Title Shenandoah, LLC.
As of September 30, 1997, Marshall held securities of the Commonwealth of
Virginia with amortized cost of $2,158,037 and market value of $2,194,979, which
exceeded 10% of stockholders' equity.
LOAN PORTFOLIO
Marshall's loan portfolio is comprised of commercial loans, construction
loans, residential and commercial real estate loans, and consumer installment
loans. Marshall's primary market is Fauquier County and the surrounding counties
adjacent to Fauquier County.
Net loans consist of total loans minus the allowance for loan losses. Net
loans were $53.5 million at September 30, 1997, a 16.2% increase from September
30, 1996. Net loans were $48.5 million at December 31, 1996, 13.3% greater than
net loans of $42.8 million at December 31, 1995. The average loans as a
percentage of average earning assets was 64.9% and 62.7% for the years ended
December 31, 1996, and 1995, respectively, and 72.2% for the nine months ended
September 30, 1997. Marshall does not and has not had any loans outstanding to
foreign countries or for highly leveraged transactions.
In the normal course of business, Marshall makes various commitments and
incurs certain contingent liabilities which are disclosed but not reflected in
the financial statements. These commitments and contingent liabilities include
commitments to extend credit and standby letters of credit. At September 30,
1997, commitments for financial standby letters of credit totaled $1.4 million
and commitments to extend credit were $8.2 million. Financial letters of credit
totaled $992 thousand and $613 thousand as of December 31, 1996, and 1995,
respectively. Commitments to extend credit totaled $6.5 million and $3.6 million
at December 31, 1996, and 1995, respectively.
Interest income on installment, commercial, and residential loans is
computed on the principal balance outstanding. Most variable rate loans carry an
interest rate tied to the Marshall prime rate. The Home Equity Lines of Credit
are tied to the Wall Street Journal prime rate.
32
<PAGE>
The following table summarizes the composition of the loan portfolio at the
dates indicated.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------- -------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Construction and land development...................................................... $ 4,598 $ 1,952 $ 1,210
Secured by Farmland.................................................................... 3,888 3,687 4,082
Secured by 1-4 Family Residential...................................................... 24,860 23,411 21,420
Other real estate loans................................................................ 10,078 10,290 8,194
------------- ------- -------
Real estate mortgage subtotal.......................................................... 43,424 39,340 34,906
Loans to Farmers......................................................................... 655 778 306
Commercial and industrial loans.......................................................... 7,271 6,193 5,305
Loans to individuals..................................................................... 2,607 2,611 2,763
All other loans.......................................................................... 63 52 23
------------- ------- -------
Total loans....................................................................... 54,020 48,974 43,303
Allowance for loan losses.............................................................. (526) (505) (517)
------------- ------- -------
Net loans......................................................................... $53,494 $48,469 $42,786
------------- ------- -------
------------- ------- -------
</TABLE>
The following table presents the maturities or repricing periods of
selected loans outstanding at September 30, 1997:
MATURITY AND RATE SENSITIVITY OF LOANS
<TABLE>
<CAPTION>
OVER ONE YEAR OVER FIVE
THROUGH FIVE YEARS YEARS
ONE YEAR --------------------------- ----------
OR LESS FIXED RATE FLOATING RATE FIXED RATE
-------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial & Agriculture..................................... $3,452 $3,718 $ 727 $290
Real Estate -- Construction.................................. 4,598 -- -- --
-------- ---------- ------------- ----------
Total........................................................ $8,050 $3,718 $ 727 $290
-------- ---------- ------------- ----------
-------- ---------- ------------- ----------
<CAPTION>
FLOATING RATE
-------------
<S> <C>
Commercial & Agriculture..................................... $ --
Real Estate -- Construction..................................
-------------
Total........................................................ --
-------------
-------------
</TABLE>
ASSET QUALITY
Marshall attempts to maintain the allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio. Loan losses are
charged directly to the allowance when they occur, while recoveries are credited
to the allowance. The provision for loan losses is determined periodically by
senior management and lending officers based upon consideration of several
factors, including changes in the character and size of the loan portfolio and
related loan loss experience, a review and examination of overall loan quality
which includes the assessment of problem loans, and an analysis of anticipated
economic conditions in the market area. In addition, input from bank regulatory
agencies that regularly review the loan portfolio as part of their examination
process and advice from Marshall's independent accountants are considered in
reviewing and assessing the adequacy of the allowance for loan losses.
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated:
33
<PAGE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31,
-------------------- ---------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average total loans........................................ $51,550 $44,630 $45,419 $41,386 $34,625
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Balance, Beginning of period............................... $ 505 $ 517 $ 517 $ 583 $ 697
Less charge-offs:
Commercial............................................ 6 2 2 23 39
Real Estate........................................... -- -- -- 15 38
Installment........................................... -- 4 4 14 26
------- ------- ------- ------- -------
Total Charge-offs........................................ $ 6 $ 6 $ 6 $ 52 $ 103
------- ------- ------- ------- -------
Plus recoveries:
Commercial............................................ 5 47 51 14 20
Real Estate........................................... 14 5 6 22 1
Installment........................................... 8 20 27 28 66
------- ------- ------- ------- -------
Total recoveries......................................... 27 72 84 64 87
------- ------- ------- ------- -------
Net charge-offs/(recoveries)............................. (21) (66) (78) (12) 16
------- ------- ------- ------- -------
Provision (Recovery) of loan losses...................... -- -- (90) (78) (98)
------- ------- ------- ------- -------
Balance, end of period..................................... $ 526 $ 583 $ 505 $ 517 $ 583
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Allowance for loan losses to period end total loans........ 0.97% 1.25% 1.03% 1.19% 1.50%
Allowance for loan losses to non-accrual loans............. 114.85% 87.41% 97.68% 66.97% 91.81%
Net charge-offs (recoveries) to average loans.............. (0.04)% (0.15)% (0.17)% (0.03)% 0.05%
</TABLE>
The allowance for loan losses is maintained at a level which in
management's judgment is adequate to absorb credit losses inherent in the loan
portfolio, although no assurance can be given in this regard due to competitive
and economic uncertainties. Management believes that the September 30, 1997,
allowance for loan losses was adequate at .97% of total loans. Management based
such estimate on the high quality of assets held and the strong local economy.
A breakdown of the allowance for loan losses is provided in the following
table. However, management of Marshall does not believe that the allowance for
loan losses can be fragmented by category with any precision that would be
useful to investors. The breakdown of the allowance for loan losses is based
primarily upon those factors discussed above in computing the allowance for loan
losses as a whole. Because all of these factors are subject to change, the
breakdown is not necessarily indicative of the category of future loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES IN DOLLARS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
-------------------- -------------------- --------------------
<CAPTION>
AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.............. $ 44 14.67% $ 30 14.23% $ 23 12.96%
Real Estate......................................... 386 80.39% 324 80.33% 327 80.61%
Installment......................................... 18 4.94% 25 5.44% 50 6.43%
Unallocated......................................... 78 0.00% 126 0.00% 117 0.00%
------ ---------- ------ ---------- ------ ----------
Total............................................... $526 100.00% $505 100.00% $517 100.00%
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
</TABLE>
- ---------------
(1) Represents percentage of loans in each category to total loans.
NON-PERFORMING ASSETS
The following table sets forth certain information with respect to
Marshall's non-accrual, restructured and past due loans, as well as foreclosed
assets, for the periods indicated.
34
<PAGE>
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------
1997 1996 1995 1994
------------- ------ ------ ------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans.................................................... $ 458 $ 517 $ 772 $ 635
Restructured loans.................................................. -- -- -- --
------------- ------ ------ ------
Total nonperforming loans...................................... 458 517 772 635
Foreclosed assets................................................... 182 208 386 537
------------- ------ ------ ------
Total nonperforming assets..................................... $ 640 $ 725 $1,158 $1,172
------------- ------ ------ ------
------------- ------ ------ ------
Loans past due 90 or more days accruing interest.................... $ 507 $ 400 $ 23 $ 91
------------- ------ ------ ------
------------- ------ ------ ------
</TABLE>
Loans are placed on non-accrual when a loan is 90 days or more past due,
unless it is both well secured and in the process of collection. If interest had
been accrued on these loans for the nine months of 1997, the interest income
would have been $31 thousand.
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management of
Marshall based on such factors as historical experience, the volume and type of
lending conducted by Marshall, the amount of non-performing assets, regulatory
policies, generally accepted accounting principles, general economic conditions
and other factors related to the collectibility of loans in Marshall's
portfolio.
The provision for loan losses during the first nine months of 1997 was $0,
compared to $0 for the first nine months of 1996. In the first nine months of
1997, net recoveries were $21 thousand compared to net recoveries of $66
thousand during the same period in 1996.
The recovery for loan losses in 1996 was $90 thousand compared to $78
thousand for 1995. The increase was the result of an increase in recoveries from
$64 thousand in 1995 to $84 thousand in 1996, and a reduction of charge-offs
from $52 thousand in 1995 to $6 thousand in 1996.
The recovery for loan losses was $78 thousand for 1995 compared to $98
thousand for 1994, representing a decrease of $20 thousand in 1995. Net
recoveries in 1995 were $12 thousand compared to net charge-offs of $16 thousand
in 1994.
Management believes the allowance is adequate to absorb losses inherent in
the loan portfolio. In view of Marshall's plans to continue its loan growth,
management will continue to closely monitor the performance of its portfolio and
make additional provisions as necessary. Marshall does not presently anticipate
that such provisions will have a material adverse impact on Marshall's results
of operations in future periods.
NON-INTEREST INCOME
For the nine month period ending September 30, 1997, non-interest income
was $468 thousand, an increase of $34 thousand, or 7.8% compared to non-interest
income of $434 thousand at September 30, 1996. For the year ended December 31,
1996, non-interest income decreased to $623 thousand from $701 thousand in 1995,
or 11.2%. The increase during 1997 is mainly due to the increased volume of
non-interest bearing deposits and their related fees and service charges.
NON-INTEREST EXPENSE
Non-interest expense increased from $1.9 million for the nine month period
ended September 30, 1996, to $2.0 million for the same period ended September
30, 1997. Non-interest expense for 1996 was $2.6 million, down $87 thousand, or
3.2% over 1995. The majority of the decrease in non-interest expense in 1996
resulted from the $65 thousand savings in examinations and assessment of federal
deposit insurance. Non-interest expense for 1995 was $2.7 million, up 4.2% from
1994 primarily due to an increase of $41 thousand in employee benefits, $20
thousand in accounting fees, $16 thousand in stationery and supplies, and $13
thousand in maintenance and repairs.
INCOME TAXES
Marshall provided for federal and state income taxes of $285 thousand
during the first nine months of 1997 based on the applicable federal and state
income tax rates. Taxes of $243 thousand were provided during the first nine
months of 1996.
35
<PAGE>
DEPOSITS
Marshall primarily uses deposits to fund its loans and investment
portfolio. For the nine months ended September 30, 1997, total average deposits
were $67.8 million, compared to $67.3 million for the comparable period of 1996.
For the year ended December 31, 1996, total average deposits were $67.3 million,
up to 7.1% from $61.8 million for 1995. For the first nine months of 1997,
average non-interest bearing demand deposits were $11.1 million, up 14.4% from
$9.7 million for the comparable 1996 period. For the year ended December 31,
1996, average non-interest bearing demand deposits were $10.1 million, up 1.6%
from $10.0 million during 1995. Average money market savings were $10.8 million
at September 30, 1997, down from $12.4 million for the comparable period of
1996. For the year ended December 31, 1996, average money market savings were
$12.2 million, up 2.0% from $11.9 million during 1995.
For the nine month period ended September 30, 1997, average certificates of
deposit over $100,000 totaled $3.745 million. Average certificates of deposits
in amounts of $100,000 or more were $3.0 million and $2.7 million at December
1996 and 1995, respectively. As of September 30, 1997, and December 31, 1996 and
1995, average certificates over $100,000 represented 12.7%, 10.7% and 11.4%,
respectively, of the total average certificates of deposit held on the
respective debts. Marshall competes with the major regional financial
institutions for money market accounts and certificates of deposit less than
$100,000. Marshall has a relatively high level of rate sensitive assets and uses
a system to adjust loan pricing to reflect its cost of funds, loan and funding
maturities and loan-to-deposit ratio.
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of September 30, 1997.
MATURITIES OF CDS OF $100,000 OR MORE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
<S> <C> <C>
AMOUNT PERCENT
------ ------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Three months or less................................................... $ 600 19.56%
Over three months to one year.......................................... 900 29.34%
Over one year to three years........................................... 1,262 41.13%
Over three years....................................................... 306 9.97%
------ ------
Total........................................................... $3,068 100.00%
------ ------
------ ------
</TABLE>
SHORT-TERM BORROWINGS
Marshall occasionally finds it necessary to purchase federal funds on a
short-term basis due to fluctuations in loan and deposit levels. Marshall had no
short-term borrowings with an average balance outstanding of more than 30% of
stockholders' equity for the years ended December 31, 1996, 1995, and 1994.
CAPITAL REQUIREMENTS
The determination of capital adequacy depends upon a number of factors,
such as asset quality, liquidity, earnings, growth trends and economic
conditions. Marshall seeks to maintain a strong capital base to support its
growth and expansion plans, provide stability to current operations and promote
public confidence in Marshall.
Marshall's capital position exceeds all regulatory minimums. The federal
banking regulators have defined three tests for assessing the capital strength
and adequacy of banks, based on two definitions of capital."Tier 1 Capital" is
defined as a combination of common and qualifying preferred stockholders' equity
less goodwill. "Tier 2 Capital" is defined as qualifying subordinated debt and a
portion of the allowance for loan losses. "Total Capital" is defined as Tier 1
Capital plus Tier 2 Capital. Three risk-based capital ratios are computed using
the above capital definitions, total assets and risk-weighted assets and are
measured against regulatory minimums to ascertain adequacy. All assets and
off-balance sheet risk items are grouped into categories according to degree of
risk and assigned a risk weighting and the resulting total is risk-weighted
assets. "Tier 1 Risk-based Capital" is Tier 1 Capital divided by risk-weighted
assets. "Total Risk-based Capital" is Total Capital divided by risk-weighted
assets. The Leverage Ratio is Tier 1 Capital divided by total average assets.
See "Supervision and Regulation -- Capital Requirements."
The following table shows Marshall's capital ratios and the minimum ratios
currently required by the Federal Reserve to be well-capitalized:
36
<PAGE>
CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------- REGULATORY
1997 1996 1995 1994 MINIMUM
------------- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C>
Tier 1 Risk-based Capital.......................................... 17.15% 17.48% 18.28% 18.56% 6.00%
Total Risk-based Capital........................................... 18.20% 18.60% 19.53% 19.81% 10.00%
Leverage Ratio..................................................... 11.31% 10.51% 9.89% 9.84% 5.00%
</TABLE>
LIQUIDITY
Liquidity represents Marshall's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold, and
certain investment securities. As a result of Marshall's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that Marshall maintains overall liquidity sufficient to
satisfy its depositors' requirements and meet its customers' credit needs.
The following table summarizes Marshall's liquid assets for the periods
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------
1997 1996 1995 1994
------------- ------- ------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash and due from banks................................................. $ 1,698 $ 2,517 $ 2,271 $ 1,403
Federal funds sold...................................................... 776 999 5,365 3,700
Investment securities(1)................................................ 3,049 5,747 2,699 --
Available for sale securities........................................... 5,904 6,904 7,190 9,547
------------- ------- ------- -------
Total liquid assets.............................................. $11,427 $16,167 $17,525 $14,650
------------- ------- ------- -------
------------- ------- ------- -------
Deposit and other liabilities........................................... $66,964 $67,453 $66,753 $61,836
------------- ------- ------- -------
------------- ------- ------- -------
Ratio of liquid assets to deposits and other liabilities................ 17.06% 23.97% 26.25% 23.69%
</TABLE>
- ---------------
(1) Only held to maturity at amortized cost with a maturity of one year or less
are considered liquid assets for this table.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning Marshall
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of Marshall is reflected in increased
operating costs. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of good and services.
Interest rates are highly sensitive to many factors which are beyond the control
of Marshall, including the influence of domestic and foreign economic conditions
and the monetary and fiscal policies of the U.S. government and federal
agencies, particularly the Federal Reserve. The Federal Reserve implements
national monetary policies such as seeking to curb inflation and combat
recession by its open market operations in U.S. government securities, control
of the discount rate applicable to borrowing by banks, and establishment of
reserve requirements against bank deposits. The actions of the Federal Reserve
in these areas influence the growth of bank loans, investments and deposits, and
affect the interest rates charged on loans and paid on deposits. The nature,
timing and impact of any future changes in federal monetary and fiscal policies
on Marshall and its results of operations are not predictable.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earning Per Share ("SFAS
128") which is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. Management
does not expect that the adoption of SFAS 128 will have a material impact on
Marshall's financial condition or reported earnings per share.
37
<PAGE>
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure ("SFAS
129") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS 129 establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
Management does not expect that the adoption of SFAS 129 will have a material
impact on Marshall's financial condition or reported capital structure.
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 130 is effective for financial statements for
periods beginning after December 15, 1997.
