<PAGE>
[MARINE BANCORP LOGO] THE MARINE BANCORP, INC.
September 15, 1998
Dear Fellow Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
The Marine BanCorp, Inc. ("Marine") to be held at 6395 Maddox Boulevard,
Chincoteague Island, Virginia on October 20, 1998 at 7 p.m.
At the Special Meeting, you will be asked to vote upon the merger of
Marine into Mercantile Bankshares Corporation ("Mercshares"). Marine's merger
into Mercshares will be accompanied by the merger of The Marine Bank into
Mercshares' affiliate bank Farmers & Merchants Bank-Eastern Shore.
As part of this Affiliation, stockholders of Marine will become
stockholders of Mercshares. Each share of Marine's common stock (other than
dissenting shares) will automatically convert into .75 of a share of
Mercshares' common stock, except that Mercshares will pay the stockholders cash
for fractional shares.
Based on the exchange ratio and Mercshares' current dividend rate, your
annual dividend payments after the Affiliation would be $0.66 per share of
Marine common stock now held by you. Marine's annual dividend for 1997 was
$0.31 per share. However, we cannot assure you that Mercshares will maintain
its current dividend levels. The Mercshares common stock that you will receive
in the Affiliation should be more readily marketable than the Marine common
stock you presently hold. The Affiliation will qualify as a tax-free
transaction for federal income tax purposes (except for cash paid for
fractional shares).
Your Board of Directors unanimously approved the Affiliation on June 9,
1998 and believes it is in the best interests of Marine and our stockholders.
Accordingly, the Board of Directors recommends that you vote TO APPROVE the
Affiliation. Approval of the Affiliation requires the affirmative vote of at
least two-thirds of the outstanding shares of Marine's common stock.
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,
RUSSELL W. EVERETT, SR. ARTHUR C. MILES, JR.
___________________________ ________________________
Chairman of the Board President
<PAGE>
THE MARINE BANCORP, INC.
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------
A Special Meeting of Stockholders of The Marine BanCorp, Inc. (each a
"Marine Stockholder") will be held at 6395 Maddox Boulevard, Chincoteague
Island, Virginia on October 20, 1998 at 7 p.m. for the following purposes:
1. To consider and vote upon a proposal to approve the Holding Company Plan
of Merger (the "Plan") provided for in the Agreement and Plan of
Affiliation and Merger, dated June 9, 1998, (the "Affililation
Agreement"), by and among The Marine BanCorp, Inc. ("Marine"), The Marine
Bank ("Marine Bank"), 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") and
Farmers & Merchants Bank-Eastern Shore, a Virginia bank and a wholly-owned
affiliate of Mercshares ("F & M"), a copy of which Affiliation Agreement
and Plan are included in Annex A attached to the accompanying Prospectus
and Proxy Statement, pursuant to which (i) Marine Bank shall become
affiliated with Mercshares by Marine's merger into Mercshares, accompanied
by Marine Bank's merger into F&M and (ii) each share of common stock of
Marine, par value $5.00 per share ("Marine Common Stock") (other than
shares held by holders of Marine Common Stock who properly perfect their
dissenters' rights) automatically shall become and be converted into .75
of a share of the common stock of Mercshares, par value $2.00 per share
("Mercshares Common Stock"). Cash will be paid in lieu of fractional
shares.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
Marine Stockholders may, if the Plan is approved and consummated, assert
dissenters' rights under Article 15 of the Virginia Stock Corporation Act.
Exercise of such rights requires strict compliance with the procedures set
forth in the applicable statute. A copy of Article 15 of the Virginia Stock
Corporation Act is included as Annex B attached to the accompanying Prospectus
and Proxy Statement.
The Board of Directors has fixed September 2, 1998, as the record date for
the Special Meeting and only holders of record of Marine 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
ARTHUR C. MILES, JR.
________________________
President
September 15, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF MARINE RECOMMENDS THAT MARINE STOCKHOLDERS VOTE TO
APPROVE THE PLAN AND THE AFFILIATION CONTEMPLATED THEREBY.
<PAGE>
PROSPECTUS RELATING TO 124,620 SHARES OF
COMMON STOCK OF
MERCANTILE BANKSHARES CORPORATION
---------------
PROXY STATEMENT RELATING TO
A SPECIAL MEETING OF STOCKHOLDERS OF
THE MARINE BANCORP, INC.
TO BE HELD ON OCTOBER 20, 1998
This proxy statement and prospectus describes a proposed affiliation
between Marine BanCorp, Inc. ("Marine") and Mercantile Bankshares Corporation
("Mercshares"). In the affiliation, Marine will merge into Mercshares and each
outstanding share of Marine common stock will convert into .75 of a share of
Mercshares common stock, except that cash will be paid for fractional shares. As
part of the affiliation, The Marine Bank will merge into Farmers Merchant Bank
- -- Eastern Shore, an affiliated bank of Mercshares. The Board of Directors of
Marine is soliciting your proxy for a special meeting of the Marine stockholders
to be held at 6395 Maddox Boulevard, Chincoteague Island, Virginia on October
20, 1998 at 7 p.m., to approve the affiliation.
This prospectus and proxy statement is the proxy statement for The Marine
special meeting, at which you will vote upon the affiliation, and the prospectus
for the issuance of up to 124,620 shares of Mercshares common stock.