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
38
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF
MERCSHARES COMMON STOCK AND MARSHALL COMMON STOCK
The rights of Marshall Stockholders currently are governed by the National
Bank Act (the "NBA"), the regulations of the Comptroller of the Currency,
Marshall's Articles of Association and its Bylaws, and the corporate governance
provisions of the Virginia Code to the extent adopted by Marshall. Upon
consummation of the Merger, Marshall Stockholders will become stockholders of
Mercshares. Their rights as stockholders of Mercshares will be governed by the
MGCL, Mercshares' Charter and its Bylaws. The following is a summary comparison
of the material differences in the rights of holders of Marshall Common Stock
and Mercshares Common Stock under governing provisions of their respective
constituent documents, and, with respect to Marshall, the NBA, the regulations
of the Comptroller of the Currency, and the corporate governance provisions of
the Virginia Code to the extent adopted by Marshall, and, with respect to
Mercshares, 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 NBA, THE
REGULATIONS OF THE COMPTROLLER OF THE CURRENCY, THE CORPORATE GOVERNANCE
PROVISIONS OF THE VIRGINIA CODE AND THE CONSTITUENT DOCUMENTS OF MARSHALL AND
MERCSHARES.
DISSENTER'S RIGHTS
For a description of the respective rights of dissenting shareholders of
Marshall, see "THE MERGER -- Appraisal Rights of Dissenting Stockholders." 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 Marshall 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.
PREEMPTIVE RIGHTS
Marshall's Articles of Association expressly authorize preemptive rights of
Marshall Stockholders in the event directors authorize the sale of additional
shares of Marshall Common Stock. Mercshares' Charter expressly denies
stockholder preemptive rights. See "DESCRIPTION OF MERCSHARES CAPITAL STOCK."
PREFERRED STOCK
Marshall's Articles of Association do not authorize the issuance of
Preferred Stock. Mercshares' Articles of Incorporation authorize the issuance of
two million shares of preferred stock, no par value ("Mercshares Preferred
Stock"). Mercshares' Board of Directors may reclassify already classified, but
unissued, shares of Mercshares Preferred Stock and may alter the rights,
privileges and restrictions on the unissued Mercshares Preferred Stock.
Currently, no Mercshares Preferred Stock is outstanding.
QUALIFICATION, NOMINATION AND NUMBER OF DIRECTORS
The NBA requires that a majority of the directors of a national banking
association must be residents of the state in which the bank is located, or
reside within 100 miles of the location of the bank, and that each director own
bank common stock having a par value of not less than $1,000, an aggregate
shareholders' equity of not less than $1,000, or an aggregate fair market value
of not less than $1,000, or stock in like amount of a bank's holding company.
Marshall's Bylaws provide that the number of Marshall directors must be between
five and twenty-five, the exact number to be fixed from time to time by a
resolution of a majority of the full Marshall Board of Directors. Marshall's
Board of Directors, however, may not increase the number of directors by more
than two directors between stockholders meetings. Currently, Marshall has eleven
directors. Under Mercshares' Charter and Bylaws, directors have no stock
ownership or residency requirements. The number of directors set forth in the
Bylaws is 20 and may be decreased or increased to not less than seven nor more
than 30 by amendment to the Bylaws.
DIRECTOR LIABILITY AND INDEMNIFICATION
Marshall's Articles of Association provide that Marshall may indemnify a
director or officer made a party to a proceeding by reason of his being or
having been a director, officer, or employee provided no person shall be so
indemnified or reimbursed in relation to any action, suit, or proceeding in
which he shall finally be adjudged to have been negligent in the performance of
his duties or to have committed an act or failed to perform a duty for which
there is a common-law or statutory liability. Also, no person shall be so
indemnified or reimbursed in relation to any action, suit or proceeding which
39
<PAGE>
has been made the subject of a compromise settlement, except with the approval
of the holders of record of a majority of the outstanding shares of Marshall.
Mercshares' Charter provides that the liability of directors and officers to
Mercshares or its stockholders for money damages shall be limited to the maximum
extent permitted by Maryland law. In addition, Mercshares' Charter provides for
the indemnification of currently acting and former directors, officers and
certain other persons to the fullest extent permitted by Maryland law.
SPECIAL MEETINGS OF STOCKHOLDERS
Marshall's Bylaws provide that special meetings of the stockholders may be
called by the Board of Directors or by three or more stockholders owning, in the
aggregate, at least 10% of the outstanding stock of Marshall. Mercshares' Bylaws
provide that special meetings of stockholders may be called by the Board of
Directors, the Chairman of the Board, the Vice-Chairman of the Board, the
President, or as otherwise provided by law. The MGCL permits stockholders
entitled to cast at least 25% of all votes entitled to be cast at a meeting to
call a special meeting.
CUMULATIVE VOTING
The NBA provides that stockholders of all national banks, including
Marshall, shall have cumulative voting in the election of directors. Mercshares'
Charter does not provide cumulative voting to stockholders.
STATE ANTI-TAKEOVER STATUTES
The NBA does not provide any specific anti-takeover statutes to national
banking associations, such as Marshall. The MGCL restricts transactions between
a corporation and its affiliates and potential acquirers. The summary below is
necessarily general and is not intended to be a complete description of all the
features and consequences of those provisions, and is qualified in its entirety
by reference to the statutory provisions contained in the MGCL.
BUSINESS COMBINATION LAW. The MGCL imposes conditions and restrictions on
certain "business combinations" (including, among other various transactions, a
merger, consolidation, share exchange, or, in certain circumstances, an asset
transfer or issuance of equity securities) between a Maryland corporation and
any person who beneficially owns at least 10% of the corporation's stock (an
"Interested Stockholder"). Unless approved in advance by the board of directors,
or otherwise exempted by the statute, such a business combination is prohibited
for a period of five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. After such five-year period, a
business combination with an Interested Stockholder must be: (a) recommended by
the corporation's board of directors; and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's common stockholders receive a
"fair price" (as defined in the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Stockholder for his shares.
CONTROL SHARE ACQUISITION LAW. Under the MGCL's control share acquisition
law, voting rights of shares of stock of a Maryland corporation acquired by an
acquiring person at ownership levels of 20%, 33 1/3% and 50% of the outstanding
shares are denied unless conferred by a special stockholder vote of two-thirds
of the outstanding shares held by persons other than the acquiring person and
officers and directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's articles of incorporation or bylaws permit the
acquisition of such shares prior to the acquiring person's acquisition thereof.
Unless a corporation's charter or bylaws provide otherwise, the statute permits
such corporation to redeem the acquired shares at "fair value" if the voting
rights are not approved or if the acquiring person does not deliver a "control
share acquisition statement" to the corporation on or before the tenth day after
the control share acquisition. The acquiring person may demand a stockholder's
meeting to consider authorizing voting rights for control shares subject to
certain disclosure obligations and payment of certain costs. If voting rights
are approved for more than fifty percent of the outstanding stock, objecting
stockholders may have their shares appraised and repurchased by the corporation
for cash.
DESCRIPTION OF MERCSHARES CAPITAL STOCK
GENERAL
Mercshares is authorized to issue up to 130,000,000 shares of Mercshares
Common Stock. On September 30, 1997, 71,818,723 shares of Mercshares Common
Stock were issued and outstanding. Mercshares is also authorized to issue
40
<PAGE>
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
Marshall Stockholders in exchange for Marshall 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
1,830,864 shares of Mercshares Common Stock in 1995, 1,066,051 shares in 1996
and 394,175 shares in 1997. 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
3,291,353 additional shares, which may be purchased from time to time depending
on the price of Mercshares Common Stock, market conditions, regulatory
considerations and other factors. It is expected that no repurchases will be
made until after the Marshall Special Meeting.
PROPOSAL 2
MARSHALL 1997 EMPLOYEE STOCK OPTION PLAN AND
AMENDMENT TO MARSHALL'S ARTICLES OF ASSOCIATION
GENERAL
Marshall's 1997 Employee Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors on September 11, 1997, subject to the approval by the
stockholders of Marshall of (i) the Option Plan and (ii) an amendment to
Marshall's Articles of Association permitting shares to be issued upon exercise
of options granted under the Option Plan and disallowing preemptive rights with
respect to the issuance of such shares. The Option Plan makes available up to
20,000 shares of Common Stock in the form of stock options to key employees of
Marshall, as more fully described below. For a description of the related
amendment to Marshall's Articles of Association, See "MARSHALL EMPLOYEE STOCK
OPTION PLAN AND AMENDMENT TO MARSHALL'S ARTICLES OF ASSOCIATION -- Amendment to
Marshall's Articles of Association."
On September 11, 1997, the Board of Directors of Marshall issued to nine
executive employees a total of 7,000 options under the Option Plan, subject to
approval of the Option Plan by stockholders. The options which were granted
become
41
<PAGE>
exercisable upon approval of the Option Plan by the Marshall Stockholders,
solicited hereby, subject to approval of the proposed amendment of the Articles
of Association. All such options may be exercised at a price of $28.00 per share
and expire on September 10, 2007, according to their terms.
Pursuant to the Affiliation Agreement, any unexpired and unexercised
options outstanding at the effective date of the Merger will be canceled and the
holders thereof will be entitled to receive the difference between the option
price per share for Marshall's common stock and the market value of 1.75 share
of common stock of Mercshares as of the effective date. This difference would be
paid by Mercshares in cash. Due to the taxable effect of this cash out
provision, it is anticipated that all options outstanding under the Option Plan
will be exercised by participants prior to the consummation date so that the
shares acquired by exercise of the options receive tax-free exchange treatment
pursuant to the consummation of the Merger.
Despite the effect of the Merger on the operation of the Option Plan, the
stockholders of Marshall are asked to ratify and approve the Option Plan. Such
approval is necessary in order for the options granted under the Option Plan to
be effective and receive favorable tax treatment as originally intended when
adopted by the Board of Directors. Therefore, the Board is recommending the
Option Plan for stockholder approval and the following description of the Option
Plan is submitted for consideration by stockholders. This description is
qualified in its entirety by reference to the Option Plan, as amended, a copy of
which may be obtained by request delivered to the Corporate Secretary of
Marshall at 8372 West Main Street, Marshall, Virginia 20115.
PURPOSE
The purpose of the Option Plan is to promote the success of Marshall by
providing incentives to key employees that will promote the identification of
their personal interests with the long-term financial success of Marshall and
with growth in stockholder value. The Option Plan is designed to provide
flexibility to Marshall in its ability to motivate, attract, and retain the
services of key employees upon whose judgment, interest, and special effort the
successful conduct of its operation is largely dependent.
ADMINISTRATION
Under the terms of the Option Plan, the Stock Option Committee of the Board
of Directors of Marshall (the "Stock Option Committee") is appointed to
administer the Option Plan. The directors who may serve as members of the Stock
Option Committee are "non-employee" and "outside" directors, as defined under
applicable law.
Each option under the Option Plan will be made pursuant to a written
agreement between Marshall and the recipient of the option, each an "Option
Agreement." The Marshall Board of Directors has full and final authority in its
discretion: (i) to make and adopt rules and regulations for the administration
of the Option Plan; (ii) to conclusively interpret the provisions of the Option
Plan and to decide all questions of fact arising in its application; (iii) to
determine the employees to whom options may be made under the Option Plan; (iv)
to determine the type of option to be made and the amount, size and terms of
each such option (including, but not limited to, any exercise price, grant
price, or purchase price, any restriction or condition, any schedule for lapse
of restrictions or conditions relating to transferability or forfeiture,
exercisability, or settlement of an option, and waivers or accelerations
thereof, based in each case on such conditions as the Marshall Board of
Directors shall determine); (v) to determine the time when options will be
granted; and (vi) to prescribe from time to time the form, and the terms,
provisions and conditions not inconsistent with the Option Plan, of any Option
Agreement.
Subject to the terms, conditions and limitations of the Option Plan, the
Stock Option Committee makes recommendations to the Board regarding the type or
types of options to be granted to each participant. After considering the Stock
Option Committee's recommendations, the Board determines the options to be made
to each participant and sets forth in each Option Agreement the terms,
conditions, and limitations applicable to each option. Options may be granted
singly, in combination, or in tandem. The Board may terminate, amend or modify
the Option Plan from time to time in any respect without stockholder approval,
unless the particular amendment or modification requires stockholder approval
under the Internal Revenue Code of 1986, as amended (the "Code"), the rules and
regulations under Section 16 of the Securities Exchange Act (the "Exchange Act")
or pursuant to any other applicable laws, rules or regulations.
ELIGIBILITY
Participants are limited to those officers and other key employees of
Marshall who are in positions in which their decisions, actions and/or efforts
significantly contribute to the success of Marshall. There are approximately
nine persons in the class of eligible participants. The Board of Directors has
the authority to determine the employees to whom awards are made. Directors of
Marshall who are not otherwise officers or employees of Marshall may not
participate in the Option Plan.
42
<PAGE>
Options granted under the Option Plan may not be assigned, transferred,
pledged or otherwise encumbered by a participant, other than by will or the laws
of descent and distribution. Options may be exercised during the recipient's
lifetime only by the recipient or, in the case of disability, by the recipient's
legal representative.
OPTIONS
The Option Plan authorizes the grant of incentive stock options within the
meaning of Section 422A of the Code ("ISOs"). The option terms were recommended
by the Stock Option Committee but approved by the Marshall Board of Directors.
No option will be exercisable in any event until approval by the Marshall
Stockholders or after ten years from its grant. All options granted may comply
with all applicable provisions of the Code and all other applicable rules and
regulations governing ISOs. All other option terms will be recommended by the
Stock Option Committee subject to the Marshall Board of Directors' final
approval and determination in its sole discretion.
Options currently outstanding under the Option Plan must be paid for in
full in cash or, unless the Marshall Board of Directors determines otherwise, in
Marshall Common Stock at fair market value, or a combination of cash and stock,
in an amount equal to the aggregate purchase price of the options. Options
awarded may be exercised in whole or in part. See "DESCRIPTION OF
MARSHALL -- Price Range of Common Stock."
NEW PLAN BENEFIT
<TABLE>
<CAPTION>
1997 EMPLOYEE STOCK OPTION PLAN
-----------------------------------------
<S> <C> <C>
NAME AND (POSITION) DOLLAR VALUE ($)(1)(2) NUMBER OF UNITS
- --------------------------------------------------------------------------------------- ---------------------- ---------------
Donald R. Yowell (President and CEO)................................................... $ 44,800 1,600
Executive Officers (9 in group)........................................................ $196,000 7,000
</TABLE>
- ---------------
(1) Based upon an exercise price of $28.00 applicable to all options currently
issued under the Option Plan.
(2) Based upon a market value per share of $53.50, the last trade of Marshall
Common Stock known by Management of Marshall to have occurred after
announcement of the affiliation transaction.
SHARES SUBJECT TO THE OPTION PLAN
Up to 20,000 shares of Marshall Common Stock may be issued under the Option
Plan. Stock related to options that are forfeited, terminated, expire
unexercised, or are settled in such manner that all or some of the shares
covered by an option under the Option Plan are not issued to a participant may
immediately become available for options under this Option Plan.
In order to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations by Marshall, the
Board will adjust the number of shares subject to each outstanding option, the
exercise price and the aggregate number of shares from which grants or options
may be made.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An optionee will not recognize income on the grant of an ISO, and an
optionee generally will not recognize income on the exercise of an ISO, except
as described in the following paragraph. Under these circumstances, no deduction
will be allowable to Marshall in connection with either the grant of such
options or the issuance of shares upon exercise thereof.
However, if the exercise of an ISO occurs more than three months after the
optionee ceased to be an employee for reasons other than death or disability (or
more than one year thereafter if the optionee ceased to be an employee by reason
of permanent and total disability), the exercise will not be treated as the
exercise of an ISO, and the optionee will recognize income upon the exercise of
the ISO. In this instance, the amount of income recognized will be measured by
the excess, if any, of the fair market value of the shares at the time of
exercise over the exercise price, provided that the shares issued are either
transferable or not subject to a substantial risk of forfeiture. For the option
to qualify as an ISO upon the optionee's death, the optionee must have been
employed at Marshall for at least three months prior to his or her death.
Gain or loss from the sale or exchange of shares acquired upon the exercise
of an ISO generally will be treated as capital gain or loss. If, however, shares
acquired pursuant to the exercise of an ISO are disposed of within two years
after the option was granted or within one year after the shares were
transferred pursuant to the exercise of the option, the optionee generally will
recognize ordinary income at the time of the disposition equal to the excess
over the exercise price of the lesser of the amount realized or the fair market
value of the shares at the time of exercise (or, in certain circumstances, at
the time such shares became either transferable or not subject to a substantial
risk of forfeiture). The exercise of an ISO may result in a tax to the optionee
under the alternative minimum tax because as a general rule the excess of the
fair market value of stock
43
<PAGE>
received on the exercise of an ISO over the exercise price is defined as an item
of "tax preference" for purposes of determining alternative minimum taxable
income.
The rules governing the tax treatment of options that may be granted under
the Option Plan are quite technical, so that the above description of tax
consequences is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are, of course, subject to change, as
are their interpretations, and their application may vary in individual
circumstances.
AMENDMENT OF MARSHALL'S ARTICLES OF ASSOCIATION
Under the terms of the Option Plan, Marshall's Articles of Association must
be amended in order to provide for the waiver of preemptive rights of
stockholders and authorization of the maximum number of shares with respect to
the additional shares of Marshall Common Stock which may be issued upon the
exercise of options. Therefore, in connection with recommending approval of the
Option Plan, the Board of Directors is recommending that the Articles of
Association be amended in the manner set forth below.