Marine has supplied the information presented in this prospectus and proxy
statement concerning Marine and Marine Bank and Mercshares has supplied the
information concerning 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 Marine Stockholders on or about September 15, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S><C>
AVAILABLE INFORMATION .......................................................... 1
DOCUMENTS INCORPORATED BY REFERENCE ............................................ 2
SUMMARY ........................................................................ 3
The Parties ................................................................... 3
The Affiliation ............................................................... 3
Certain Federal Income Tax Consequences ....................................... 5
Comparison of Stockholder Rights .............................................. 5
Market Price Data ............................................................. 5
SUMMARY HISTORICAL FINANCIAL DATA .............................................. 6
COMPARATIVE UNAUDITED PER SHARE DATA ........................................... 7
THE MARINE SPECIAL MEETING ..................................................... 8
Date, Place and Time .......................................................... 8
Purpose of the Marine Special Meeting ......................................... 8
Record Date ................................................................... 8
Voting Information ............................................................ 8
Solicitation of Proxies ....................................................... 9
THE AFFILIATION ................................................................ 9
General ....................................................................... 9
Background of the Affiliation ................................................. 9
Reasons for the Affiliation; Recommendation of the Marine Board of Directors .. 10
Effective Date ................................................................ 11
Procedures for Exchange of Certificates ....................................... 11
Certain Federal Income Tax Consequences ....................................... 11
Accounting Treatment .......................................................... 12
Resale of Mercshares Common Stock after the Affiliation by Controlling Persons 12
Conditions to Affiliation ..................................................... 12
Treatment of Employee Benefit Plans ........................................... 13
Post-Affiliation Operations ................................................... 13
Exclusive Dealing ............................................................. 13
Interests of Certain Persons in the Affiliation ............................... 14
Termination ................................................................... 14
Rights of Dissenting Stockholders ............................................. 14
CERTAIN OTHER AGREEMENTS ....................................................... 16
The Support Agreement ......................................................... 16
Affiliate Undertakings ........................................................ 16
The Eastville Bank Merger ..................................................... 16
DESCRIPTION OF MARINE .......................................................... 16
General ....................................................................... 16
Business ...................................................................... 17
Competition ................................................................... 18
Employees ..................................................................... 18
Properties .................................................................... 18
Dividends ..................................................................... 18
Price Range of Common Stock ................................................... 18
Stock Ownership of Directors and Executive Officers ........................... 18
SELECTED FINANCIAL INFORMATION ................................................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ....................................................... 21
Overview ...................................................................... 21
Interest Revenue .............................................................. 21
Interest Expense .............................................................. 21
Net Interest Income ........................................................... 22
Income Taxes .................................................................. 22
</TABLE>
i
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<TABLE>
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<S><C>
Liquidity ........................................................... 22
Interest Rate Sensitivity ........................................... 22
Analysis of Investment Securities ................................... 23
Analysis of Loans ................................................... 24
Deposits Analysis ................................................... 27
Other Borrowed Funds ................................................ 27
Capital Adequacy .................................................... 27
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF MERCSHARES COMMON STOCK
AND MARINE COMMON STOCK ............................................. 29
DESCRIPTION OF MERCSHARES CAPITAL STOCK .............................. 31
LEGAL MATTERS ........................................................ 32
EXPERTS .............................................................. 32
INDEX TO FINANCIAL STATEMENTS ........................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF AFFILIATION AND MERGER .............. A-1
ANNEX B -- DISSENTERS' RIGHTS STATUTORY PROVISIONS ................... B-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Mercshares is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at the following
Regional Offices of the Commission: Chicago Regional Office, CitiCorp Center,
500 West Madison Street, Suite 1400 Chicago, Illinois 60621-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials may be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004. 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 124,620 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, 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.
1
<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, 1997;
2. Mercshares' Quarterly Reports on Form 10-Q for the periods ended March 31,
1998 and June 30, 1998; 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 Marine 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 OCTOBER 13, 1998.
2
<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. MARINE 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, four 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 June 30, 1998, Mercshares and the Affiliates had total
assets of approximately $7.3 billion, deposits of approximately $5.8 billion,
and loans of approximately $5.0 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 June 30, 1998, there were 71,784,995
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.
F&M. F&M is a Virginia bank and a wholly-owned affiliate of Mercshares
which operates four banking offices in Virginia. At June 30, 1998, F&M had
total assets of approximately $138.5 million, deposits of approximately $110.2
million, and loans of approximately $99.7 million. Its principal executive
office is located at 25275 Lankford Highway, Onley, Virginia 23418, telephone
number (757) 787-4111. In September, 1998, Mercshares expects that The
Eastville Bank, Eastville, Virginia, a wholly-owned affiliate of Mercshares
("Eastville"), will merge into F&M. At June 30, 1998, Eastville had total
assets of approximately $31.1 million, deposits of approximately $24.1 million,
and loans of approximately $22.9 million.
MARINE AND MARINE BANK. Marine is a Virginia corporation registered as a
bank holding company under the BHCA. Its principal operations are conducted by
its wholly-owned subsidiary, The Marine Bank, a Virginia bank ("Marine Bank").
Marine Bank operates two banking offices in the Chincoteague Island, Virginia
area. At June 30, 1998, Marine and Marine Bank had total assets of
approximately $23.5 million, deposits of approximately $20.9 million and loans
of approximately $14.8 million. The principal executive office of Marine and
Marine Bank is located at 6395 Maddox Boulevard, Chincoteague Island, Virginia
23336, telephone number (757) 336-6539.
As of June 30, 1998 there were 166,160 shares of Marine Common Stock
outstanding for which there is no established trading market.
As used in this Prospectus and Proxy Statement, the term "Marine" refers
to both The Marine BanCorp, Inc. and The Marine Bank, unless the context
otherwise requires. The term "Marine Bank" refers to The Marine Bank.
THE AFFILIATION
GENERAL. At the Marine Special Meeting described in the notice (the
"Notice") accompanying this Prospectus and Proxy Statement, Marine Stockholders
will be asked to consider and vote upon a proposal to approve the Plan provided
for in the Affiliation Agreement, a copy of which Plan and Affiliation
Agreement are attached as Annex A to this Prospectus and Proxy Statement, and
the Affiliation contemplated thereby. Upon consummation of the Affiliation,
each share of Marine Common Stock (other than shares held by Marine
Stockholders who properly perfect their dissenters' rights) automatically shall
become and be converted into .75 of a share of Mercshares Common Stock (the
"Exchange Ratio"). Cash will be paid in lieu of fractional shares of Mercshares
Common Stock. See "THE AFFILIATION -- General."
VOTE REQUIRED. The affirmative vote of the holders of at least two-thirds
of the outstanding shares of Marine Common Stock entitled to vote thereon will
be required to approve the Plan and the Affiliation contemplated thereby. As of
June 9, 1998, the directors of Marine and persons related to them owned an
aggregate of 85,528 shares constituting approximately
3
<PAGE>
51% of the Marine Common Stock. They have agreed to support and to vote their
shares to approve the Plan and the Affiliation. BECAUSE THE REQUIRED VOTE OF
MARINE STOCKHOLDERS ON THE PLAN AND THE AFFILIATION IS BASED UPON THE TOTAL
NUMBER OF OUTSTANDING SHARES OF MARINE COMMON STOCK, THE FAILURE TO SUBMIT A
PROXY CARD (OR THE FAILURE TO VOTE IN PERSON AT THE MARINE SPECIAL MEETING IF A
PROXY CARD IS NOT SUBMITTED), THE ABSTENTION FROM VOTING AND ANY BROKER NON-VOTE
WILL (EXCEPT FOR PURPOSES OF RIGHTS OF DISSENTING STOCKHOLDERS) HAVE THE SAME
EFFECT AS A VOTE AGAINST THE PLAN AND THE AFFILIATION. See "The Marine Special
Meeting" and "Certain Other Agreements -- The Support Agreement."