The Board of Directors recommends that the provisions of the fourth
paragraph of Article "Fifth" of Marshall's Articles of Association be deleted in
their entirety and the following be inserted in place thereof:
The Board of Directors shall be authorized to issue options,
under a plan approved by shareholders, to acquire up to 20,000
shares of the common stock of Marshall. The options authorized
hereby shall be issued to such officers and other key employees
of Marshall as the Board of Directors shall determine in its
sole discretion. The shareholders of Marshall shall have no
preemptive rights with respect to the shares of Marshall to be
issued pursuant to this paragraph. In adopting these provisions,
the shareholders of Marshall hereby ratify any prior grants of
options that the Board of Directors has made that are subject to
shareholder approval.
As noted above, the sole reason for the above-referenced amendment is to
accommodate the terms of the Option Plan. No other amendments are proposed for
adoption by the Marshall Stockholders. The Marshall Stockholders will continue
to have preemptive rights with respect to any other additional shares that may
be authorized for sale by the Board of Directors. However, if the Affiliation
Agreement described herein is approved and consummated, the rights of
stockholders of Marshall will be governed in accordance with the Mercshares
Articles of Incorporation and Bylaws and the MGCL, and thus stockholders will no
longer have preemptive rights. See "COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS
OF MERCSHARES COMMON STOCK AND MARSHALL COMMON STOCK" and "DESCRIPTION OF
MERCSHARES CAPITAL STOCK."
VOTE REQUIRED
The affirmative vote of the holders of a majority of Marshall Common Stock
represented in person or by proxy voting at the Marshall Special Meeting,
assuming a quorum is present, is required generally to ratify and approve the
Option Plan. The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Marshall Common Stock is required to approve the proposed
amendment. Since these matters are related and are not effective without the
other's approval, the matters are submitted to shareholders as one item of
business, and, therefore, must be approved by two-thirds of the outstanding
shares of Marshall.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE TO APPROVE THE
OPTION PLAN AND THE PROPOSED AMENDMENT.
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 Marshall by Mays & Valentine, L.L.P.
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, 1996 and 1995 and for each of the three years in the period ended
December
44
<PAGE>
31, 1996 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 Marshall included in this Prospectus and Proxy
Statement for the three years ended December 31, 1996 have been audited by
Yount, Hyde & Barbour, P.C., independent certified public accountants, whose
reports thereon are incorporated herein by reference in reliance upon the report
of said firm and upon the authority of said firm as experts in auditing and
accounting.
Representatives of Yount, Hyde & Barbour, P.C. are expected to be present
at the Marshall 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.
45
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors Report.......................................................................................... F-2
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996 and 1995...................................................................... F-3
Statements of Income for the Three Years Ended December 31, 1996..................................................... F-4
Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1996............................ F-5
Statements of Cash Flows for the Three Years Ended December 31, 1996................................................. F-6
Notes to Financial Statements........................................................................................ F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance Sheet as of September 30, 1997............................................................................... F-16
Statements of Income for the Nine Months Ended September 30, 1997 and 1996........................................... F-17
Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1997 and 1996.................. F-18
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996....................................... F-19
Notes to Unaudited Financial Statements.............................................................................. F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
MARSHALL NATIONAL BANK AND TRUST COMPANY
MARSHALL, VIRGINIA
We have audited the accompanying balance sheets of Marshall National Bank
and Trust Company as of December 31, 1996 and 1995, and the related statements
of income, changes in stockholders' equity and cash flows for the years ended
December 31, 1996, 1995, and 1994. 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 Marshall National Bank and
Trust Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994, in conformity with generally accepted accounting principles.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
January 23, 1997
F-2
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 9)............................................................... $ 2,516,995 $ 2,270,920
Securities (fair value: 1996, $20,314,903 and 1995, $21,159,476) (Notes 1 and 2)............... 20,305,457 20,968,934
Federal funds sold............................................................................. 999,000 5,365,000
Loans, net (Notes 1, 3, 4 and 10).............................................................. 48,468,663 42,786,240
Bank premises and equipment, net (Notes 1 and 5)............................................... 713,909 806,810
Accrued interest receivable.................................................................... 554,099 513,874
Other real estate (Note 1)..................................................................... 207,587 385,858
Other assets (Note 6).......................................................................... 1,477,961 753,266
----------- -----------
Total assets............................................................................ $75,243,671 $73,850,902
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand.................................................................................... $10,032,543 $ 9,620,458
NOW accounts.............................................................................. 9,096,489 7,916,406
Money market accounts..................................................................... 11,222,056 12,720,515
Savings................................................................................... 12,241,207 12,797,238
Time, $100,000 and over................................................................... 3,162,192 3,095,016
Other time................................................................................ 21,443,426 20,333,499
----------- -----------
Total deposits.......................................................................... 67,197,913 66,483,132
Accrued expenses and other liabilities....................................................... 255,389 269,867
Commitments and contingent liabilities (Note 9).............................................. -- --
----------- -----------
Total liabilities....................................................................... 67,453,302 66,752,999
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share; authorized 500,000 shares; issued and outstanding
379,970................................................................................... 759,940 759,940
Surplus...................................................................................... 917,796 917,796
Retained earnings (Note 11).................................................................. 6,193,777 5,492,099
Unrealized (loss) on securities available for sale, net...................................... (81,144) (71,932)
----------- -----------
Total stockholders' equity.............................................................. 7,790,369 7,097,903
----------- -----------
Total liabilities and stockholders' equity.............................................. $75,243,671 $73,850,902
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................................................ $4,089,380 $3,729,253 $3,133,300
Interest and dividends on investment securities held to maturity:
U.S. Treasury securities and agency obligations................................ 605,350 627,448 601,110
Obligations of states and political subdivisions............................... 199,684 114,566 92,772
Other.......................................................................... 11,132 3,566 3,390
Interest on securities available for sale:
U.S. Treasury securities and agency obligations................................ 444,049 460,075 509,901
Obligations of states and political subdivisions............................... -- 9,843 51,905
Interest on Federal funds sold.................................................... 146,480 178,426 189,132
---------- ---------- ----------
Total interest income........................................................ 5,496,075 5,123,177 4,581,510
INTEREST EXPENSE, interest on deposits.............................................. 2,207,041 2,081,714 1,684,403
---------- ---------- ----------
Net interest income.......................................................... 3,289,034 3,041,463 2,897,107
(Recovery of) loan losses (Notes 1 and 4)......................................... (90,000) (78,019) (98,000)
---------- ---------- ----------
Net interest income after (recovery of) loan losses.......................... 3,379,034 3,119,482 2,995,107
---------- ---------- ----------
OTHER INCOME
Trust Department income........................................................... 316,664 382,403 313,980
Service fees...................................................................... 335,334 302,844 276,073
Gain on sale of other real estate................................................. 8,285 16,761 21,445
(Loss) on sale of assets.......................................................... -- (1,436) --
Securities (loss)................................................................. (37,095) (1,000) --
---------- ---------- ----------
Total other income........................................................... 623,188 699,572 611,498
---------- ---------- ----------
OTHER EXPENSES
Salaries and wages................................................................ 1,415,927 1,361,964 1,303,582
Employee benefits (Note 7)........................................................ 260,438 283,048 242,011
Net occupancy expenses............................................................ 33,955 29,765 39,188
Equipment rentals, depreciation and maintenance................................... 236,915 233,461 211,353
Other operating expenses.......................................................... 709,851 835,333 838,348
---------- ---------- ----------
Total other expenses......................................................... 2,657,086 2,743,571 2,634,482
---------- ---------- ----------
Income before income taxes................................................... 1,345,136 1,075,483 972,123
Income tax expense (Notes 1 and 6).................................................. 396,477 336,679 303,757
---------- ---------- ----------
Net income................................................................... $ 948,659 $ 738,804 $ 668,366
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER SHARE (Note 1)....................................................... $ 2.50 $ 1.94 $ 1.76
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
COMMON RETAINED AVAILABLE FOR
STOCK SURPLUS EARNINGS SALE, NET TOTAL
-------- -------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993................................. $759,940 $917,796 $4,483,897 $ -- $6,161,633
Net income -- 1994....................................... -- -- 668,366 -- 668,366
Cash dividend, $0.50 per share........................... -- -- (189,985) -- (189,985)
Change in unrealized gain (loss) on securities available
for sale, net of deferred income taxes of $151,715.... -- -- -- (294,505) (294,505)
-------- -------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1994................................. 759,940 917,796 4,962,278 (294,505) 6,345,509
Net income -- 1995....................................... -- -- 738,804 -- 738,804
Cash dividend, $0.55 per share........................... -- -- (208,983) -- (208,983)
Change in unrealized gain (loss) on securities available
for sale, net of deferred income taxes of $114,659.... -- -- -- 222,573 222,573
-------- -------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1995................................. 759,940 917,796 5,492,099 (71,932) 7,097,903
Net income -- 1996....................................... -- -- 948,659 -- 948,659
Cash dividend, $0.65 per share........................... -- -- (246,981) -- (246,981)
Change in unrealized gain (loss) on securities available
for sale, net of deferred income taxes of $(4,746).... -- -- -- (9,212) (9,212)
-------- -------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1996................................. $759,940 $917,796 $6,193,777 $ (81,144) $7,790,369
-------- -------- ---------- ------------- ----------
-------- -------- ---------- ------------- ----------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 948,659 $ 738,804 $ 668,366
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation................................................................ 108,288 103,903 127,207
(Recovery of) loan losses................................................... (90,000) (78,019) (98,000)
Deferred income taxes....................................................... 28,008 103,713 164,204
Loss on sale of securities.................................................. 37,095 1,000 --
Loss on sale of equipment................................................... -- 1,436 --
Net premium amortization on securities...................................... 3,756 3,330 7,433
(Gain) on other real estate................................................. (8,285) (16,761) (21,445)
Changes in assets and liabilities:
(Increase) in accrued interest receivable and other assets................ (788,183) (72,374) (142,740)
Increase (decrease) in accrued expenses and other liabilities............. (14,478) 1,354 (126,516)
----------- ----------- -----------
Net cash provided by operating activities.............................. 224,860 786,386 578,509
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities.................... 2,700,000 -- 417,500
Proceeds from sale of securities available for sale............................ 1,965,704 998,750 --
Proceeds from maturities and calls of securities available for sale............ 2,600,000 2,200,000 3,010,250
Purchase of investment securities.............................................. (2,330,987) (1,278,143) (2,712,601)
Purchase of securities available for sale...................................... (4,326,048) (500,500) (1,992,734)
Proceeds from sale of premises and equipment................................... -- 2,950 --
Proceeds from sale of other real estate........................................ 186,556 168,060 253,783
(Increase) decrease in federal funds sold...................................... 4,366,000 (1,665,000) 4,400,000
Purchase of premises and equipment............................................. (15,387) (250,352) (54,642)
Net (increase) in loans........................................................ (5,592,423) (4,301,104) (8,442,356)
----------- ----------- -----------
Net cash (used in) investing activities................................ (446,585) (4,625,339) (5,120,800)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in demand deposits, NOW accounts and savings accounts........... (462,322) (1,376,199) 2,721,715
Net increase in certificates of deposit........................................ 1,177,103 6,291,800 (1,109,339)
Cash dividends paid............................................................ (246,981) (208,983) (189,985)
----------- ----------- -----------
Net cash provided by financing activities.............................. 467,800 4,706,618 1,422,391
----------- ----------- -----------
Increase in cash and cash equivalents.................................. 246,075 867,665 (3,119,900)
CASH AND CASH EQUIVALENTS
Beginning...................................................................... 2,270,920 1,403,255 4,523,155
----------- ----------- -----------
Ending......................................................................... $ 2,516,995 $ 2,270,920 $ 1,403,255
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest.................................................................... $ 2,217,123 $ 2,013,955 $ 1,686,312
----------- ----------- -----------
----------- ----------- -----------
Income taxes................................................................ $ 417,060 $ 223,416 $ 163,478
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans.............................. $ -- $ -- $ 198,311
----------- ----------- -----------
----------- ----------- -----------
Unrealized gain (loss) on securities available for sale........................ $ (13,958) $ 337,232 $ (446,220)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Marshall National Bank and Trust Company grants commercial, financial,
agricultural, residential and consumer loans to customers in Virginia. The loan
portfolio is well diversified and generally is collateralized by assets of the
customers. The loans are expected to be repaid from cash flow or proceeds from
the sale of selected assets of the borrowers.
The Bank's primary service area is Fauquier County, Virginia, and the
surrounding counties adjacent to Fauquier County. The Bank makes loans for all
purposes and to all qualified applicants without regard to race, color, creed,
national origin, age, sex and familial status of applicant.
Products include loans for autos, trucks, business equipment, farm
equipment, recreational vehicles and other equipment as the need arises, plus
loans to farmers for crops, cattle and other needs of farm customers. Business
loans are offered for operating capital, inventory, equipment purchases and
other needs of the business community.
The Bank's primary product is residential loans aimed at meeting the
housing needs of the community. The real estate loan department is staffed with
loan officers familiar with the Fauquier County community and ready to make
loans for all types of housing including 1-4 family residential, mobile homes, 5
family and over units, home improvement, construction and lot purchases. The
Marshall Home Equity Line of Credit is available as an open-end revolving loan
plan for consumer purposes secured by a deed of trust.
In the deposit area, the Bank offers three different types of draftable
accounts to best suit the individual needs of the customer: regular personal and
commercial checking, NOW, and money market accounts. Savings accounts include
passbook savings, Christmas clubs, individual retirement, and certificates of
deposit.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to accepted practice within the banking
industry. The following is a description of the more significant of these
policies:
TRUST DIVISION
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Bank and are not included in the
accompanying financial statements.
SECURITIES
Investments are classified in three categories and accounted for as
follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Bank has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the
interest method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and equity
securities that the Bank intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the
maturity mix of the Bank's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses
are reported as increases or decreases in stockholders' equity, net of
the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in
earnings only if sold prior to maturity.
c. Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are included in
interest income on trading account securities. The Bank had no trading
securities at December 31, 1996 and 1995.
F-7
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES -- Continued
LOANS
Loans are shown on the balance sheet net of unearned income and allowance
for possible loan losses. Unearned interest on the rule of 78's installment
loans is amortized to income over the life of the loans, using the
sum-of-the-months-digits method. For all other loans, interest is computed on
the loan balance outstanding.
On January 1, 1995, the Bank adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by FASB No. 118. Statement 114,
as amended, requires that the impairment of loans that have been separately
identified for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of those loans is
to be based on the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and the
allowance for credit losses and interest income recognized on loans. The Bank
has no loans to which Statement 114 applies at December 31, 1996 and 1995.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed for income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowances relating to impaired
loans are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses in the loan portfolio and the related allowance may change in the
near term.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation of property and equipment is computed principally on
the straight-line and declining-balance methods over their estimated useful
lives.
Maintenance and repairs of property and equipment are charged to expense
and major improvements are capitalized. Upon retirement, sale or other
disposition of property and equipment, the cost and accumulated depreciation are
eliminated from the accounts and gain or loss is included in operations.
OTHER REAL ESTATE
Real estate acquired by foreclosure is carried at the lower of cost or fair
market value less an allowance for estimated selling expenses on the future
disposition of the property.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely
F-8
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES -- Continued
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
PENSION PLAN
The Bank has a noncontributory pension plan covering substantially all
full-time employees. The Bank computes the net periodic pension cost of the plan
in accordance with FASB No. 87, "Employers' Accounting for Pensions."
EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share of common stock are based on the weighted
average number of shares outstanding during each year.
CASH AND CASH EQUIVALENTS
The Bank has defined cash equivalents as those amounts included in the
balance sheet caption "Cash and due from banks."
USE OF ESTIMATES
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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE
In December, 1996, FASB Statement No. 126, "Exemption From Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities,"
exempted nonpublic entities with total assets of less than $100 million at year
end and do not hold or issue any derivative financial instruments from the fair
value disclosures of FASB Statement No. 107.
NOTE 2. SECURITIES
The amortized cost and fair value of securities being held to maturity as
of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies............................................ $ 8,734,926 $ 63,128 $(30,823) $ 8,767,231
Obligations of states and political subdivisions....................... 4,666,234 25,340 (48,199) 4,643,375
------------ ---------- ---------- ------------
$ 13,401,160 $ 88,468 $(79,022) $ 13,410,606
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
The amortized cost and fair value of securities being held to maturity as
of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies............................................ $ 10,892,076 $ 173,116 $ (7,626) $ 11,057,566
Obligations of states and political subdivisions....................... 2,886,477 32,365 (7,313) 2,911,529
------------ ---------- ---------- ------------
$ 13,778,553 $ 205,481 $(14,939) $ 13,969,095
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
F-9
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. SECURITIES -- Continued
The amortized cost and fair value of the securities being held to maturity
as of December 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations without any penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................................................ $ 5,746,639 $ 5,752,964
Due after one year through five years.......................................................... 4,140,030 4,164,666
Due after five years through ten years......................................................... 3,514,491 3,492,976
------------ ------------
$ 13,401,160 $ 13,410,606
------------ ------------
------------ ------------
</TABLE>
The amortized cost and fair value of the securities available for sale as
of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government corporations
and agencies........................................................... $ 6,702,993 $ 11,606 $ (134,552) $ 6,580,047
Other.................................................................... 324,250 -- -- 324,250
----------- ---------- ---------- -----------
$ 7,027,243 $ 11,606 $ (134,552) $ 6,904,297
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
The amortized cost and fair value of the securities available for sale as
of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government corporations
and agencies........................................................... $ 7,199,019 $ 48,908 $ (157,896) $ 7,090,031
Other.................................................................... 100,350 -- -- 100,350
----------- ---------- ---------- -----------
$ 7,299,369 $ 48,908 $ (157,896) $ 7,190,381
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because the issuers may have the right to
call or prepay obligations without any penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less........................................................................... $ 1,100,103 $ 1,108,188
Due after one year through five years............................................................. 4,092,042 3,989,444
Due after five years through ten years............................................................ 1,510,848 1,482,415
Other............................................................................................. 324,250 324,250
----------- -----------
$ 7,027,243 $ 6,904,297
----------- -----------
----------- -----------
</TABLE>
Proceeds from maturities and calls of securities being held to maturity
during 1996, 1995 and 1994 were $2,700,000,
$-0-, and $417,500. There were no gains or losses realized in 1996, 1995 or
1994.