RECOMMENDATION OF THE MARINE BOARD, REASONS FOR THE AFFILIATION. The
Marine Board of Directors believes that the terms of the Affiliation Agreement,
the Plan and the Affiliation are in the best interests of Marine and the Marine
Stockholders and has approved the Affiliation Agreement, the Plan and the
Affiliation. These determinations were made by a unanimous vote of the Marine
Directors. In considering the terms and conditions of the Affiliation, the
Marine Board of Directors considered, among other things: the financial terms
of the Affiliation; that the Affiliation would qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the
"Code"); that Mercshares Common Stock is publicly traded and quoted on The
Nasdaq National Market and should be more readily marketable than Marine 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; and the operational and competitive benefits of the
Affiliation.
The Marine Board of Directors also considered that the historical
dividends per share of the Mercshares Common Stock to be received by the Marine
Stockholders, after giving effect to the Exchange Ratio, represent a
substantial increase in the historical dividends per share of Marine Common
Stock, although there can be no assurance that pro forma amounts are indicative
of future dividends of Mercshares. Based upon the $35.50 per share closing
market price of Mercshares Common Stock on June 8, 1998 (the last trading day
preceding the public announcement of the execution of the Affiliation
Agreement), the price to be paid in the Affiliation as a percentage of Marine's
March 31, 1998 book value was 188%. THE MARINE BOARD OF DIRECTORS RECOMMENDS
THAT MARINE STOCKHOLDERS VOTE TO APPROVE THE PLAN AND THE AFFILIATION. See "THE
AFFILIATION -- Background of the Affiliation" and " -- Reasons for the
Affiliation; Recommendation of the Marine Board of Directors."
CONDITIONS TO AFFILIATION. The mutual obligation of Mercshares and Marine
to consummate the Affiliation is subject to the requisite approval of the Plan
by the Marine Stockholders. Additionally, the obligation of Mercshares to
consummate the Affiliation is subject to various conditions, including the
receipt of all appropriate regulatory approvals and that holders of not more
than 10% of the outstanding shares of Marine Common Stock shall have (a)
delivered written notice of intent to demand cash payment for their shares
prior to the Marine Special Meeting and (b) not voted in favor of the Plan,
pursuant to Article 15 of Chapter 9 of Title 13.1 of the Virginia Stock
Corporation Act. See "THE AFFILIATION -- Conditions to Affiliation."
GOVERNMENTAL APPROVALS. Certain aspects of the Affiliation will require
notifications to, and approvals from, certain federal and state authorities,
including approval by the Federal Deposit Insurance Corporation, the Virginia
State Corporation Commission and the Maryland Commissioner of Financial
Regulation. Mercshares has submitted filings and notifications for these
purposes. See "THE AFFILIATION -- Conditions to Affiliation."
ACCOUNTING TREATMENT. The Affiliation will be accounted for as a purchase.
See "THE AFFILIATION -- Accounting Treatment" and "COMPARATIVE UNAUDITED PER
SHARE DATA" in this Summary.
DISSENTERS' RIGHTS. Under Article 15 of the Virginia Stock Corporation Act,
a Marine Stockholder who objects to the Affiliation and follows specified
procedures is entitled to dissenters' rights with respect to the Affiliation. In
order to be entitled to dissenters' rights, a Marine Stockholder must (1)
deliver to Marine prior to the vote at the Special Meeting written notice of his
or her intent to demand cash payment for his or her shares if the Affilation is
effectuated, (b) ensure that his or her shares are not voted (or deemed to have
been voted) to approve the Plan, (c) after the Affiliation is consummated,
follow the procedures set forth in a dissenters' notice sent to such Marine
Stockholder by Mercshares, and (d) deliver his or her share certificates as
required by the dissenters' notice, certify as to when such shares were acquired
and make a demand for payment therefor. If a judicial determination of the "fair
value" of Marine Common Stock is necessary, such determination may result in a
value that is more than, less than, or equal to the value of the consideration
which would have been delivered by Mercshares pursuant to the Affiliation. See
"THE AFFILIATION -- Rights of Dissenting Stockholders" for more complete
discussion of Marine Stockholders' dissenters' rights.
A Marine 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 Plan and the Affiliation and therefore to
have waived his or her dissenters' rights. See "THE AFFILIATION -- Rights of
Dissenting Stockholders."
4
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Holding Company Merger will qualify as a tax-free
reorganization for federal income tax purposes. Accordingly, (i) the Holding
Company Merger will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code to which Marine and Mercshares will
each be a party, (ii) no gain or loss will be recognized by Mercshares or
Marine as a result of the Affiliation, and (iii) no gain or loss will be
recognized by the Marine Stockholders upon receipt by them of Mercshares Common
Stock in exchange for their shares of Marine 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 Affiliation. Marine Stockholders are urged to consult their own
tax advisors as to the specific tax consequences to them of the Affiliation.
See "THE AFFILIATION -- Certain Federal Income Tax Consequences."
COMPARISON OF STOCKHOLDER RIGHTS
Upon consummation of the Affiliation, Marine Stockholders will become
stockholders of Mercshares, and their rights as stockholders of Mercshares will
be governed by the Maryland General Corporation Law, Mercshares' Articles of
Incorporation and Mercshares' Bylaws. The rights of Marine 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 STOCK -- HOLDER RIGHTS OF HOLDERS
OF MERCSHARES COMMON STOCK AND MARINE 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 Marine 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 June 8, 1998, 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 $35.50 per share.
The market value of Mercshares Common Stock on September 11, 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 $30.75 per
share. Marine Common Stock is not traded on any exchange, and no established
trading market exists for Marine Common Stock. For information concerning
certain repurchases by Mercshares of Mercshares Common Stock, see "DESCRIPTION
OF MERCSHARES CAPITAL STOCK -- Stock Repurchases." BECAUSE THE MARKET PRICE OF
MERCSHARES COMMON STOCK IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE
MERCSHARES COMMON STOCK THAT MARINE STOCKHOLDERS WILL RECEIVE PURSUANT TO THE
AFFILIATION MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE DATE. MARINE
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR MERCSHARES COMMON
STOCK.