Proceeds from sale of securities available for sale during 1996 and 1995
were $1,965,704 and $998,750. Gross losses of $37,095 and $1,000 were realized
in 1996 and 1995. No gains or losses were realized in 1994.
Proceeds from maturity and calls of securities available for sale during
1996, 1995 and 1994 were $2,600,000, $2,200,000, and $3,010,250.
Securities with book values of $848,501, $1,305,573 and $1,808,786 at
December 31, 1996, 1995 and 1994, respectively, were pledged as collateral on
public deposits and for other purposes as required by law.
F-10
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. LOANS, NET
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Real estate loans:
Construction and land development.................................................................. $ 1,952 $ 1,210
Secured by farmland................................................................................ 3,687 4,082
Secured by 1-4 family residential.................................................................. 23,411 21,420
Other real estate loans............................................................................ 10,290 8,194
Loans to farmers (except secured by real estate)..................................................... 778 306
Commercial and industrial loans (except those secured by real estate)................................ 6,193 5,305
Loans to individuals for personal expenditures....................................................... 2,611 2,763
All other loans...................................................................................... 52 23
-------- --------
$ 48,974 $ 43,303
Less allowance for loan losses....................................................................... 505 517
-------- --------
Loans, net...................................................................................... $ 48,469 $ 42,786
-------- --------
-------- --------
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $517,346, $772,368 and $634,862 for 1996, 1995 and 1994,
respectively. If interest on these loans had been accrued, such income would
have approximated $1,381, $11,176 and $16,526 for 1996, 1995 and 1994,
respectively.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1995 1994
-------- -------- ---------
Balance, beginning....................................................................... $517,062 $582,795 $ 697,136
(Recovery of) loan loss added to operating income........................................ (90,000) (78,019) (98,000)
Recoveries added to the reserve.......................................................... 83,608 64,081 86,704
Loan losses charged to the reserve....................................................... (5,446) (51,795) (103,045)
-------- -------- ---------
Balance, ending.......................................................................... $505,224 $517,062 $ 582,795
-------- -------- ---------
-------- -------- ---------
</TABLE>
NOTE 5. BANK PREMISES AND EQUIPMENT, NET
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
<S> <C> <C>
1996 1995
----------- -----------
Land.............................................................................................. $ 16,444 $ 16,444
Buildings and improvements........................................................................ 1,058,934 1,057,256
Furniture and equipment........................................................................... 1,401,102 1,387,393
----------- -----------
$ 2,476,480 $ 2,461,093
Less accumulated depreciation..................................................................... 1,762,571 1,654,283
----------- -----------
Bank premises and equipment, net.................................................................. $ 713,909 $ 806,810
----------- -----------
----------- -----------
</TABLE>
Depreciation expense of bank premises and equipment included in operating
expenses for the years ended December 31, 1996, 1995 and 1994 was $108,288,
$103,903 and $127,207, respectively.
F-11
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. INCOME TAXES
Net deferred tax assets consist of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Deferred tax assets:
Allowance for loan losses.............................................................. $ 4,945 $ 35,545 $ 62,071
Deferred compensation payable.......................................................... 23,010 19,566 16,386
Pension................................................................................ -- 2,886 23,480
Interest on nonaccrual loans........................................................... 45,849 17,786 29,814
Writedown of foreclosed real estate.................................................... 9,047 -- 47,745
Securities available for sale.......................................................... 41,802 37,056 151,715
--------- --------- ---------
124,653 112,839 331,211
--------- --------- ---------
Deferred tax liabilities:
Pension................................................................................ 27,407 -- --
Depreciation........................................................................... 7,669 -- --
--------- --------- ---------
35,076 -- --
--------- --------- ---------
$ 89,577 $ 112,839 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes charged to operations consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current tax expense...................................................................... $ 368,469 $ 232,966 $ 139,553
Deferred tax expense..................................................................... 28,008 103,713 164,204
--------- --------- ---------
$ 396,477 $ 336,679 $ 303,757
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1996 1995 1994
-------- -------- --------
Computed "expected" tax expense.......................................................... $457,346 $365,665 $330,522
(Decrease) in income taxes resulting from:
Tax exempt interest income............................................................. (71,689) (41,694) (48,578)
Other.................................................................................. 10,820 12,708 21,813
-------- -------- --------
$396,477 $336,679 $303,757
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 7. DEFINED BENEFIT PENSION PLAN
The amount charged to expense for the Company's pension plan totaled
$58,411, $86,352 and $43,679 for the years ended December 31, 1996, 1995 and
1994, respectively. The components of the pension cost charged to expense
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost........................................................................... $ 96,326 $ 89,230 $ 77,977
Interest cost on projected benefit obligation.......................................... 133,153 118,835 100,553
Actual return on plan assets........................................................... (166,896) (125,248) (126,597)
Net amortization and deferral.......................................................... (4,172) 3,535 (8,254)
--------- --------- ---------
$ 58,411 $ 86,352 $ 43,679
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. DEFINED BENEFIT PENSION PLAN -- Continued
The following table sets forth the plan's funded status as of September 30,
1996, 1995 and 1994, and the amount recognized in the accompanying balance
sheets as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits................................................................ $ 1,173,320 $ 998,806 $ 855,816
----------- ----------- -----------
----------- ----------- -----------
Accumulated benefits........................................................... $ 1,185,732 $ 1,012,150 $ 869,021
----------- ----------- -----------
----------- ----------- -----------
Projected benefit.............................................................. $(1,713,534) $(1,569,173) $(1,400,727)
Plan assets at fair value...................................................... 2,070,135 1,759,467 1,321,063
----------- ----------- -----------
Funded status.................................................................. 356,601 190,294 (79,664)
Unrecognized prior service costs............................................... 109,128 120,040 130,952
Unrecognized net (gain)........................................................ (535,789) (469,203) (287,955)
Unrecognized net obligations................................................... 3,162 3,513 3,864
----------- ----------- -----------
Liability on balance sheet -- September 30....................................... (66,898) (155,356) (232,803)
Fourth quarter entries, employer contribution.................................. 155,704 146,869 163,744
----------- ----------- -----------
Asset (liability) on balance sheet -- December 31.............................. $ 88,806 $ (8,487) $ 69,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The discount rate and the rate of increase in future compensation levels
used in determining the actuarial present value of the benefit obligations were
8.5%, 8.5% and 6%, respectively. The expected long-term rate of return on plan
assets was 9.5%.
NOTE 8. STOCK OPTION PLAN
The Bank maintains a stock option plan for the senior management of the
Bank. Ten thousand shares of common stock were reserved for grant. Under the
terms of the plan, options are granted at the fair market value of the stock at
the date of exercise. There were no shares exercised in 1996, 1995, or 1994. At
December 31, 1996, 1995 and 1994, 3,325 shares are available for future
exercise.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, which are not reflected in the accompanying
financial statements. The Bank does not anticipate any material loss as a result
of these transactions.
The Bank must maintain a reserve against its deposits in accordance with
Regulation D of the Federal Reserve Act. For the final weekly reporting period
in the years ended December 31, 1996 and 1995, the aggregate amounts of daily
average required balances were approximately $370,000 and $352,000,
respectively.
As of December 31, 1996, the Bank was obligated under two lease agreements
for land on which the Warrenton Branch Bank building is constructed. The
original lease was for a period of ten years commencing on October 10, 1969, and
had renewal options for four additional ten-year terms. The second renewal
option was exercised on October 10, 1989 for ten years. The annual rent is
$5,000.
The second lease originated on December 2, 1987, and has renewal options
for six additional five-year terms starting on October 10, 1989. The annual rent
is $3,257.
The Bank maintains cash accounts in other financial institutions. The
amount on deposit at one of these financial institutions exceeded the insurance
limits of the Federal Deposit Insurance Corporation (FDIC) by approximately
$766,000 at December 31, 1996.
See Note 12 with respect to financial instruments with off-balance-sheet
risk.
F-13
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. TRANSACTIONS WITH DIRECTORS, PRINCIPAL SHAREHOLDERS AND EXECUTIVE
OFFICERS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
shareholders, executive officers, their immediate families and affiliated
companies in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others. These
persons and firms were indebted to the Bank for loans totaling $513,109 and
$616,617 at December 31, 1996 and 1995, respectively.
NOTE 11. RETAINED EARNINGS
Federal regulations limit the amount of dividends which the Bank can pay
without obtaining prior approval and, additionally, require that the Bank
maintain a ratio of total capital to assets, as defined by regulatory
authorities. As of December 31, 1996, the Bank could declare dividends of
$1,709,880 or 21.9% of net assets without prior approval.
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract or notional amount of the Bank's exposure to
off-balance-sheet risk as of December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit.................................................................... $ 6,468,039 $ 3,570,984
Standby letters of credit....................................................................... $ 992,341 $ 613,268
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, income-producing commercial
properties and residential real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds bank deposits as
collateral to support those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at December 31,
1996 varies from 0 percent to 100 percent; the average amount collateralized is
56 percent.
F-14
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 13. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- --------- ------ --------- -------
<CAPTION>
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets).................. $8,377 18.6% >$3,603 >8.0% >$4,504 >10.0%
Tier 1 Capital (to Risk Weighted Assets)................. $7,872 17.48% >$1,802 >4.0% >$2,702 > 6.0%
Tier 1 Capital (to Average Assets)....................... $7,872 10.51% >$2,247 >3.0% >$3,745 > 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets).................. $7,660 19.53% >$3,138 >8.0% >$3,922 >10.0%
Tier 1 Capital (to Risk Weighted Assets)................. $7,170 18.28% >$1,569 >4.0% >$2,353 > 6.0%
Tier 1 Capital (to Average Assets)....................... $7,170 9.89% >$3,174 >3.0% >$3,624 > 5.0%
</TABLE>
F-15
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks............................................................................................ $ 1,698
Securities, held to maturity, at amortized cost.................................................................... 11,095
Securities, available for sale, at fair value...................................................................... 5,904
Federal funds sold................................................................................................. 776
Loans, net......................................................................................................... 53,494
Bank premises and equipment, net................................................................................... 971
Other real estate.................................................................................................. 182
Other assets....................................................................................................... 1,405
-------
Total assets................................................................................................ $75,525
-------
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand........................................................................................................ $10,653
NOW accounts.................................................................................................. 7,800
Money market accounts......................................................................................... 10,611
Savings....................................................................................................... 7,876
Time, $100,000 and over....................................................................................... 3,068
Other time.................................................................................................... 26,589
-------
Total deposits.............................................................................................. 66,597
Accrued expenses and other liabilities........................................................................... 367
-------
Total liabilities........................................................................................... 66,964
-------
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share; authorized 500,000 shares; issued and outstanding 379,970.................. 760
Surplus.......................................................................................................... 918
Retained earnings................................................................................................ 6,923
Unrealized (loss) on securities available for sale, net.......................................................... (40)
-------
Total stockholders' equity.................................................................................. 8,561
-------
Total liabilities and stockholders' equity.................................................................. $75,525
-------
-------
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................................................................... $3,458 $2,992
Interest and dividends on investment securities held to maturity:
U.S. Treasury securities and agency obligations....................................................... 324 796
Obligations of states and political subdivisions...................................................... 175 145
Other................................................................................................. 15 2
Interest on securities available for sale:
U.S. Treasury securities and agency obligations....................................................... 284 --
Obligations of states and political subdivisions...................................................... 1 --
Interest on Federal funds sold........................................................................... 51 129
------ ------
Total interest income............................................................................... 4,308.. 4,064
INTEREST EXPENSE, interest on deposits..................................................................... 1,627 1,655
------ ------
Net interest income................................................................................. 2,681 2,409
(Recovery of) loan losses................................................................................ -- --
------ ------
Net interest income after (recovery of) loan losses................................................. 2,681 2,409
------ ------
OTHER INCOME
Trust Department income.................................................................................. 192 210
Service fees............................................................................................. 280 240
Gain on sale of other real estate........................................................................ 2 (9)
Securities (loss)........................................................................................ (6) (7)
------ ------
Total other income.................................................................................. 468 434
------ ------
OTHER EXPENSES
Salaries and employee benefits........................................................................... 1,233.. 1,197
Net occupancy expenses................................................................................... 26 25
Equipment rentals, depreciation and maintenance.......................................................... 210 163
Other operating expenses................................................................................. 552 496
------ ------
Total other expenses................................................................................ 2,021 1,881
------ ------
Income before income taxes.......................................................................... 1,128.. 962
Income tax expense......................................................................................... 285 243
------ ------
Net income.......................................................................................... $ 843 $ 719
------ ------
------ ------
NET INCOME PER SHARE....................................................................................... $ 2.22 $ 1.89
------ ------
------ ------
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
COMMON RETAINED AVAILABLE FOR
STOCK SURPLUS EARNINGS SALE, NET TOTAL
------ ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............................................. $760 $ 918 $5,492 $ (72) $7,098
Net income........................................................... -- -- 719 -- 719
Cash dividends....................................................... -- -- (76) -- (76)
Change in unrealized gain (loss) on securities available for sale,
net of deferred income taxes...................................... -- -- -- (62) (62)
------ ------- -------- ------------- ------
BALANCE, SEPTEMBER 30, 1996............................................ $760 $ 918 $6,135 $(134) $7,679
------ ------- -------- ------------- ------
------ ------- -------- ------------- ------
BALANCE DECEMBER 31, 1996.............................................. $760 $ 918 $6,194 $ (82) $7,790
Net income........................................................... -- -- 843 -- 843
Cash dividends....................................................... -- -- (114) -- (114)
Change in unrealized gain (loss) on securities available for sale,
net of deferred income taxes...................................... -- -- -- 42 42
------ ------- -------- ------------- ------
BALANCE, SEPTEMBER 30, 1997............................................ $760 $ 918 $6,923 $ (40) $8,561
------ ------- -------- ------------- ------
------ ------- -------- ------------- ------
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................................... $ 843 $ 719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation........................................................................................... 114 79
(Gain) loss on other real estate....................................................................... (2) 9
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets................................. 674 (514)
Increase in accrued expenses and other liabilities.................................................. 112 128
------- -------
Net cash provided by operating activities......................................................... 1,741 421
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities............................................ 2,750 1,600
Proceeds from sale of securities available for sale.................................................... 1,600 500
Proceeds from maturities and calls of securities available for sale.................................... 1,100 2,600
Purchase of investment securities...................................................................... (452) (2,033)
Purchase of securities available for sale.............................................................. (1,698) (3,731)
Proceeds from sale of premises and equipment...........................................................
Proceeds from sale of other real estate................................................................ 28 115
Decrease in federal funds sold......................................................................... 223 4,365
Purchase of premises and equipment..................................................................... (371) (13)
Net (increase) in loans................................................................................ (5,025) (3,233)
------- -------
Net cash provided by (used in) investing activities............................................... (1,845) 170
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in demand deposits, NOW accounts and savings accounts................................... (1,260) (392)
Net increase in certificates of deposit................................................................ 659 793
Cash dividends paid.................................................................................... (114) (76)
------- -------
Net cash provided by (used in) financing activities............................................... (715) 325
------- -------
Increase (decrease) in cash and cash equivalents......................................................... (819) 916
CASH AND CASH EQUIVALENTS
Beginning.............................................................................................. 2,517 2,271
------- -------
Ending................................................................................................. $ 1,698 $ 3,187
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest............................................................................................ $1,571.. $ 1,617
------- -------
------- -------
Income taxes........................................................................................ $ 301 $ 417
------- -------
------- -------
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited financial statements as of and for the nine months ended
September 30, 1997 and 1996 have not been audited but, in the opinion of
management, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Bank as of such date and for such periods. The unaudited
financial statements should be read in conjunction with the annual financial
statements of the Bank and the notes thereto appearing elsewhere herein. The
results of operation for the nine months ended September 30, 1997 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 1997 or for any future periods.
NOTE 2. EARNINGS PER SHARE
Earnings per share has been computed by dividing net income by the weighted
average number of shares outstanding for the period. Weighted average shares
used for the computation were 379,970 for the nine months ended September 30,
1997 and 1996.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued FASB No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. The Bank is not presently expected to be
impacted by this Statement in the foreseeable future.
In October 1996, the FASB issued FASB Statement No. 127, which deferred for
one year paragraphs 9-12 (Accounting for Transfers and Servicing of Financial
Assets) under FASB No. 125 for securities lending, repurchase agreements, dollar
rolls, and other secured transactions. The FASB also agreed to defer for one
year paragraph 15 (Secured Borrowings and Collateral) under FASB No. 125 for all
transactions.
In February 1997, the FASB issued FASB No. 128, "Earnings Per Share." FASB
No. 128 simplifies the calculation of earnings per share (EPS) and makes it
comparable to international standards. Under FASB No. 128, primary EPS is
replaced with a calculation known as basic EPS. Basic EPS is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Fully diluted EPS has not
changed significantly but has been renamed diluted EPS. Under the new rules,
income available to common shareholders should be adjusted for the assumed
conversion of all potentially dilutive securities. The treasury stock method is
used to calculate the dilutive effect of options and warrants. The treasury
stock method is applied using the average market price of the Bank's common
stock during the period rather than the higher of the average market price or
ending market price. The dilutive effect of convertible debt of convertible
preferred stock will be calculated using the if-converted method, which assumes
conversion at the beginning of the period of the effect is dilutive. FASB No.
128 is effective for both interim and annual financial statements for periods
ending after December 15, 1997. Earlier application is not permitted.
In February 1997, the FASB also issued FASB No. 129, "Disclosures of
Information about Capital Structure." FASB No. 129 consolidates the existing
guidance from several other pronouncements relating to an entity's capital
structure. Management does not expect the application of this pronouncement to
have a material impact on the Bank's financial statements.
During June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive
Income." This pronouncement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FASB No. 130 is effective
for financial statements beginning after December 15, 1997.
F-20
<PAGE>
MARSHALL NATIONAL BANK AND TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS -- Continued
Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related Information." FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.
NOTE 4. PROPOSED MERGER
Mercantile Bankshares Corporation (Mercshares) and the Bank have entered
into an Agreement and Plan of Affiliation and Merger, dated November 20, 1997,
including the Agreement to Merge (the "Affiliation Agreement"). The transaction
is subject to the approval of regulatory authorities and shareholders of the
Bank. The proposed merger will entitle the shareholders of the Bank to receive,
in a tax-free exchange, 1.75 shares of Mercshares Common Stock for each share of
Bank Common Stock. Cash will be paid in lieu of fractional shares. At September
30, 1997, Mercshares and the Affiliates had total assets of approximately $7
billion, deposits of approximately $5.6 billion, and loans (net) of
approximately $4.9 billion.
F-21
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF AFFILIATION AND MERGER
BETWEEN MERCANTILE BANKSHARES CORPORATION,
AND MARSHALL NATIONAL BANK AND TRUST COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
- ---------- ---------------------------------------------------------------------------------------------------------- ----
<S> <C>
1.1 The Affiliation and Merger................................................................................ A-3
1.2 Conversion Rate; Stock Options............................................................................ A-3
1.3 Commercially Reasonable Efforts Requirement............................................................... A-3
1.4 Stockholder List.......................................................................................... A-3
1.5 Representations of the Corporation; Antidilution.......................................................... A-3
(a) Representations
(1) Bank Holding Company Status.................................................................... A-3
(2) Regulatory Applications........................................................................ A-3
(3) Good Standing.................................................................................. A-3
(4) Capitalization................................................................................. A-3
(5) SEC Registration of Common Stock............................................................... A-4
(6) Financial Statements........................................................................... A-4
(7) Material Adverse Changes....................................................................... A-4
(8) No Conflicting Agreements...................................................................... A-4
(9) Validly Issued Stock........................................................................... A-4
(10) Due Authorization.............................................................................. A-4
(b) Antidilution........................................................................................ A-4
1.6 Representations of the Bank............................................................................... A-5
(a) Corporate Status.................................................................................... A-5
(b) Capitalization...................................................................................... A-5
(c) Number of Stockholders.............................................................................. A-5
(d) Unpaid Dividends.................................................................................... A-5
(e) Compliance with Laws and Regulations................................................................ A-5
(f) Employment Agreements, Leases,
Material Contracts, List of Securities, Title Information
Community Reinvestment Act Statement,
Financial Reports, Material Adverse Changes,
Losses and Liabilities.............................................................................. A-5
(g) Accuracy of Financial Statements.................................................................... A-6
(h) Stock Issuance, Distributions since September 30, 1997.............................................. A-6
(i) Litigation.......................................................................................... A-6
(j) Tax Returns and Liability........................................................................... A-6
(k) Brokers............................................................................................. A-6
(l) Employee Benefit Plans.............................................................................. A-6
(m) Title to Assets..................................................................................... A-8
(n) Due Authorization; No Conflicting Agreements;....................................................... A-8
(o) Personal Property................................................................................... A-8
(p) Zoning Laws, Etc. .................................................................................. A-8
(q) Title to Offices.................................................................................... A-8
(r) Conditions of Buildings............................................................................. A-8
(s) Environmental Matters............................................................................... A-8
1.7 Access to Records and Information; Operation of Business.................................................. A-9
(a) Access.............................................................................................. A-9
(b) Operations.......................................................................................... A-9
1.8 Audits; Income and Capital Account Requirements, etc. .................................................... A-9
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
- ---------- ---------------------------------------------------------------------------------------------------------- ----
<S> <C>
1.9 Regulatory Approvals...................................................................................... A-10
1.10 Cooperation with Respect to Tax-Free Reorganization and Proxy Statement................................... A-10
1.11 Exclusive Dealing......................................................................................... A-10
1.12 Conditions to Corporation's Obligation.................................................................... A-11
(a) Federal Regulatory Approvals........................................................................ A-11
(b) State Regulatory Approvals.......................................................................... A-11
(c) SEC Registration Statement.......................................................................... A-11
(d) Agreements With Respect to SEC Rule 145............................................................. A-11
(e) Consents............................................................................................ A-11
(f) Legal Proceedings and Impediments................................................................... A-11
(g) Dividends........................................................................................... A-11
(h) Stock Issuance, Evidences of Indebtedness, Distributions............................................ A-11
(i) Compensation; Employee Benefit Plans................................................................ A-11
(j) Investment Practices................................................................................ A-11
(k) Other Approvals..................................................................................... A-12
(l) Limit on Dissenters................................................................................. A-12
(m) Office Openings and Closings........................................................................ A-12
(n) Tax Opinion......................................................................................... A-12
(o) Representation Update and Certificate re Representations and Conditions............................. A-12
1.13 Conditions to the Bank's Obligations...................................................................... A-12
(a) Federal Regulatory Approvals........................................................................ A-12
(b) State Regulatory Approvals.......................................................................... A-12
(c) SEC Registration Statement.......................................................................... A-12
(d) Tax Opinion......................................................................................... A-12
(e) Fairness Opinion.................................................................................... A-13
(f) Representation Update and Certificate re Representations and Conditions............................. A-13
1.14 Confidentiality........................................................................................... A-13
1.15 Employee Benefit Matters.................................................................................. A-13
(a) 401(k) and Pension Plans............................................................................ A-13
(b) Stock Option Plans.................................................................................. A-13
(c) Other Benefits...................................................................................... A-14
2.1 Effective Date............................................................................................ A-14
2.2 Corporation's Obligation in Accomplishing Merger.......................................................... A-14
2.3 Bank's Obligations in Accomplishing Merger................................................................ A-14
2.4 Stockholder Approval...................................................................................... A-15
2.5 Effect of Merger.......................................................................................... A-15
2.6 Terms of Merger; Dissenting Stockholders.................................................................. A-15
2.7 Confirmatory Deeds........................................................................................ A-16
2.8 Procedural Matters........................................................................................ A-16
3.1 Termination for Regulatory Reasons........................................................................ A-16
3.2 Termination by Consent or Due to Passage of Time.......................................................... A-16
3.3 Termination with Respect to Acquisition Proposal.......................................................... A-16
3.4 Amendment................................................................................................. A-16
3.5 Expenses; Limited Liability............................................................................... A-17
3.6 Notices................................................................................................... A-17
3.7 Counterparts.............................................................................................. A-17
3.8 Binding Effect; No Third Party Rights..................................................................... A-17
3.9 Governing Law............................................................................................. A-18
Exhibit A Agreement to Merge........................................................................................ A-20
</TABLE>
A-2
<PAGE>
AGREEMENT AND PLAN OF
AFFILIATION AND MERGER
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 20th day of November, 1997, between Mercantile Bankshares Corporation, a
body corporate of the State of Maryland (the "Corporation"), and Marshall
National Bank and Trust Company, a national banking association (the "Bank").
WITNESSETH, that for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable consideration,
the parties hereto agree as follows:
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 an interim national bank to be formed by the
Corporation (the "Interim Bank") and, as of the Effective Date, hereinafter
defined, renamed Marshall National Bank and Trust Company, pursuant to the
procedures described in Article II of this Agreement (the "Merger" or the
"Affiliation") and the form of Agreement to Merge attached as Exhibit A hereto
(the "Agreement to Merge").
1.2. CONVERSION RATE; STOCK OPTIONS.
(a) The Affiliation shall be accomplished on the basis of one and
seventy-five hundredths (1.75) 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, immediately prior to the
Affiliation 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 Affiliation 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 one and seventy-five hundredths (1.75)
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 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.
(2) The Corporation, with the assistance and cooperation of the Bank,
will cause the filing of an application with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") and the Comptroller of the
Currency (the "OCC") for approval of the Affiliation and the Merger and
prosecute such applications in good faith and with diligence.
(3) The Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland and has the
corporate power and authority to carry on its business as it is now
conducted.
(4) As of September 30, 1997, the authorized capital stock of the
Corporation consisted of 2,000,000 shares of preferred stock, no par value
("Mercantile Preferred"), and 130,000,000 shares of Common Stock. At
September 30,
A-3
<PAGE>
1997, no shares of Mercantile Preferred were outstanding, 71,818,723 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 Affiliation 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 (the "Proxy Statement"), 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, 1996
containing the following consolidated financial statements of the
Corporation (collectively, the "Corporation's Audited Financial
Statements"): consolidated balance sheets as of December 31, 1996 and 1995
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, 1996, together with the notes thereto,
certified by Coopers & Lybrand, LLP independent certified public
accountants, and (ii) copies of its unaudited consolidated financial
statements for the nine months ended September 30, 1997 containing a
consolidated balance sheet as of September 30, 1997 and statements of
consolidated income, consolidated cash flows and consolidated changes in
stockholders' equity for the nine months then ended (the "Corporation's
September 30, 1997 Financial Statements"). All of the Corporation's Audited
Financial Statements and the Corporation's September 30, 1997 Financial
Statements have been prepared in accordance with generally accepted
accounting principles and applicable SEC requirements and present fairly
the information presented therein.
(7) Since September 30, 1997, there has not been any material adverse
change in the Corporation's consolidated balance sheet, consolidated income
statement, financial position, results of operations, or business. There is
no material liability, actual or contingent, known or anticipated, of a
character that should be disclosed in the Corporation's Audited Financial
Statements or in the Corporation's September 30, 1997 Financial Statements
and that is not disclosed therein, other than liabilities arising since the
respective dates thereof in the ordinary course of business, which are not
materially adverse.
(8) Neither the execution and delivery of this Agreement nor the
carrying out of the transactions contemplated hereunder will result in any
material violation, termination, modification of, or be in conflict with,
any terms of the Corporation's Charter or Bylaws, or any contract or other
instrument to which the Corporation is a party, or of any judgment, decree,
or order applicable to the Corporation, or result in the creation of any
material lien, charge, or encumbrance upon any of the properties or assets
of the Corporation.
(9) The Common Stock deliverable pursuant to this Agreement will be,
prior to its issuance, duly authorized for issuance and will, when issued
and delivered in accordance with this Agreement, be duly and validly
issued, fully paid and nonassessable.
(10) The execution, delivery, and performance of this Agreement by the
Corporation have been duly authorized by its Board of Directors and require
no action on the part of the stockholders of the Corporation. This
Agreement constitutes a valid and binding obligation of the Corporation,
enforceable against the Corporation in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally or by
general equitable principles.
(b) Nothing in this Agreement shall limit the right of the Corporation to
issue or repurchase any of its stock or other securities in any manner and for
any consideration permitted by law either in connection with acquisitions of new
affiliates or otherwise, prior to or after the Effective Date, as hereinafter
defined; provided, however, that if the Corporation takes any
A-4
<PAGE>
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 Affiliation 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 arrangements 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 stock
option arrangements pursuant to the foregoing provisions of Section 1.5(b).
1.6. REPRESENTATIONS OF THE BANK. The obligations of the Corporation under
this Agreement are based upon and subject to the correctness and accuracy of the
following representations of the Bank:
(a) The Bank is a national banking association and a member of the Federal
Reserve System, having and exercising trust powers, legally formed, validly
existing and in good standing under the laws of the United States, the deposits
of which are insured by the FDIC. The Bank has the corporate power and authority
to carry on its business as it is now conducted. The Bank has two banking
offices, with its main office in Marshall, Virginia and one branch office
located in Warrenton, Virginia. The Bank owns its main office and leases its
branch office located in Warrenton, Virginia. No application for any additional
office is pending. The Bank has no subsidiaries or affiliated companies and is
not a general partner or coventurer in any joint venture or other business
enterprise.
(b) The authorized capital stock of the Bank consists of 500,000 shares of
a single class of common stock, par value of $2.00 per share, of which 379,970
shares were issued and outstanding as of the date of this Agreement. 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 stock or any security
representing the right to purchase or receive any capital stock of the Bank
except for (i) a plan approved by the Bank's stockholders in 1986 pursuant to
which the Board of Directors was authorized to award stock in lieu of cash
bonuses to the Bank's senior officers (the "Stock Bonus Plan") and (ii) stock
options issued to nine officers of the Bank under a stock option plan adopted on
September 11, 1997 by the Bank's directors, subject to approval by the Bank's
stockholders, which has not yet been obtained, for an aggregate of 7,000 shares
of Bank common stock as of the date of this Agreement (collectively, the "Stock
Options"). The Stock Options were validly authorized and issued by the Bank,
subject to the expected approval of its stockholders. No additional further
shares of common stock of the Bank will be issued under the Stock Bonus Plan.
(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
Articles of Association and other charter documents 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, deeds, title policies, title opinions, and title
reports with respect to its banking offices and other real estate, copies or
descriptions of all other material contracts and leases, a list of all
securities held by the Bank on September 30, 1997, 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.
(section mark)345.5(a)), copies of the Bank's year-end Consolidated Reports of
Condition and Income ("Call Reports") filed with the OCC for all years
subsequent to 1991, copies of all interim Call Reports filed with the OCC in
1996 and 1997 (the Bank's September 30, 1997 Call Reports being hereinafter
referred to as the "Bank's September 30, 1997 Call Reports"), copies of the
Bank's audited financial statements for the years ended December 31, 1992, 1993,
1994, 1995 and 1996, together with the notes thereto, certified by Yount, Hyde &
Barbour, P.C., independent certified public accountants (the said financial
statements for the year ended December 31, 1996 being hereinafter referred to as
the "Bank's December 31, 1996 Financial Statements"), a copy of the most recent
management letter rendered by the Bank's independent
A-5
<PAGE>
certified public accountants, and copies of the Bank's federal income tax
returns and Virginia bank franchise tax returns for the years 1994, 1995, and
1996. Since September 30, 1997, 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, 1996 Financial
Statements or the Bank's September 30, 1997 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, 1996 Financial Statements or the Bank's September 30, 1997 Call
Reports and that is not disclosed therein, other than liabilities arising since
the respective dates thereof in the ordinary course of business, which are not
materially adverse.
(g) All of the financial statements previously provided to the Corporation
pursuant to subparagraph (f) of this Section 1.6 are accurate and complete in
all material respects, have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods covered by
such financial statements, and present fairly the financial position, cash flows
(with respect to those financial statements containing statements of cash
flows), results of operations, and changes in stockholders' equity (with respect
to those financial statements containing statements of changes in stockholders'
equity) of the Bank at the close of business at the dates thereof and for the
periods covered thereby.
(h) Since September 30, 1997, 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, 1996 Financial Statements
and September 30, 1997 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, 1996 Financial Statements and September 30, 1997 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 not been audited by the Internal
Revenue Service ("IRS") during the ten year period preceding the date of this
Agreement.
(k) There is no finder or broker acting, or who acted, for the Bank, or, to
the knowledge of the directors of the Bank, for any stockholder of the Bank, in
connection with the transactions contemplated by this Agreement, except that the
Bank has retained McKinnon & Company, Inc. as its financial advisor pursuant to
a retainer agreement, a copy of which has been provided to the Corporation.
(l) Except as set forth in a schedule previously provided by the Bank (the
"Benefit Plan Schedule"), the Bank does not sponsor or maintain and is not
required to contribute to and has not during the preceding five (5) years
sponsored, maintained or contributed to an "employee benefit plan" (as such term
is defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) or any other employee benefit program or
arrangement, whether formal or informal, including, without limitation, any
pension, profit sharing, deferred compensation, retirement, bonus, stock option,
stock appreciation right, stock purchase or restricted stock plan, severance or
"golden parachute" arrangement, consulting agreement, incentive plan, or any
other compensation, perquisite, welfare or fringe benefit plan, program or
arrangement providing for benefits for, or for the welfare of, any or all of the
current or former employees, leased 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) 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
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course of plan administration, there is no litigation or other legal
proceeding pending or threatened against or with respect to any Employee
Plan or its fiduciaries and no facts exist which could give rise to such
proceedings or litigation; all reports, returns, forms, notifications or
other disclosure materials required to be filed with any governmental
entity or distributed to employees with respect to any Employee Plan have
been timely filed or distributed and are accurate and complete; no
nonexempt "prohibited transaction" (as defined in Section 4975 of the Code
or Section 406 of ERISA) has occurred or will occur prior to the Effective
Date with respect to any Employee Plan subject to such rules, any parties
in interest, or fiduciaries; no excise taxes are payable or will become
payable prior to the Effective Date with respect to any Employee Plan;
except with respect to retiree health and group life insurance programs as
to which the Bank believes it has no legal obligation to continue, 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) and related schedules for each Employee
Plan that have been filed with any governmental agency; and all other
material documents relating to any Employee Plan as may reasonably be
requested by the Corporation.