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of
Mercshares and Marine. 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. The selected
historical financial data for Mercshares for the six-month periods ended June
30, 1997 and 1998 have been derived from Mercshares' unaudited Quarterly
Reports on Form 10-Q previously filed with the Commission. Marine's selected
historical financial data for the years ended December 31, 1996 and 1997 have
been derived from its audited historical financial statements. The selected
historical financial data for Marine for the years ended December 31, 1993,
1994 and 1995 and for the six-month periods ended June 30, 1997 and 1998 have
been derived from Marine's unaudited financial statements. In the opinions of
the respective managements of Mercshares and Marine, such data include all
normal recurring adjustments necessary for a fair presentation of results for
such interim periods. Operating results for the six months ended June 30, 1998
for each company are not necessarily indicative of the results that may be
obtained for the entire year ended December 31, 1998. THE SUMMARY HISTORICAL
FINANCIAL DATA SET FORTH BELOW DOES NOT PURPORT TO BE COMPLETE. WITH RESPECT TO
MERCSHARES, FURTHER INFORMATION IS CONTAINED IN MERCSHARES' AUDITED FINANCIAL
STATEMENTS FOR EACH OF THE ANNUAL PERIODS PRESENTED AND MERCSHARES' UNAUDITED
FINANCIAL STATEMENTS FOR EACH OF THE INTERIM PERIODS PRESENTED, ALL OF WHICH
ARE INCORPORATED BY REFERENCE HEREIN. SEE "AVAILABLE INFORMATION." WITH RESPECT
TO MARINE, FURTHER INFORMATION IS CONTAINED IN MARINE'S AUDITED FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND MARINE'S
UNAUDITED FINANCIAL STATEMENTS FOR EACH OF THE INTERIM PERIODS PRESENTED, ALL
OF WHICH ARE PRESENTED ELSEWHERE HEREIN.
<TABLE>
<CAPTION>
AS OF OR FOR
THE SIX MONTHS
ENDED JUNE 30
---------------------------
1998 1997
------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S><C>
MERCANTILE BANKSHARES CORPORATION
Net Interest Income ..................... $ 174,055 $ 164,201
Provision for Loan Losses ............... 5,626 6,425
Other Operating Income .................. 52,123 47,019
Income before Income Taxes .............. 113,401 102,109
Net Income .............................. 72,079 64,559
Cash Dividends Declared and Paid on
Common Stock ........................... 30,193 26,553
Net Income Per Share of Common
Stock (1) .............................. 1.00 0.91
Per Share Cash Dividends Declared and
Paid on Common Stock (1) ............... 0.42 0.37
Total Assets ............................ 7,326,097 6,842,833
Loans ................................... 4,999,280 4,869,455
Long-Term Debt .......................... 49,951 50,032
MARINE (2)
Net Interest Income ..................... 498 513
Provision for Loan Losses ............... 6 6
Other Operating Revenue ................. 85 70
Income before Income Taxes .............. 171 172
Net Income .............................. 110 112
Net Income Per Share of Common
Stock (3) .............................. 0.66 0.67
Per Share Cash Dividends Declared and
Paid on Common Stock (3) ............... 0.15 --
Total Assets ............................ 22,509 23,288
Loans ................................... 14,736 15,819
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S><C>
MERCANTILE BANKSHARES CORPORATION
Net Interest Income ..................... $ 336,049 $ 310,581 $ 286,788 $ 262,956 $ 246,482
Provision for Loan Losses ............... 13,703 14,666 7,988 7,056 12,969
Other Operating Income .................. 98,653 89,428 80,906 84,807 80,700
Income before Income Taxes .............. 207,595 186,928 166,009 146,886 135,971
Net Income .............................. 132,043 117,400 104,432 90,441 83,468
Cash Dividends Declared and Paid on
Common Stock ........................... 55,277 46,579 41,013 34,982 30,173
Net Income Per Share of Common
Stock (1) .............................. 1.85 1.64 1.46 1.25 1.16
Per Share Cash Dividends Declared and
Paid on Common Stock (1) ............... 0.77 0.65 0.57 0.49 0.43
Total Assets ............................ 7,170,669 6,642,681 6,349,103 5,938,225 5,789,620
Loans ................................... 4,978,522 4,582,717 4,209,872 3,846,838 3,628,780
Long-Term Debt .......................... 50,016 49,395 25,623 31,470 32,350
MARINE (2)
Net Interest Income ..................... 1,051 990 993 1,203 1,176
Provision for Loan Losses ............... 17 18 43 78 280
Other Operating Revenue ................. 147 129 110 100 197
Income before Income Taxes .............. 358 287 131 246 58
Net Income .............................. 238 195 96 168 49
Net Income Per Share of Common
Stock (3) .............................. 1.43 1.17 0.58 1.01 0.29
Per Share Cash Dividends Declared and
Paid on Common Stock (3) ............... 0.31 0.31 0.31 0.31 0.30
Total Assets ............................ 22,462 22,937 21,892 21,108 23,864
Loans ................................... 15,565 14,957 15,628 16,982 18,170
</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.
(2) Marine Bank was reorganized into a one bank holding company structure on
October 31, 1997. The financial data provided for the years ended December
31, 1997 and 1996 have been derived from Marine's audited historical
financial statements. The financial data provided for the years ended
December 31, 1995, 1994 and 1993 and the six months ended June 30, 1997
and 1998 have been derived from Marine's unaudited financial statements.
(3) 1996 through 1993 restated to reflect a 4 for 1 share exchange when Marine
Bank was reorganized into a one bank holding company in 1997.
6
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following unaudited consolidated financial information reflects
certain comparative per share data relating to the Affiliation. The information
shown below should be read in conjunction with the historical consolidated
financial statements of Mercshares and Marine, including the respective notes
thereto, which are included elsewhere in this Prospectus and Proxy Statement or
in documents incorporated herein by reference.
The following information is not necessarily indicative of the results of
operations or combined financial position that would have resulted had the
Affiliation been consummated at the beginning of the periods indicated, nor is
it necessarily indicative of the results of operations in future periods.