(3) The only Employee Plans currently maintained or contributed to by
the Bank which are intended to be qualified under Section 401(a) of the
Code are a defined benefit plan (the "Pension Plan") and a 401(k) plan
(collectively, the Qualified Plans); each 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 requiring current amendments (including any
regulations issued thereunder), has received, or will timely file an
application for, a favorable determination letter from the Internal Revenue
Service with respect to its tax-qualified status and the Bank has
delivered, or will deliver, to the Corporation complete copies of all such
determination letters and all material correspondence relating to the
applications therefor; nothing has occurred since the date of the most
recent applicable determination letter nor will occur prior to the
Effective Date that would adversely affect the tax-qualified status of the
Qualified Plan.
(4) Except as previously disclosed to the Corporation in writing, 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 or applicable
state law.
(5) With respect to the Pension Plan, no "accumulated funding
deficiency" (as defined in Section 412 of the Code and Section 302 of
ERISA), whether or not waived, and no "unfunded current liability" (as
defined in Section 412 of the Code and Section 302 of ERISA) exists; the
funding method for the Pension Plan is acceptable under Section 412 of the
Code and Section 302 of ERISA; each actuarial assumption used in connection
with the funding of the Pension Plan is reasonable; no "reportable event"
(as defined in Section 4043 of ERISA) has occurred or will occur prior to
the Effective Date; the Bank has made all required premium payments to the
Pension Benefit Guaranty Corporation ("PBGC") when due; no amendment has
occurred or will occur prior to the Effective Date which could require the
Bank to provide security to the Pension Plan under Section 401(a)(29) of
the Code; as of October 1, 1997, the fair market value of the assets of the
Pension Plan equals or exceeds the present value of the accrued benefits of
the participants, former participants, and beneficiaries in such plan,
based on the actuarial methods, tables and assumptions that would be used
by the Pension Plan for PBGC premium calculation purposes; the fair market
value of the assets of the Pension Plan equals or exceeds the present value
of all projected benefit obligations (including, but not limited to, any
early retirement or other subsidy) calculated in accordance with Statement
No. 87 of the Financial Accounting Standards Board, based on the actuarial
methods, tables and assumptions that are no more favorable to the Pension
Plan than the actuarial methods, tables and assumptions that would be used
by the PBGC in terminating any underfunded single employer plan on the date
of such calculation; since the last valuation date for the Pension Plan,
there has been no amendment or change to such Pension Plan, nor will there
be any such amendment or change to the Pension Plan prior to the Effective
Date, that would increase the amount of benefits thereunder and there has
been no event or occurrence, nor will there be any such event or occurrence
prior to the Effective Date, that would cause the accrued benefits or
projected benefit obligations under the Pension Plan to exceed the fair
market value of the plan's assets; and the Bank has delivered to the
Corporation complete copies of the actuarial valuation and trustee reports
for the Pension Plan for the last five (5) plan years.
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(6) The Bank has not at any time been a contributing employer to any
multiemployer plan as defined in Section 4001 of ERISA.
(7) Any Employee Plan which is a group health plan has complied in
each and every case with the requirements of Sections 601 through 607 of
ERISA and Section 4980B of the Code and all other applicable federal, state
and local laws relating to continuation coverage.
(8) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any director or employee of the Bank under any
Employee Plan or otherwise, (ii) materially increase any benefit otherwise
payable under any plan, or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
(m) The Bank has good and marketable title to all of its material property
and assets, including those reflected on the Bank's September 30, 1997 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. Neither the execution and
delivery of this Agreement nor the carrying out of the transactions contemplated
hereunder will result in any violation, termination, modification of, or be in
conflict with the Charter or Bylaws of the Bank, or the terms of any material
contract or other instrument to which the Bank is a party, or of any judgment,
decree, order or regulatory agreement applicable to the Bank, or result in the
creation of any material lien, charge, or encumbrance upon any of the properties
or assets of the Bank. No consent to this Agreement by any private party is
required under any contract, lease, mortgage, or other instrument to which the
Bank is a party. This Agreement constitutes a valid and binding obligation of
the Bank, enforceable against the Bank in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally or by general equitable
principles.
(o) The tangible personal property of the Bank is in good operating
condition and repair, subject to ordinary wear and tear.
(p) To the best of the Bank's knowledge, 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
owned by the Bank, including its main office, 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 lease for the Bank's office in Warrenton, Virginia is valid
and in full force and effect; neither the Bank nor, to the knowledge of the
Bank, its lessor has breached any provision of, or is in default in any respect
under the terms of the lease.
(r) All electrical, plumbing, heating, air conditioning and other
mechanical systems and related equipment in the Bank's banking offices are in
good working order, subject to ordinary wear and tear. The roofs of the office
buildings are waterproof and, except as previously disclosed to the Corporation
in writing, their basements 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.
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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 (and other required regulatory actions) with
respect to the Affiliation by the Federal Reserve, the OCC, the FDIC, the
Maryland Commissioner of Financial Regulation (the "Maryland Commissioner"), the
Virginia State Corporation Commission (the "Virginia Commission"), the Delaware
Bank Commissioner (if required by law), Pennsylvania banking authorities, (if
required by law), 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 $75,000;
(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 Articles of Association or other charter documents
or Bylaws;
(10) except as provided in Section 1.11, 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
Affiliation except as provided in Section 1.11.
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, 1994, 1995 and 1996, 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
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audit, or update thereof, shall disclose, in the opinion of the Corporation, (1)
that the stockholders' equity of the Bank, determined in accordance with
generally accepted accounting principles, consistently applied, is less than
$8,500,000, or (2) that since September 30, 1997 there has been a material
adverse change in the balance sheet, income statement, financial position,
results of operation or business of the Bank, or (3) that any inability of
independent public accountants to certify financial statements of the Bank for
any period (or any qualification to such a certification) would materially
interfere with or prevent the Corporation, before or after the Effective Date,
from complying with requirements of the SEC (or other requirements) for the
preparation and publication of certified or other required financial statements,
whether for the Bank or for the Corporation and its consolidated subsidiaries,
or (4) that the representations contained in Section 1.6 hereof or elsewhere in
this Agreement are inaccurate in any material respect, or (5) that the nature or
composition of the Bank's loan portfolio is materially different from the nature
or composition of the Bank's loan portfolio as reflected in the Bank's September
30, 1997 Call Reports, or (6) that any material item or group of items in the
Bank's loan portfolio is unacceptable to the Corporation for stated defects,
including, without limitation, matters relating to credit, collateral or
documentation, that are not cured within thirty days after the Bank receives
notice of such defects from the Corporation, or (7) that the nature or
composition of the Bank's deposit liabilities are materially different from the
nature or composition of the Bank's deposit liabilities as reflected in the
Bank's September 30, 1997 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 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
Affiliation by all appropriate State and Federal regulatory agencies.
1.10. COMMERCIALLY REASONABLE EFFORTS REGARDING TAX-FREE REORGANIZATION AND
PROXY STATEMENT. The Bank agrees to use all commercially reasonable effort to
(i) cause the Affiliation to qualify as a tax-free reorganization under Section
368(a)(2)(D) of the Code, and (ii) cooperate with the Corporation in preparing
and furnishing the Proxy Statement.
1.11. EXCLUSIVE DEALING. The Board of Directors of the Bank has carefully
considered and deliberated upon the terms and conditions of the Affiliation and
has concluded that the Affiliation is fair to, and in the best interests of the
stockholders of the Bank, with the intent that this Agreement be conclusive and
binding, subject to the terms and conditions hereof. In the process of so
concluding, the Board of Directors of the Bank has, at the Bank's expense,
received the written opinion of McKinnon & Company, Inc., its financial advisor,
that the consideration to be received in the Affiliation is fair to the
stockholders of the Bank from a financial viewpoint. Accordingly, in view of the
commitments of the parties and the time and expense required to consummate the
Agreement and while this Agreement is in effect, neither the Bank nor any of its
officers, directors, employees, agents or representatives (including, without
limitation, investment bankers) shall, directly or indirectly: (i) encourage,
solicit or initiate the submission of any Acquisition Proposal, as hereinafter
defined, or take any other action to facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to any
Acquisition Proposal; or (ii) recommend any Acquisition Proposal to the Bank's
stockholders or enter into any agreement with respect to any Acquisition
Proposal or participate in discussions or negotiations with, or furnish any
information to, any person other than the Corporation or its affiliates and
agents in connection with any potential Acquisition Proposal, unless an
unsolicited Acquisition Proposal is made and the Board of Directors of the Bank
shall conclude, based on a written opinion of counsel, which may be based with
respect to financial matters on the written opinion of the Bank's financial
advisor, that its fiduciary obligations require consideration of such
Acquisition Proposal because such Acquisition Proposal may be in the best
interest of the Bank's stockholders and is more favorable to the Bank's
stockholders from a financial point of view than the Affiliation provided for
herein. "Acquisition Proposal" shall mean any proposed (A) merger,
consolidation, share exchange or similar transaction involving the Bank, (B)
sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange, or otherwise of assets of the Bank representing
10% or more of the consolidated assets of the Bank, (C) issue, sale or other
disposition (including by way of merger, consolidation, share exchange or any
similar transactions) of securities (or options, rights or warrants to purchase,
or securities convertible into, such securities) representing 10% or more of the
voting power of the Bank, (D) transaction in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange
Act), or the right to acquire beneficial ownership, or any "group" (as such term
is defined under the Exchange Act) shall have been formed which beneficially
owns or has the right to acquire beneficial ownership, of 20% or more of the
Bank's outstanding common stock. The Bank shall promptly advise the Corporation
of, and communicate to the Corporation the terms of, any such inquiry or
proposal addressed to the Bank or of which the
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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 1.11.
1.12. CONDITIONS TO THE CORPORATION'S OBLIGATIONS. The obligations of the
Corporation under this Agreement are subject to the satisfaction prior to, and
at, the Effective Date, of the conditions set forth in Article II of this
Agreement or elsewhere in this Agreement and of the following conditions:
(a) That pursuant to applicable statutes, the Federal Reserve, the OCC, and
the FDIC shall have given all required approvals (and taken any other required
regulatory action) to permit the Affiliation and such approvals and actions
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 Commission, the Delaware
Bank Commissioner (if required by law), and Pennsylvania banking authorities (if
required by law), shall have approved (or taken any other required regulatory
action) with respect to the Affiliation to the extent required by applicable
State or Federal laws, and all required waiting periods with respect thereto
shall have expired.
(c) That the Registration Statement shall have been declared effective by
the SEC and there shall not be in effect a stop order with respect thereto.
(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 Affiliation, 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 Affiliation.
(g) That since September 30, 1997, the Bank shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except for a regular semi-annual cash dividend not to exceed forty
cents ($.40) per share to be declared in December, 1997, and regular cash
dividends for any full calendar quarter occurring before the Effective Date that
begins after December 31, 1997 at an effective quarterly rate of not more than
nineteen cents ($.19) per share; provided, however, that if the Effective Date
occurs after June 30, 1998, the Corporation will discuss with the Bank whether
an increase in such dividend for the calendar quarter beginning July 1, 1998,
may be appropriate.
(h) That since September 30, 1997, 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 1.12(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. Notwithstanding the foregoing, the Bank may extend until December
31, 2003, the term of the employment contract of its President, Donald R.
Yowell, dated December 9, 1993 (the "Employment Contract"), subject to the other
terms of the Employment Contract.
(j) That between September 30, 1997, and the Effective Date, no change
shall have been made in the Bank's existing investment practices and policies.
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(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 the Interim Bank, as successor in the
Affiliation, 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 20% of the Bank's common stock shall
have voted against the Merger or given notice in writing at or prior to the
meeting at which the Bank's stockholders vote on the Merger that they dissent
from the plan of Merger pursuant to 12 U.S.C.A. (section mark)215a.
(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 shall have received from Mays & Valentine, LLP
(or, in the Corporation's discretion, from Venable, Baetjer and Howard, LLP, or
such other counsel as may be acceptable to the Corporation) an opinion with
respect to the federal income tax consequences of the Affiliation substantially
to the effect that the Affiliation will qualify as a reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code, that the
Corporation, Interim Bank, and the Bank will each be a party thereto, and that
no gain or loss will be recognized by the Corporation, Interim Bank or the Bank
as a result of the Affiliation.
(o) That the representations of the Bank contained in Section 1.6 of this
Agreement shall be true in all material respects on and as of the Effective Date
as if made again as of such date, and that, on request of the Corporation, and
as of the Effective Date, the President of the Bank shall deliver a written
certificate to the Corporation that to his knowledge, information and belief,
the representations set forth in this Agreement are true and correct in all
material respects as if made on and as of the date of such certificate and that
the conditions set forth herein which are required to have been met by such date
have, without exception, been met.
Conditions (d), (e), (f), (g), (h), (i), (j), (k), (l), (m), (n), and (o)
may be waived by the Corporation.
1.13. CONDITIONS TO THE BANK'S OBLIGATIONS.
The obligation of the Bank to consummate the Affiliation under this
Agreement is subject to the following conditions:
(a) That pursuant to applicable statutes, the Federal Reserve, the OCC, and
the FDIC shall have given all required approvals (and taken any other required
regulatory action) to permit the Affiliation, and such approvals and actions
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 Commission, the Delaware
Bank Commissioner (if required by law), and Pennsylvania banking authorities (if
required by law), shall have approved the Affiliation to the extent required by
applicable State or Federal laws and all required waiting periods with respect
thereto shall have expired.
(c) That the Registration Statement shall have been declared effective by
the SEC and there shall not be in effect a stop order with respect thereto.
(d) That the Bank shall have received an opinion of Mays & Valentine, LLP
(or from such other counsel as may be acceptable to the Corporation and the
Bank, in their reasonable discretion), with respect to the federal income tax
consequences of the Affiliation, substantially to the effect that, upon
completion of the Affiliation (except as to the disposition of fractional
shares):
(1) the Affiliation will qualify as a reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code;
(2) the Corporation, Interim Bank and the Bank will each be a party
thereto;
(3) no gain or loss will be recognized by the Corporation, Interim
Bank or the Bank as a result of the Affiliation;
(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;
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(5) provided that the Bank's common stock is held as a capital asset,
the basis of the Common Stock received by such stockholders of the Bank
will be the same as the basis of the common stock of the Bank surrendered
by such stockholders in exchange for the Common Stock;
(6) provided that the Bank's common stock is held as a capital asset,
such stockholders' holding period of the Common Stock received by them will
include the stockholders' holding period of the common stock of the Bank
which is surrendered in exchange for such Common Stock.
(e) That the Bank's Proxy Statement shall contain the written opinion of
McKinnon & Company, Inc. (or such other recognized investment firm as the Bank
may select), dated contemporaneously with the date of the Proxy Statement to the
effect that the consideration to be received in the Affiliation is fair to the
stockholders of the Bank from a financial point of view.
(f) That the representations of the Corporation contained in Section 1.5(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) and (f) may be waived by the Bank.
1.14. CONFIDENTIALITY
Between the date of this Agreement and the Effective Date, the Corporation
and the Bank each will maintain in confidence, and cause its directors,
officers, employees, agents and advisors to maintain in confidence, and will not
use for any purpose other than those contemplated in this Agreement, any
written, oral or other information obtained in confidence from the other party
or a third party in connection with this Agreement or the transactions
contemplated hereby unless such information is already known to such party or to
others not bound by a duty of confidentiality or unless such information becomes
publicly available through no fault of such party, unless use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the transactions
contemplated hereby or unless the furnishing or use of such information is
required by or necessary or appropriate in connection with legal proceedings. If
the Affiliation is not consummated, each party will return or destroy as much of
such written information as may reasonably be requested except to the extent
that it is necessary or appropriate for the party to retain the information in
connection with any legal proceedings relating to the Agreement.
1.15. EMPLOYEE BENEFIT MATTERS.
(A) 401(K) PLAN AND PENSION PLAN. At the option of the Corporation, after
the Effective Date, the Bank's 401(k) and pension plans may be terminated,
frozen or merged with and into the Corporation's 401(k) and cash balance plans,
respectively. Until such termination, freeze or merger, employees of the Bank
will continue to be eligible to participate in the Bank's 401(k) and pension
plans, subject to such changes in the plans as are required by law and are
deemed advisable by the Corporation. Upon such termination, freeze or merger,
employees of the Bank will be eligible to participate in the Corporation's
401(k) and cash balance plans, subject to their terms and conditions, and will
be given credit under such plans for service with the Bank prior to the
Effective Date for purposes of eligibility to participate and vesting and, in
the case only of a merger of the Bank's Pension Plan with and into the
Corporation's cash balance plan, benefit accrual. In addition, upon the adoption
(by merger or otherwise) of the Corporation's cash balance plan by the Bank for
the benefit of its employees, such employees will be given credit under such
plan for service with the Bank prior to such adoption (including service with
the Bank prior to the Effective Date) for purposes of calculating the employees'
accrual rates under such plan; furthermore, such employees will receive benefit
accruals under Section 4.2 of such plan (base, excess and supplemental credits),
as applicable, based upon the employees' respective ages as of the date of such
adoption. In the event the Bank's Pension Plan is not continued and the Bank's
employees become participants in the Corporation's cash balance plan, those
individuals who were Bank employees as of the Effective Date will receive
retirement benefits under the Corporation's retirement plans or otherwise which
are comparable to those they would have received had the Bank's Pension Plan and
401(k) plan continued in effect.