The table below presents selected comparative consolidated unaudited per
share information (i) for Mercshares on a historical basis and on a pro forma
combined basis assuming the Affiliation had been effective during the period
presented and accounted for as a purchase and (ii) for Marine on a historical
basis and on a pro forma equivalent basis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------------ ------------------
<S><C>
PER COMMON SHARE:
NET INCOME:
Marine-historical (1) ..................... $ 0.66 $ 1.43
Marine pro forma equivalent (1) ........... 0.75 1.39
Mercshares-historical ..................... 1.00 1.85
Mercshares pro forma combined (2) ......... 1.00 1.85
CASH DIVIDENDS DECLARED:
Marine-historical ......................... 0.15 0.31
Marine pro forma equivalent (1) ........... 0.32 0.58
Mercshares-historical ..................... 0.42 0.77
Mercshares pro forma combined (3) ......... 0.42 0.77
BOOK VALUE:
Marine-historical ......................... 14.49 14.00
Marine pro forma equivalent (1) ........... 10.16 9.76
Mercshares-historical ..................... 13.54 13.01
Mercshares pro forma combined ............. 13.54 13.01
</TABLE>
- ---------
(1) Marine pro forma equivalent amounts represent Mercshares' pro forma combined
information multiplied by the Exchange Ratio of .75 of a share of Mercshares
Common Stock for each share of Marine Common Stock. Marine declared an
annual dividend of $.31 per share in December 1997, a semi-annual
dividend of $.15 per share in June 1998 and a quarterly dividend of $.075
per share in September 1998.
(2) Pro forma combined net income per share represents historical net income per
share of Mercshares adjusted for the impact of the purchase of Marine.
(3) Pro forma combined dividends per share represent historical dividends per
share paid by Mercshares. Mercshares paid quarterly dividends of $.20 per
share in June, September and December 1997, $.20 per share in March 1998 and
$.22 per share in June and September 1998. At the current quarterly rate,
the annual dividends would be $.88 per share.
7
<PAGE>
THE MARINE SPECIAL MEETING
DATE, PLACE AND TIME
The Marine Special Meeting will be held at 6395 Maddox Boulevard,
Chincoteague Island, Virginia on October 20, 1998, at 7 p.m.
PURPOSE OF THE MARINE SPECIAL MEETING
At the Marine Special Meeting, Marine Stockholders will consider and vote
upon (i) the proposal to approve the Plan and the Affiliation contemplated
thereby pursuant to which each share of Marine Common Stock (other than shares
held by Marine Stockholders who properly perfect their dissenters' rights)
automatically shall become and be converted into .75 of a share of Mercshares
Common Stock and cash in lieu of fractional shares of Mercshares Common Stock,
and (ii) such other matters as may properly be brought before the Marine
Special Meeting.
The Marine Board of Directors unanimously recommends a vote to approve the
Plan and the Affiliation contemplated thereby.
RECORD DATE
The Marine Board of Directors has fixed the close of business on September
2, 1998 (the "Marine Record Date") as the record date for determining holders
entitled to notice of and to vote at the Marine Special Meeting. Accordingly,
only holders of record of Marine Common Stock at the close of business on the
Marine Record Date will be entitled to notice of, and to cast their vote at,
the Marine Special Meeting. As of September 2, 1998, there were 166,160 shares
of Marine Common Stock issued and outstanding held by approximately 218 holders
of record.
VOTING INFORMATION
Each holder of record of shares of Marine Common Stock on the Marine
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 Marine Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the shares of Marine Common Stock outstanding on the Marine
Record Date is necessary to constitute a quorum at the Marine Special Meeting.
The approval of the Plan and the Affiliation requires the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Marine
Common Stock entitled to vote thereon.
As of June 9, 1998, the directors of Marine and persons related to them
owning an aggregate of 85,528 shares (approximately 51%) of Marine Common Stock
have executed agreements with Mercshares pursuant to which such persons have
agreed to vote their shares of Marine Common Stock to approve the Plan and the
Affiliation. See "CERTAIN OTHER AGREEMENTS -- The Support Agreement" and
"DESCRIPTION OF MARINE -- Stock Ownership of Directors and Executive Officers."
All shares of Marine 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 Marine Common Stock will be voted to approve the Plan
and the Affiliation. Marine does not know of any matters other than as
described in the Notice that are to come before the Marine Special Meeting. If
any other matter or matters are properly presented for action at the Marine
Special Meeting, the persons named in the enclosed form of proxy and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment, unless such authorization is withheld.
A Marine 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
Marine Special Meeting to Arthur C. Miles, Jr., President of Marine, or Henry
J. Conklin, Corporate Secretary of Marine, by signing and returning a later
dated proxy, or by voting in person at the Marine Special Meeting; however,
mere attendance at the Marine Special Meeting will not in and of itself have
the effect of revoking the proxy.
Votes cast by proxy or in person at the Marine Special Meeting will be
tabulated to determine whether or not a quorum is present. Where, as to any
matter submitted to the Marine Stockholders for a vote, proxies are marked as
abstentions (or Marine 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
8
<PAGE>
also treated as shares that are present and entitled to vote for quorum
purposes. Because the required vote of Marine Stockholders on the Plan and the
Affiliation are based upon the total number of outstanding shares of Marine
Common Stock, the failure to submit a proxy card (or the failure to vote in
person at the Marine Special Meeting if a proxy card is not submitted), the
abstention from voting and any broker non-vote will (except for purposes of
rights of dissenting stockholders) have the same effect as a vote against the
Plan and the Affiliation.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Marine Board of
Directors, and Marine will bear the costs of its solicitation of proxies.
Solicitations may be made by mail, telephone, or personally by directors,
officers and employees of Marine, 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.
THE AFFILIATION
THE FOLLOWING DESCRIPTION OF THE AFFILIATION DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AFFILIATION
AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROSPECTUS AND PROXY STATEMENT
AS ANNEX A AND INCORPORATED HEREIN BY REFERENCE.
GENERAL
The Affiliation Agreement provides that, subject to the satisfaction or
waiver of the conditions set forth therein, Marine Bank shall become affiliated
with Mercshares by Marine's Merger into Mercshares, accompanied by Marine
Bank's merger into F&M, whereupon, the separate existences of Marine and Marine
Bank shall cease and Mercshares and F&M, respectively, will be the surviving
corporations. Each share of Marine Common Stock (other than shares held by
Marine Stockholders who properly perfect their dissenters' rights)
automatically shall become and be converted into .75 of a share of Mercshares
Common Stock and the right to receive payment for fractional shares held.
Certificates for Marine Common Stock shall be exchanged for certificates of
Mercshares Common Stock as described below.
The Marine Stockholders will own less than one percent of the outstanding
Mercshares Common Stock following consummation of the Affiliation, and the
percentage of total assets and the percentage of total liabilities represented
by Marine in Mercshares will each be less than one percent.
The Marine Board of Directors has concluded that the terms of the
Affiliation, the Affiliation Agreement and the Plan are advisable and are fair
to, and in the best interests of, Marine and the Marine Stockholders. Upon
consummation of the Affiliation, the former Marine Stockholders who become
holders of Mercshares Common Stock will be stockholders in a larger entity with
equity traded on The Nasdaq National Market. Each Marine Stockholder who
becomes a holder of Mercshares Common Stock shall possess the same rights as
other such holders, and former Marine Stockholders as a group will no longer be
taking action at the Marine corporate level. See "COMPARISON OF STOCKHOLDER
RIGHTS OF HOLDERS OF MERCSHARES COMMON STOCK AND MARINE COMMON STOCK" and
"DESCRIPTION OF MERCSHARES CAPITAL STOCK."
BACKGROUND OF THE AFFILIATION
In January, 1998, Marine began to receive inquiries from other bank
holding companies concerning possible acquisitions of Marine. The Marine Board
of Directors proceeded to study the prospects of such an acquisition, as
opposed to a strategy of continued independence. From January through May of
1998, the Marine Board considered offers or indications of interest from four
institutions including Mercshares.
Late in January, 1998, H.B. Rew, Jr., President of F&M, contacted Marine
to explore the possibility of an affiliation of Marine with F&M and Mercshares.
On March 24, 1998, Mercshares' Chairman and Chief Executive Officer, H. Furlong
Baldwin, and Mr. Rew met with Marine's Chairman, Russell W. Everett, Sr., and
other Marine representatives. Mr. Baldwin presented a proposal for a merger of
Marine Bank into F&M in which the stockholders of Marine would receive .75 of a
share of Mercshares Common Stock in exchange for each outstanding share of
Marine Common Stock. After deliberation by the Marine Board, various aspects of
the proposals were discussed on May 7, 1998 at a meeting attended by Messrs.
Baldwin, Rew, Everett, Miles and five other members of Marine's Board of
Directors and it was agreed that the proposal would be considered at a meeting
of the Marine Board to be held on May 22, 1998. Following that meeting, Mr.
Everett contacted Mr. Baldwin with a request to increase the exchange ratio,
which Mr. Baldwin declined to accept. On
9
<PAGE>
May 26, 1998, the parties agreed to present the Mercshares proposal for final
action by their respective boards of directors at meetings to be held on June
9, 1998.
On June 1, 1998, Mr. Rew and Mercshares' General Counsel, Alan D. Yarbro,
met with Arthur C. Miles, Jr., Marine's President and Chief Executive Officer,
to review drafts of definitive agreements for the proposed transaction and to
exchange related information. On June 9, 1998, the boards of directors of
Mercshares, F&M, Marine and Marine Bank met and approved the Affiliation
Agreement and the Affiliation, and the terms of the transaction were publicly
announced on that day.
REASONS FOR THE AFFILIATION; RECOMMENDATION OF THE MARINE BOARD OF DIRECTORS
The Marine Board of Directors has unanimously approved and recommends that
Marine Stockholders vote to approve the Plan and the Affiliation.
The Marine Board of Directors believes that the terms of the Affiliation
Agreement, the Plan and the Affiliation are in the best interests of Marine and
the Marine Stockholders. In considering the terms and conditions of the
Affiliation Agreement, the Marine Board of Directors considered a number of
factors. The Marine Board of Directors did not assign any relative or specific
weights to the factors considered. The material factors considered were:
(i) THE FINANCIAL TERMS OF THE AFFILIATION. In this regard, the Marine
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 Marine Stockholders resulting from the
Exchange Ratio represented a fair multiple of Marine's per share book value
and earnings. The Marine Board of Directors also considered that, under the
proposed Exchange Ratio and based on the Marine Board of Directors' belief
that Mercshares would continue to pay dividends at its current rate, the
Affiliation would result in a substantial increase in dividend income to
the Marine Stockholders, although there can be no assurance that current
dividends are indicative of future dividends. See "COMPARATIVE UNAUDITED
PER SHARE DATA." The Marine Board of Directors also considered that the
transaction would qualify as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended (the "Code"). See "THE AFFILIATION --
Certain Federal Income Tax Consequences."
(ii) THE TERMS, OTHER THAN THE FINANCIAL TERMS, AND STRUCTURE OF THE BANK
MERGER. In this respect, the Marine Board of Directors considered the
benefits to the customers and employees of Marine Bank and the communities
it serves of combining Marine Bank's operations with F&M's. As combined
with F&M's operations, Marine Bank's present operations would offer an
expanded range of products and services, would have access to Mercshares'
financial and managerial resources, and would benefit from greater
geographical coverage.
(iii) CERTAIN FINANCIAL AND OTHER INFORMATION CONCERNING MERCSHARES. In
this respect, the Marine 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 Marine Board of Directors also considered
that the historical dividends per share of Mercshares Common Stock to be
received by the Marine Stockholders, after giving effect to the Exchange
Ratio, would represent a substantial increase in the historical dividends
per share of the Marine Common Stock, although there can be no assurance
that pro forma amounts are indicative of future dividends of Mercshares.
The Marine Board of Directors also considered the marketability of
Mercshares Common Stock, which is publicly traded and quoted on The Nasdaq
National Market. The Marine Board of Directors further considered the
diversification of risk associated with ownership of an institution that
operates 22 banks serving a broad geographic area that encompasses most of
Maryland and parts of Virginia and Delaware.
(iv) OTHER POSSIBLE AFFILIATION PARTNERS. Of the three bank holding
companies (other than Mercshares) which discussed possible affiliations
with Marine in 1998, one did not make an offer, and another made an offer
which was not comparable in price to the Mercshares offer. The offer of an
exchange of stock by the third institution was priced comparably to the
Mercshares offer, but the trading market for that institution's stock did
not approach the quality of the market for Mercshares Common Stock in terms
of number of shares outstanding, trading volume and liquidity. The Marine
Board of Directors concluded that the Mercshares offer was superior because
of the various factors described above.
(v) CERTAIN RELATED CONSIDERATIONS. The Marine Board of Directors further
determined that the addition of resources resulting from the Affiliation
will enable Marine 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 Marine Board of Directors concluded that the Affiliation will
help provide Marine with
10
<PAGE>
the financial resources needed to meet the competitive challenges arising
from recent and anticipated changes in the banking and financial services
industry.