(B) STOCK OPTION PLANS. Effective as of the Effective Date, the Bank's
stock option plans will be terminated and all unexercised and theretofore
unexpired Stock Options will be disposed of pursuant to Section 1.2(b) hereof.
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(C) OTHER BENEFITS. Except with respect to (i) the Bank's 401(k) and
pension plans described in Section 1.15(a) above (the disposition of which shall
be governed by Section 1.15(a) above), and (ii) executive plans, programs and
arrangements, eligibility for participation in which is determined in the
discretion of the Corporation, after the Effective Date, employees of the Bank
shall, to the extent that any of the Bank's other employee benefit plans and
programs are not continued, be entitled to participate in the Corporation's
employee benefit plans and programs on substantially the same basis as similarly
situated employees of the Corporation (taking into account all applicable
factors, including but not limited to, position, employment classification, age,
length of service, pay, part-time or full time status, and the like.) Except as
set forth in Section 1.15(a) above, the Corporation agrees to treat service with
the Bank before the Effective Date as service with the Corporation for purposes
of all such employee benefit and seniority based plans and programs.
ARTICLE II
MERGER
The following terms, provisions and conditions are in addition to those
contained in Articles I and III of this Agreement:
2.1. EFFECTIVE DATE. The effective date of the Merger (the "Effective
Date") shall be the effective date set forth in the Certificate of Merger, or
other approval of the Merger, issued by the OCC pursuant to applicable
provisions of the laws of the United States of America. 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 or the Bank,
as the case may be).
2.2. CORPORATION'S OBLIGATIONS IN ACCOMPLISHING MERGER. In order to effect
the Merger, the Corporation will (i) cause the formation of Interim Bank as a
newly chartered national banking association intended to be a wholly-owned
subsidiary of the Corporation (and to be renamed Marshall National Bank and
Trust Company as of the Effective Date); (ii) use its best efforts to obtain all
necessary authority and approvals from the OCC, the FDIC and the Federal Reserve
for Interim Bank to commence business upon the Effective Date as an FDIC insured
national banking association; (iii) approve, execute, deliver and cause Interim
Bank to approve, through all necessary corporate action, execute and deliver an
Agreement to Merge substantially in the form attached as Exhibit A hereto (or in
such other form reflecting the pertinent terms of this Agreement as may be
required by applicable provisions of the laws of the United States of America
and the regulations of the OCC), as determined by the Corporation, and to cause
Interim Bank to become a party to this Agreement pursuant to an Addendum hereto;
(iv) prepare and file with the OCC an application for approval of the Merger of
the Bank and Interim Bank described herein pursuant to the provisions of 12
U.S.C. Sections 215a and 1828(e); (v) prepare and file with the Federal Reserve
an application requesting approval of its acquisition of stock of Interim Bank
and/or control of the Bank pursuant to the Bank Holding Company Act of 1956, as
amended; (vi) prepare and file any required application with the Virginia
Commission pursuant to the Code of Virginia; (vii) cause the publication of any
newspaper notices required by law to be published by the Corporation or Interim
Bank with respect to the Affiliation and the Interim Bank stockholder meeting
with respect thereto; (viii) cause the Corporation's existing Maryland banking
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 as contemplated
herein; (ix) prepare and file any other required regulatory applications; and
(x) 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, if
required by law, execute this Agreement and shall approve and, if required by
law, execute an Agreement to Merge substantially in the form of Exhibit A hereto
(with such changes reflecting the pertinent terms of this Agreement as may be
required under applicable provisions of the laws of the United States of America
and the regulations of the OCC, as determined by the Corporation); (ii) shall
cause the execution and delivery of the Agreement to Merge by the Bank; (iii)
through counsel for the Corporation, shall submit the Agreement to Merge to the
OCC for its approval pursuant to the provisions of 12 U.S.C. Sections 215a and
1828(c); (iv) shall cause the publication of any newspaper notices required by
law to be published by the Bank with respect to the Affiliation or the
stockholders meeting at which the Affiliation will be voted upon; and (v) shall
duly call and convene a meeting of the Bank's stockholders to act upon the
Agreement to Merge and the Affiliation and, subject to the terms of this
Agreement, in connection therewith shall recommend approval of the Agreement to
Merge and the Affiliation 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 1.11 hereof.
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2.4. STOCKHOLDER APPROVAL. The Merger is subject to the additional
nonwaivable condition that the Agreement to Merge and the Merger provided for
therein shall have been ratified and confirmed by the holders of two-thirds of
the votes entitled to be cast with respect to each of Interim Bank and the Bank
at stockholder meetings duly called for that purpose (or with respect to Interim
Bank, if permitted by law, by stockholder consent action in accordance with 12
U.S.C. Section 215a(a)(2)). The Corporation will vote or cause to be voted all
of the outstanding common stock shares of Interim Bank in favor of the Agreement
to Merge and the Merger provided for therein, subject to the terms of this
Agreement.
2.5. EFFECT OF MERGER. Upon the Effective Date, the Bank shall be merged
with and into Interim Bank in accordance with this Agreement and the Agreement
to Merge and pursuant to applicable provisions of the laws of the United States
of America and with the effect provided in said provisions. As a result of the
Merger and as of the Effective Date:
(a) Interim Bank shall be the receiving association (the "Successor"),
under the name Marshall National Bank and Trust Company.
(b) The bylaws of Interim Bank in effect immediately prior to the Effective
Date shall be the bylaws of the Successor.
(c) The charter of the Successor shall be as provided for in the Agreement
to Merge.
(d) The offices of the Bank as of the date of this Agreement and any
additional offices opened by the Bank prior to the Effective Date in accordance
with this Agreement shall be and become the offices of the Successor.
(e) The directors and officers of the Bank as of the Effective Date shall
be the directors and officers of the Successor.
2.6. TERMS OF MERGER; DISSENTING STOCKHOLDERS. On the Effective Date and
immediately upon the Merger becoming effective with the effects set forth in
Section 2.5 above and in 12 U.S.C.A. (section mark) 215a, or any successor
statute thereto, and in consideration thereof, the terms of the Merger shall be
as follows:
(a) Each share of issued and outstanding common stock of the Bank (other
than the shares held by any dissenting stockholder of the Bank pursuant to
paragraph (d) of this Section 2.6) shall for all corporate purposes, and without
any action on the part of the holder thereof, automatically become and be
converted into one and seventy-five hundredths (1.75) 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 dissenting stockholders) will thereafter represent a number of whole
shares of Common Stock (and the right to receive cash in lieu of fractional
shares of Common Stock) determined in accordance with the 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(a) will be cancelled.
(b) For each share of common stock of Marshall issued and outstanding
immediately prior to the Effective Date and converted into Common Stock of the
Corporation pursuant to Section 2.6(a) above, the Interim Bank shall
automatically issue one share of its common stock to the Corporation. In
addition, the Interim Bank shall pay a special dividend to the Corporation of
$120,000, or such other amount representing the original consideration paid by
the Corporation for 50,000 shares of Interim Bank common stock, and, in turn,
the Corporation shall cancel the certificate representing such previously
outstanding shares of Interim Bank common stock.
(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
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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 the Bank's
stockholders at which the Merger is approved or who has given notice in writing
at or prior to such meeting that he dissents from the plan of merger, and who,
at any time before thirty (30) days after the Effective Date, makes a written
demand upon the Successor for payment of the value of such shares, accompanied
by a surrender of the certificates for such shares, shall be entitled to receive
from the Successor in cash the value of such shares of the common stock of the
Bank, all pursuant to and determined in accordance with the provisions of 12
U.S.C.A. (section mark) 215a, or any successor statute thereto. The amount paid
to any such dissenting stockholder shall be debited against the capital accounts
of the Successor. If the holders of any of the shares of the Bank object to the
Merger and demand payment in cash for the value of their shares as aforesaid,
the Corporation shall pay to Successor, as a contribution to its capital, cash
at a price per share equal to the price per share paid by the Successor to the
dissenting shareholder (or, in its discretion, shall pay such funds to the
Successor in exchange for additional shares of its common stock).
(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, 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 may deem necessary or desirable in order to vest or
perfect in or confirm of record or otherwise to Successor, 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.
2.8. PROCEDURAL MATTERS. The Corporation, at its option, may revise the
sequence of events or other matters relating to the accomplishment of the Merger
in such manner as it may reasonably determine will best facilitate
accomplishment of the Affiliation.
ARTICLE III
MISCELLANEOUS
3.1. TERMINATION FOR REGULATORY REASONS. If, at any time, the Corporation
receives information from any regulatory authority, which by law is required to
approve or otherwise act upon the Affiliation or any other aspect of the
transactions provided for herein or which has authority to challenge the
validity of the Affiliation or such transactions in judicial proceedings or
otherwise, that provides a substantial basis for concluding that the required
regulatory approval will not be granted or that the Affiliation or such
transactions will be so challenged, the Corporation may, subject to the
provisions of Section 3.5 with respect to expenses, terminate all obligations
under this Agreement by giving fourteen (14) days written notice of such
termination to the Bank. 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 the Bank shall be
entitled to terminate this Agreement after November 30, 1998, 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 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 1.11 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 three hundred
thousand dollars ($300,000) and shall also pay its own expenses as provided in
Section 3.5 below.
3.4. AMENDMENT. This Agreement may be amended, but only in writing approved
by the Bank and the Corporation, at any time prior to the Effective Date and
with respect to any of the terms and provisions hereof; provided, however, that
after the stockholders of the Bank have approved the Merger, no amendment shall
be made that alters the Conversion Rate (except pursuant to Section 1.5(b)) or
otherwise materially adversely affects the rights of the Bank's stockholders.
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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 by reason of a material breach by the Bank, or by the Bank by
reason of a material breach by the Corporation, and such breach involves an
intentional, willful or grossly negligent misrepresentation or breach of
covenant, the breaching party shall be liable to the nonbreaching party for all
costs and expenses reasonably incurred by the nonbreaching party in connection
with the preparation, execution and attempted consummation of this Agreement,
including the fees of its counsel, accountants, consultants and other advisors
and representatives.
3.6. 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, addressed as follows:
If to the Corporation:
Mercantile Bankshares Corporation
Two Hopkins Plaza
Baltimore, Maryland 21201
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
Attention: Lee M. Miller, Esq.
If to the Bank:
Marshall National Bank and Trust Company
8372 West Main Street
Marshall, Virginia 20115
Attention: Donald R. Yowell
President and Chief Executive Officer
Copy to:
Hugh B. Wellons, Esq.
Mays & Valentine
NationsBank Center
1111 East Main Street
Richmond, VA 23218
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 hand delivered, as the case may be.
3.7. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
together be deemed one and the same Agreement.
3.8. BINDING EFFECT; NO THIRD PARTY RIGHTS. This Agreement shall bind the
Corporation and the Bank and their respective successors and assigns. Nothing in
this Agreement is intended to confer upon any individual, corporation or other
entity, other than the parties hereto or their respective successors, any rights
or remedies under of or by reason of this Agreement.
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3.9. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Maryland, without regard to conflict of law principles, except to the
extent governed by the laws of the United States.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above, pursuant to resolutions of their Boards of
Directors, acting by a majority.
<TABLE>
<S> <C>
ATTEST MERCANTILE BANKSHARES CORPORATION
By: /s/ ALAN D. YARBRO By: /s/ H. FURLONG BALDWIN (SEAL)
_________________________________ _____________________________________
Alan D. Yarbro, Secretary H. Furlong Baldwin
Chairman of the Board
MARSHALL NATIONAL BANK AND TRUST COMPANY
By: /s/ CAROL C. MEREWETHER By: /s/ GEORGE R. THOMPSON, JR.(SEAL)
_________________________________ _____________________________________
Carol C. Merewether, Secretary George R. Thompson, Jr.
Chairman of the Board
</TABLE>
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<PAGE>
THE BOARD OF DIRECTORS OF
MARSHALL NATIONAL BANK AND TRUST COMPANY
<TABLE>
<S> <C>
/s/ RANDOLPH S.E. CARTER /s/ WILLIAM HUNTER DEBUTTS, JR.
_________________________________ _____________________________________
Randolph S.E. Carter William Hunter deButts, Jr.
/s/ THOMAS W. DIZEREGA /s/ THOMAS B. GLASCOCK, JR.
_________________________________ _____________________________________
Thomas W. diZerega Thomas B. Glascock, Jr.
/s/ HARVEY L. PEARSON /s/ RICHARD C. RIEMENSCHNEIDER
_________________________________ _____________________________________
Harvey L. Pearson Richard C. Riemenschneider
/s/ GEORGE N. SLATER /s/ GEORGE R. THOMPSON, JR.
_________________________________ _____________________________________
George N. Slater George R. Thompson, Jr.
/s/ EVELYN D. TRUMBO /s/ LEWIS S. WILEY
_________________________________ _____________________________________
Evelyn D. Trumbo Lewis S. Wiley
/s/ DONALD R. YOWELL
_____________________________________
Donald R. Yowell
</TABLE>
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<PAGE>
EXHIBIT A
AGREEMENT TO MERGE
BETWEEN
INTERIM BANK
AND
MARSHALL NATIONAL BANK AND TRUST COMPANY
UNDER THE CHARTER OF
INTERIM BANK
UNDER THE TITLE OF
MARSHALL NATIONAL BANK AND TRUST COMPANY
(JOINED IN BY MERCANTILE BANKSHARES CORPORATION)
This agreement to merge (the "Agreement") made between Marshall National
Bank and Trust Company (hereinafter referred to as "Marshall"), a banking
association organized under the laws of the United States, with its main office
in Marshall, Fauquier County, Virginia, and Interim Bank, an interim national
banking association being organized under the laws of the United States of
America, with its main office in Marshall, Fauquier County, Virginia,
established for the purpose of facilitating a transaction as a result of which
Marshall will become a wholly-owned affiliate of Mercantile Bankshares
Corporation, a Maryland corporation ("Mercshares"). Mercshares joins in this
Agreement.
WHEREAS, as of __________, 199__, Marshall had total capital of $_____,
comprised of _____ issued and outstanding shares of common stock, par value
$2.00 per share, with $______ in its stated capital account, paid in surplus of
$______, and retained earnings, including capital reserves, of $_______, and
unrealized gain (loss) on securities available for sale of $_________. Marshall
has total authorized capital stock of $1,000,000, comprised of 500,000 shares of
common stock, par value $2.00 per share.
WHEREAS, prior to the Effective Date, as hereinafter defined, Interim Bank
will have total capital of $120,000, comprised of 50,000 issued and outstanding
shares of common stock, par value $2.00 per share, with $100,000 in its stated
capital account and paid-in surplus of $20,000. Interim Bank has total
authorized capital stock of $1,000,000, comprised of 500,000 shares of common
stock, par value $2.00 per share.
WHEREAS, each of Marshall and Interim Bank is acting pursuant to a
resolution of its board of directors, adopted by the vote of a majority of its
directors, pursuant to the authority given by, and in accordance with the
provisions of the Act of November 7, 1918, as amended (12 U.S.C. 215(a)),
witnessed as follows:
SECTION 1.
At of the Effective Date, hereinafter defined, Marshall shall be merged
into Interim Bank, which shall be the receiving bank and the continuing
corporation, under the charter of Interim Bank (the "Merger").
SECTION 2.
At the Effective Date, the name of Interim Bank (hereinafter referred to as
the "Continuing Bank" whenever reference is made to it as of the Effective Date
or thereafter) shall be changed to "Marshall National Bank and Trust Company."
SECTION 3.
The business of the Continuing Bank shall be that of a national banking
association, having and exercising fiduciary powers. The main office and branch
of Marshall immediately prior to the Merger shall become the main office and
branch, respectively, of the Continuing Bank.
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SECTION 4.
The amount of authorized capital stock of the Continuing Bank shall be
$1,000,000, divided into 500,000 shares of common stock, par value $2.00 per
share. By virtue of Marshall's merger into the Continuing Bank, the Continuing
Bank's capital structure shall be identical to that of Marshall immediately
prior to the Effective Date, such that the Continuing Bank's capital shall be as
follows: ____ issued and outstanding shares of common stock, par value $2.00 per
share, for total stated capital of $______, paid in surplus of $______, and
retained earnings, including capital reserves, of $__________, and unrealized
gain (loss) on securities available for sale of $__________, adjusted, however,
for normal earnings, expenses, and other operations (and market fluctuations) in
the ordinary course of business between _________ and the Effective Date (and,
if applicable, purchase accounting adjustments), and regular cash dividends of
Marshall in accordance with Section 7 hereof.
SECTION 5.
All assets of Marshall, as they exist at the Effective Date, shall pass to
and vest in the Continuing Bank by virtue of the Merger without any conveyance
or other transfer. Upon the Merger becoming effective and without any order or
other action on the part of any court or otherwise, the Continuing Bank shall
hold and enjoy all rights of property, franchises and interests, including
appointments, designations, and nominations, and all other rights and interests
as trustee, executor, administrator, registrar of stocks and bonds, guardian of
estates, assignee, receiver, and in every other fiduciary capacity, in the same
manner and to the same extent as such rights, franchises, and interests were
held or enjoyed by Marshall immediately prior to the Effective Date. The
Continuing Bank shall be responsible for all of the liabilities of every kind
and description, including liabilities arising from the operation of a trust
department, of Marshall existing as of the Effective Date.
SECTION 6.