THE MARINE BOARD OF DIRECTORS BELIEVES THAT THE PLAN, THE AFFILIATION
AGREEMENT AND THE AFFILIATION ARE IN THE BEST INTERESTS OF MARINE AND THE
MARINE STOCKHOLDERS. THE MARINE BOARD OF DIRECTORS RECOMMENDS THAT THE MARINE
STOCKHOLDERS VOTE TO APPROVE THE PLAN AND THE AFFILIATION.
EFFECTIVE DATE
As soon as practicable after the performance of all agreements and
obligations of the parties under the Affiliation Agreement and upon fulfillment
or waiver of all conditions precedent contained therein, Mercshares and Marine
will execute and deliver Articles of Merger (the "Articles"), and will file the
Articles with the Virginia State Corporation Commission and with the State
Department of Assessments and Taxation of the State of Maryland (the "Maryland
SDAT"). The Affiliation shall become effective on such date and time (the
"Effective Date") as set forth in the Articles as filed with the Maryland SDAT
and in a certificate of merger to be issued by the Virginia State Corporation
Commission.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
On and after the Effective Date, certificates for shares of Marine 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 Marine 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 Marine 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, Marine 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 Marine Common Stock (other than shares of dissenting stockholders as
described herein under the heading " -- 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
Marine 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.
MARINE STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL FORMS AND INSTRUCTIONS. MARINE 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 Affiliation; it is not intended to be a complete
description of those consequences. The matters set forth in paragraphs (i)
through (v) are based upon the opinion of Venable, Baetjer and Howard, LLP,
counsel to Mercshares:
(i) the Holding Company Merger will qualify as a tax-free reorganization
within the meaning of Sections 368(a)(1)(A) of the Internal Revenue Code of
1986, as amended (the "Code"), to which Mercshares and Marine will each be
a party;
(ii) no gain or loss will be recognized by Mercshares or Marine in the
Affiliation;
(iii) no gain or loss will be recognized by the Marine Stockholders upon
receipt by them of Mercshares Common Stock in exchange for Marine Common
Stock pursuant to the Affiliation;
11
<PAGE>
(iv) provided that the Marine Common Stock is held as a capital asset,
the tax basis of the Mercshares Common Stock received by the Marine
Stockholders will be the same as the tax basis of the Marine Common Stock
surrendered and exchanged therefor; and
(v) provided that the Marine Common Stock is held as a capital asset, the
holding period of the Mercshares Common Stock received by the Marine
Stockholders will include the holding period during which the Marine Common
Stock surrendered in exchange therefor was held.
The obligation of Marine to consummate the Affiliation is subject to the
receipt of an opinion of Venable, Baetjer and Howard, LLP, counsel to
Mercshares (or such other qualified law firm as Marine shall select), with
respect to the federal income tax consequences of the Affiliation,
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
Affiliation.
Any cash received by Marine 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 Marine Stockholders. The receipt
of such cash generally will be treated as a sale or exchange of the stock
resulting in capital gain or loss measured by the difference between the cash
received and an allocable portion of the basis of the stock relinquished. The
receipt of such cash may be treated as a dividend and taxed as ordinary income
in certain limited situations.
The discussion set forth above is included for general information only.
It does not address the state, local or foreign tax aspects of the Affiliation.
In addition, it does not discuss the federal income tax considerations that may
be relevant to certain persons, and may not apply to certain holders subject to
special tax rules, including dealers in securities and foreign holders. The
discussion is based upon currently existing provisions of the Code, existing
Treasury regulations thereunder and current administrative rulings and court
decisions. All of the foregoing are subject to change and any such change could
affect the continuing validity of this discussion.
Each Marine Stockholder should consult his own tax advisor with respect to
the specific tax consequences of the Affiliation to him, including the
application and effect of state, local and foreign tax laws.
ACCOUNTING TREATMENT
The Affiliation 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 Affiliation would result in identifiable
intangibles and goodwill approximating $2,075,000, 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 AFFILIATION BY CONTROLLING PERSONS
Under Federal securities laws there are certain potential limitations on
the sale of Mercshares Common Stock received in the Affiliation that will
affect certain Marine Stockholders who may be controlling persons of Marine.
Mercshares and Marine believe that the only Marine Stockholders who may be
deemed controlling persons subject to these limitations are the directors of
Marine and certain persons related to them who have been advised of these
restrictions and have agreed in writing to them.
CONDITIONS TO AFFILIATION
Consummation of the Affiliation is conditioned upon, among other things,
approval of the Plan by an affirmative vote of at least two-thirds of the
outstanding shares of Marine Common Stock entitled to vote thereon.
The obligation of Mercshares to consummate the Affiliation is also subject
to the prior satisfaction of certain further conditions including the
following: (1) stockholders who are affiliates of Marine 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) Marine shall
not have authorized or distributed any assets to its stockholders by way of
dividends or otherwise, except for a semi-annual dividend not to exceed $0.15
per share (which was declared in June 1998), and regular cash dividends for
any full calendar quarter occurring before the Effective Date of the Holding
Company Merger that begins after June 30, 1998 at an effective quarterly rate
of not more than $.075 per share; (3) Marine 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 Marine; (5) compliance by Marine with certain
conditions,
12
<PAGE>
including limits on unapproved increases in compensation of directors, officers
or employees of Marine or unapproved alterations in benefits received by such
individuals; (6) absence of any change in Marine's investment practices and
policies; (7) that the holders of not more than 10% of Marine's Common Stock
shall have (a) delivered written notice of intent to demand payment for their
shares prior to the Special Meeting and (b) not voted in favor of the
Affiliation; (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 Affiliation; (9) Marine Bank shall not have
applied for or opened any new, or closed any existing, branch offices unless
approved by Mercshares; (10) receipt of an opinion of counsel confirming
certain of the tax consequences of the Affiliation for Mercshares, Marine, F&M
and Marine Bank, including those 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
Marine; (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 F&M, as successor to Marine Bank in the
Bank Merger, and Mercshares, as successor to Marine in the Holding Company
Merger, to conduct after the Effective Date all and every part of the business
and activities conducted by Marine Bank and Marine, respectively, prior to the
Effective Date in the manner in which such activities and business were then
conducted by Marine Bank and Marine, respectively, 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 Marine to consummate the Affiliation is subject to the
satisfaction of certain further conditions including the following: (1) receipt
of an opinion of counsel confirming certain of the tax consequences of the
Affiliation for Marine Stockholders as set forth above under the heading " --
Certain Federal Income Tax Consequences;" (2) the receipt of certain regulatory
approvals; (3) the effectiveness of the Registration Statement; and (4) the
accuracy and satisfaction of various financial and legal representations and
conditions with respect to Mercshares. Marine may in its discretion waive
condition (4).