On the Effective Date and immediately upon the Merger becoming effective
and in consideration thereof, the terms of the Merger shall be as follows:
(a) Each share of issued and outstanding common stock of Marshall
(other than the shares held by any dissenting stockholder of Marshall
pursuant to paragraph (d) of this Section 6) shall for all corporate
purposes, and without any action on the part of the holder thereof,
automatically become and be converted into one and seventy-five hundredths
(1.75) shares of Common Stock of Mercshares (the "Common Stock") (subject
to adjustment pursuant to Section71.5(b)) of the Plan, as hereinafter
defined), and the right to receive cash in lieu of fractional shares of
Common Stock as provided in paragraph (c) of this Section 6. Each
certificate representing shares of the common stock of Marshall (other than
certificates for shares held by any dissenting stockholders) will
thereafter represent a number of whole shares of Common Stock (and the
right to receive cash in lieu of fractional shares of Common Stock)
determined in accordance with the 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 Mercshares 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 Marshall 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 theretofore
representing outstanding common stock of Marshall as evidencing the
ownership of the number of whole shares of Common Stock into which the
common stock of Marshall, previously represented by such certificates,
shall have been converted, notwithstanding the failure to surrender such
certificates. All certificates for common stock of Marshall surrendered to
the Exchange Agent for new certificates representing shares of Common Stock
pursuant to this Section 6(a) will be cancelled.
(b) For each share of common stock of Marshall issued and oustanding
immediately prior to the Effective Date and converted into Mercshares
common stock pursuant to Section 6(a) above, the Continuing Bank shall
automatically issue one share of its common stock to Mercshares. In
addition, the Continuing Bank shall pay a special dividend to Mercshares of
$120,000, representing the original consideration paid by Mercshares for
50,000 shares of Interim Bank common stock, and, in turn, Mercshares shall
cancel the certificate representing such previously outstanding shares of
Interim Bank common stock.
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<PAGE>
(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 common stock of Marshall 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 common stock of Marshall whose shares are
voted against the approval of the Merger at the meeting of Marshall's
stockholders at which the Merger is approved or who has given notice in
writing at or prior to such meeting that he dissents from the plan of
Merger, and who, at any time before thirty (30) days after the Effective
Date, makes a written demand upon the Continuing Bank for payment of the
value of such shares of common stock of Marshall, accompanied by a
surrender of the certificates for such shares, shall be entitled to receive
from the Continuing Bank in cash the value of such shares of common stock
of Marshall, all pursuant to, and determined in accordance with, the
provisions of the Act of November 7, 1918, as amended (12 U.S.C.
(section mark) 215a). The amount paid to any such dissenting stockholder
shall be debited against the capital accounts of the Continuing Bank. If
the holders of any of the shares of Marshall object to the Merger and
demand payment in cash for the value of their shares as aforesaid,
Mercshares shall pay to the Continuing Bank, as a contribution to its
capital, cash at a price per share equal to the price per share paid by the
Continuing Bank to the dissenting shareholder (or, in its discretion, shall
pay such funds to the Continuing Bank in payment for additional shares of
its common stock).
(e) All unexercised and theretofore unexpired stock options for shares
of common stock of Marshall shall automatically terminate and be cancelled
on the Effective Date immediately prior to the Merger becoming effective.
With respect to any such unexercised stock options having an option price
per share of Marshall common stock which is less than the then market value
of one and seventy-five hundredths (1.75) shares of 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 Mercshares 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 7.
Marshall shall not declare or pay any dividend to its shareholders between
the date of this Agreement and the Effective Date, except that, in accordance
with the Plan, as hereinafter defined, it may pay regular cash dividends for any
full calendar quarter before the Effective Date at an effective quarterly rate
of not more than nineteen cents ($.19) per share.
SECTION 8.
From the Effective Date, the board of directors of Marshall shall serve as
the board of directors of the Continuing Bank, until its next annual meeting or
until such time as their successors have been elected and have qualified. From
the Effective Date, the officers of Marshall shall serve as the officers of the
Continuing Bank until such time as their successors have been elected or
appointed.
SECTION 9.
Effective as of the Effective Date immediately upon the Merger becoming
effective, the Articles of Association of the Continuing Bank shall be amended
and restated in substantially the form attached as Appendix I to this Agreement.
[Appendix I will reflect the current provisions of Marshall's Articles of
Association or such other provisions as Mercshares, in its discretion, may
determine to be appropriate.] Effective as of the Effective Date, the Bylaws of
Interim Bank shall become and be the Bylaws of the Continuing Bank.
SECTION 10.
This Agreement and consummation of the Merger is subject to the approval of
the Comptroller of the Currency and other federal and state bank regulatory
authorities and must be ratified and confirmed by the affirmative vote of the
holders of
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<PAGE>
at least two-thirds (2/3rds) of the issued and outstanding capital stock of each
of Marshall and Interim Bank. This Agreement is subject also to the conditions
set forth in the Agreement and Plan of Affiliation and Merger dated November 20,
1997, between Marshall and Mercshares (to which Interim Bank will become a party
pursuant to an Addendum thereto) (the "Plan"), in accordance with which this
Agreement 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 Marshall and/or Interim Bank, the parties hereto, without
further action or approval of the stockholders of Marshall or Interim Bank, may
amend the terms of the Merger, or terminate or abandon the Merger in accordance
with Article III of the Plan.
SECTION 11.
The Merger shall become effective in accordance with Section 2.1 of the
Plan at the time specified in the Certificate of Merger or other merger approval
to be issued by the Comptroller of the Currency of the United States (the
"Effective Date").
WITNESS, the signatures and seals of said merging banks this day of
, 199 , each set by its President and attested to by its Secretary,
pursuant to a resolution of its board of directors, acting by a majority.
<TABLE>
<S> <C>
ATTEST: MARSHALL NATIONAL BANK AND TRUST COMPANY
By:
, Secretary , President
(Seal of Bank)
ATTEST: INTERIM BANK
By:
, Secretary , President
(Seal of Bank)
</TABLE>
Mercantile Bankshares Corporation hereby joins in the foregoing Agreement
to Merge and undertakes that it will be bound thereby and will issue the shares
of its Common Stock and make the payments required by the provisions of Section
6.
WITNESS, the signature and seal of Mercantile Bankshares Corporation this
day of , 199 , set by its President and attested to by its
Secretary.
<TABLE>
<S> <C>
ATTEST: MERCANTILE BANKSHARES CORPORATION
By:
, Secretary , President
(SEAL)
</TABLE>
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<PAGE>
A MAJORITY OF THE BOARD OF DIRECTORS OF
MARSHALL NATIONAL BANK AND TRUST COMPANY
<TABLE>
<S> <C>
Randolph S.E. Carter William Hunter deButts, Jr.
Thomas W. diZerega Thomas B. Glascock, Jr.
Harvey L. Pearson Richard C. Riemenschneider
George N. Slater George R. Thompson, Jr.
Evelyn D. Trumbo Lewis S. Wiley
Donald R. Yowell
</TABLE>
A-24
<PAGE>
A MAJORITY OF THE BOARD
OF DIRECTORS OF INTERIM BANK
<TABLE>
<S> <C>
</TABLE>
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<PAGE>
ANNEX B
MCKINNON & COMPANY, INC.
INVESTMENT BANKING
MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
555 MAIN STREET MEMBER SIPC TELEPHONE (757) 623-4636
NORFOLK, VIRGINIA 23510 FAX (757) 623-1560
OPINION OF MCKINNON & COMPANY, INC.
January 12, 1998
Board of Directors
Marshall National Bank & Trust Company
8372 Main Street
Marshall, Virginia 22116-0038
Dear Board Members:
In connection with the proposed affiliation of Marshall National Bank &
Trust Company ("Marshall") with Mercantile Bankshares Corporation ("Mercshares")
you have asked us to render an opinion as to whether the financial terms of the
Agreement and Plan of Affiliation and Merger, including the Agreement to Merge
attached thereto (the "Affiliation Agreement") dated as of November 20, 1997
between Marshall and Mercshares, are fair, from a financial point of view, to
the stockholders of Marshall. The Affiliation Agreement provides for the merger
of Marshall with and into an interim national bank to be formed by Mercshares
which will continue the business of Marshall under the Marshall name, and
stockholders of Marshall will receive common stock of Mercshares (the "Merger").
Under the terms of the Affiliation Agreement, upon consummation of the Merger,
each share of common stock of Marshall, par value $2.00 per share, (other than
those shares of Marshall stockholders who properly perfect their dissenters'
rights), automatically shall become and be converted into 1.75 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. As of the date of the
Affiliation Agreement, Marshall had 379,970 shares of common stock issued and
outstanding and a stock option plan adopted on September 11, 1997 by Marshall's
directors, subject to approval by Marshall's stockholders, which has not yet
been obtained, for an aggregate of 7,000 shares of Marshall common stock (the
"Stock Options"). Under the terms of the Affiliation Agreement, and based on the
exchange ratio of 1.75 shares of Mercshares for each share of Marshall common
stock, an aggregate of 677,198 shares of Mercshares may be issued for the
Marshall common stock outstanding, including the Stock Options.
McKinnon & Company, Inc. ("McKinnon") is an investment banking firm that
specializes in Virginia community banks and thrifts. In nine years McKinnon has
been lead managing underwriter in approximately twenty-eight public stock
offerings for Virginia community banks and thrifts and has served as financial
advisor, including providing fairness opinions, to numerous Virginia community
banks and thrifts. McKinnon, as part of its investment banking business, is
engaged in the evaluation of businesses, particularly banks, and their
securities, in connection with mergers and acquisitions, initial public
offerings, private placements and evaluations for estates and corporate
recapitalizations. McKinnon is also a market maker in Virginia community bank
stocks listed on NASDAQ and the OTC Bulleting Board. McKinnon believes it has a
thorough working knowledge of the banking industry throughout Virginia.
In developing our opinion, we have among other things, reviewed and
analyzed material bearing upon the financial and operating conditions of
Marshall, Mercshares, and, on a pro forma basis, Marshall and Mercshares
combined, and material proposed in connection with the Affiliation Agreement,
including, among other things, the following:
(1) the Agreement and Plan of Affiliation and Merger, dated as of
November 20, 1997 among Marshall and Mercshares;
(2) the registration statement filed with the Securities and Exchange
Commission in connection with the proposed Merger, including a prospectus
relating to 677,198 shares of common stock of Mercshares, and the Proxy
Statement relating to a special meeting of stockholders of Marshall to be
held on February 17, 1998; and
(3) Marshall's and Mercshares' financial results for fiscal years 1990
through 1996, and the first, second and third quarters ended March 31, June
30, and September 30, 1997, respectively, and certain documents and
information we deem relevant to our analysis;
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<PAGE>
(4) held discussions with senior management of Marshall and Mercshares
regarding past and current business operations of, and outlook for,
Marshall, Mercshares, including trends, the terms of the proposed Merger,
and related matters;
(5) reviewed the reported price and trading activity of Marshall and
Mercshares Common Stock and compared financial and stock market information
(when available) for Marshall and Mercshares with similar information for
certain other companies, and securities for which are publicly traded;
(6) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part;
(7) performed such other studies and analyses as we considered
appropriate, including an analysis of the pro forma financial impact of the
Merger on Marshall and Mercshares;
(8) reviewed other published information, performed certain financial
analyses and considered other factors and information which we deem
relevant.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the information furnished to us by
or on behalf of Marshall and Mercshares. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of Marshall or Mercshares. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience in business valuation
in general.
We have been retained by you as a financial advisor to Marshall with
respect to the proposed Merger. In the normal course of business McKinnon &
Company, Inc. is a market maker in the common stock of Marshall listed on the
OTC Bulletin Board. Our opinion is directed to the Board of Directors of
Marshall. We participated in some of the discussions but we did not recommend
the structure or give any opinion regarding the business reasons for doing this
proposed Merger.
On the basis of our analysis and review and in reliance on the accuracy and
completeness of the information furnished to us and subject to the conditions
noted above, it is our opinion that, as of the date hereof, the terms of the
Affiliation Agreement are fair, from a financial point of view, to the holders
of Marshall Common Stock.
Very truly yours,
McKinnon & Company, Inc.
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<PAGE>
ANNEX C
(SECTION MARK) 215A. MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL BANKS
(A) APPROVAL OF COMPTROLLER, BOARD AND SHAREHOLDERS; MERGER AGREEMENT;
NOTICE; CAPITAL STOCK; LIABILITY OF RECEIVING ASSOCIATION
One or more national banking associations or one or more State banks, with
the approval of the Comptroller, under an agreement not inconsistent with this
subchapter, may merge into a national banking association located within the
same State, under the charter of the receiving association. The merger agreement
shall --
(1) be agreed upon in writing by a majority of the board of directors
of each association or State bank participating in the plan of merger;
(2) be ratified and confirmed by the affirmative vote of the
shareholders of each such association or State bank owning at least
two-thirds of its capital stock outstanding, or by a greater proportion of
such capital stock in the case of a State bank if the laws of the State
where it is organized so require, at a meeting to be held on the call of
the directors, after publishing notice of the time, place, and object of
the meeting for four consecutive weeks in a newspaper of general
circulation published in the place where the association or State bank is
located, or, if there is no such newspaper, then in the newspaper of
general circulation published nearest thereto, and after sending such
notice to each shareholder of record by certified or registered mail at
least ten days prior to the meeting, except to those shareholders who
specifically waive notice, but any additional notice shall be given to the
shareholders of such State bank which may be required by the laws of the
State where it is organized. Publication of notice may be waived, in cases
where the Comptroller determines that an emergency exists justifying such
waiver, by unanimous action of the shareholders of the association or State
banks;
(3) specify the amount of the capital stock of the receiving
association, which shall not be less than that required under existing law
for the organization of a national bank in the place in which it is located
and which will be outstanding upon completion of the merger, the amount of
stock (if any) to be allocated, and cash (if any) to be paid, to the
shareholders of the association or State bank being merged into the
receiving association; and
(4) provide that the receiving association shall be liable for all
liabilities of the association or State bank being merged into the
receiving association.
(B) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(C) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be ascertained,
as of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash; (2)
one selected by the directors of the receiving association; and (3) one selected
by the two so selected. The valuation agreed upon by any two of the three
appraisers shall govern. If the value so fixed shall not be satisfactory to any
dissenting shareholder who has requested payment, that shareholder may, within
five days after being notified of the appraised value of his shares, appeal to
the Comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
(D) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF
SHARES; STATE APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written
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<PAGE>
request of any interested party cause an appraisal to be made which shall be
final and binding on all parties. The expenses of the Comptroller in making the
reappraisal or the appraisal, as the case may be, shall be paid by the receiving
association. The value of the shares ascertained shall be promptly paid to the
dissenting shareholders by the receiving association. The shares of stock of the
receiving association which would have been delivered to such dissenting
shareholders had they not requested payment shall be sold by the receiving
association at an advertised public auction, and the receiving association shall
have the right to purchase any of such shares at such public auction, if it is
the highest bidder therefor, for the purpose of reselling such shares within
thirty days thereafter to such person or persons and at such price not less than
par as its board of directors by resolution may determine. If the shares are
sold at public auction at a price greater than the amount paid to the dissenting
shareholders, the excess in such sale price shall be paid to such dissenting
shareholders. The appraisal of such shares of stock in any State bank shall be
determined in the manner prescribed by the law of the State in such cases,
rather than as provided in this section, if such provision is made in the State
law; and no such merger shall be in contravention of the law of the State under
which such bank is incorporated. The provisions of this subsection shall apply
only to shareholders of (and stock owned by them in) a bank or association being
merged into the receiving association.
(E) STATUS OF RECEIVING ASSOCIATION; PROPERTY RIGHTS AND INTERESTS VESTED
AND HELD AS FIDUCIARY
The corporate existence of each of the merging banks or banking
associations participating in such merger shall be merged into and continued in
the receiving association and such receiving association shall be deemed to be
the same corporation as each bank or banking association participating in the
merger. All rights, franchises, and interests of the individual merging banks or
banking associations in and to every type of property (real, personal, and
mixed) and choses in action shall be transferred to and vested in the receiving
association by virtue of such merger without any deed or other transfer. The
receiving association, upon the merger and without any order or other action on
the part of any court or otherwise, shall hold and enjoy all rights of property,
franchises, and interests, including appointments, designations, and
nominations, and all other rights and interests as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, and committee of estates of lunatics, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises,
and interests were held or enjoyed by any one of the merging banks or banking
associations at the time of the merger, subject to the conditions hereinafter
provided.
(F) REMOVAL AS FIDUCIARY; DISCRIMINATION
Where any merging bank or banking association, at the time of the merger,
was acting under appointment of any court as trustee, executor, administrator,
registrar of stocks and bonds, guardian of estates, assignee, receiver, or
committee of estates of lunatics, or in any other fiduciary capacity, the
receiving association shall be subject to removal by a court of competent
jurisdiction in the same manner and to the same extent as was such merging bank
or banking association prior to the merger. Nothing contained in this section
shall be considered to impair in any manner the right of any court to remove the
receiving association and to appoint in lieu thereof a substitute trustee,
executor, or other fiduciary, except that such right shall not be exercised in
such a manner as to discriminate against national banking associations, nor
shall any receiving association be removed solely because of the fact that it is
a national banking association.
(G) ISSUANCE OF STOCK BY RECEIVING ASSOCIATION; PREEMPTIVE RIGHTS
Stock of the receiving association may be issued as provided by the terms
of the merger agreement, free from any preemptive rights of the shareholders of
the respective merging banks.
- ---------------
(Nov. 7, 1918, c. 209, (section mark) 2, as added Sept. 8, 1959, Pub. L. 86-230,
(section mark) 20, 73 Stat. 463.)
C-2