TREATMENT OF EMPLOYEE BENEFIT PLANS
Pursuant to the Agreement and Plan and at the option of Mercshares,
Marine's qualified plan (a 401(k) plan) is expected to be merged into
Mercshares' 401(k) plan. If in the judgment of Mercshares, it is not
technically feasible or desirable to merge the plans, Marine's qualified plan
will be terminated, with its assets held for distribution to the participants.
In addition, effective as of the first January 1st following the Effective
Date, employees of Marine Bank will become eligible to participate in
Mercshares' cash balance pension plan according to its applicable provisions
and will be given credit for service with Marine Bank for purposes of
eligibility to participate and vesting.
Except with respect to Marine's qualified plan and Mercshares' cash
balance pension plan, which will be treated as above, and executive plans,
programs and arrangements, eligibility for participation in which is determined
in the discretion of F&M and/or Mercshares, after the Effective Date, Marine
Bank's employees employed by F&M after the Affiliation will be entitled to
participate in F&M's employee benefit plans and programs on substantially the
same basis as similarly situated employees of F&M. Except as set forth above
with respect to Mercshares' 401(k) and cash balance pension plans, F&M has
agreed to treat service with Marine Bank before the Effective Date as service
with F&M for purposes of all such employee benefit and seniority-based plans
and programs.
POST-AFFILIATION OPERATIONS
It is anticipated that upon consummation of the Affiliation, Marine Bank's
main office in Chincoteaque Island will be closed and consolidated into F&M's
branch in Chincoteaque Island, and Marine Bank's Wattsville branch will be
closed and consolidated into F&M's branch in Oak Hall, Virginia.
EXCLUSIVE DEALING
Marine has agreed that while the Affiliation Agreement is in effect,
neither Marine, Marine Bank nor any of their respective officers, directors,
employees, agents or representatives 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 Marine
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 Marine Board of Directors shall conclude, based on a written
opinion of counsel, which
13
<PAGE>
may be based with respect to financial matters on the written opinion of a duly
qualified and independent financial advisor to Marine, that its fiduciary
obligations require consideration of such Acquisition Proposal because it may
be in the best interests of the Marine Stockholders and is more favorable to
the Marine Stockholders from a financial point of view than the Affiliation.
An "Acquisition Proposal" is defined in the Affiliation Agreement as
including any proposed (A) merger, consolidation, share exchange or similar
transaction involving Marine or Marine Bank, (B) sale, lease or other
disposition directly or indirectly by merger, consolidation, share exchange or
otherwise of assets of Marine or Marine Bank representing 10% or more of the
assets of Marine (including capital stock of Marine Bank) or of Marine Bank,
(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 Marine or Marine Bank, or (D)
any transaction in which any person or group shall acquire beneficial ownership
(as such term is defined in Rule 13d-3 under the Exchange Act), or the right to
acquire beneficial ownership, of 20% or more of Marine's or Marine Bank's
outstanding capital stock.
Marine and Marine Bank have agreed that they will promptly advise
Mercshares of, and communicate to Mercshares the terms of, any such inquiry or
proposal addressed to Marine or Marine Bank or of which Marine or Marine Bank
or their respective officers, directors, employees, agents, or representatives
(including, without limitation, any investment banker) has knowledge.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
Arthur C. Miles, Jr., the President of Marine and Marine Bank currently
has a rolling five-year employment contract dated December 9, 1997 with Marine.
Under the employment contract, Mr. Miles is entitled to receive a base salary
of $70,000, subject to annual review of and increase by the Marine Board of
Directors. The employment contract also contains provisions relating to a
change in control of Marine, such as the Affiliation. Pursuant to these change
in control provisions, Mr. Miles may elect to terminate his employment for
certain enumerated reasons. Upon such termination, Mr. Miles would be entitled
to receive within 15 days after such termination, a lump sum cash payment equal
to (1) his base salary through the date of such termination, (2) approximately
three times his base salary, and (3) a cash amount equal to the sum of the
maximum payments he would have received for all incentive award rights
outstanding at the date of such termination. By virtue of the Holding Company
Merger, the employment contract will become an obligation of Mercshares.
TERMINATION
The Affiliation Agreement provides that it may be terminated and the
Affiliation abandoned at any time prior to the Effective Date: (a)
notwithstanding the approval of the Affiliation by the Marine Stockholders, by
the mutual consent of the parties; (b) by Mercshares and F&M if at any time
Mercshares 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 in the Affiliation Agreement, 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 such
transactions will be so challenged; (c) by Mercshares and F&M if Marine's Board
of Directors recommends to the Marine Stockholders, or Marine accepts, a
competing Acquisition Proposal, or by Marine and Marine Bank if, in compliance
with the provisions of the Affiliation Agreement, Marine's Board of Directors
recommends to the Marine Stockholders, or it accepts such an Acquisition
Proposal; and (d) by Mercshares or Marine if the Merger is not consummated by
May 31, 1999. The Affiliation Agreement provides that in the case of a
termination under (c) above, Marine shall pay Mercshares a termination fee of
$200,000. The Affiliation Agreement also provides that if the Affiliation
Agreement is terminated by Mercshares or F&M by reason of a material breach by
Marine or Marine Bank, or by Marine or Marine Bank by reason of a material
breach by Mercshares or F&M, 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 in connection with the
preparation, execution and attempted consummation of the Affiliation Agreement,
including the fees of the non-breaching party's counsel, accountants,
consultants and other advisors and representatives.
RIGHTS OF DISSENTING STOCKHOLDERS
A Marine Stockholder who objects to the Affiliation (a "Dissenting
Stockholder") and who complies with the provisions of Article 15 of the
Virginia Stock Corporation Act ("Article 15") may demand the right to receive a
cash payment, if the Affiliation is consummated, of the fair value of his or
her shares immediately before the Effective Date, exclusive of any appreciation
or depreciation in anticipation of the Affiliation, unless such exclusion would
be inequitable. In order to
14
<PAGE>
receive payment, a Dissenting Stockholder must deliver to Marine prior to the
vote at the Marine Special Meeting a written notice of intent to demand payment
for his or her shares if the Affiliation is effectuated (an "Intent to Demand
Payment") and must not vote his or her shares to approve the Plan and the
Affiliation. A Marine 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 Plan and the Affiliation, and,
therefore, to have waived his or her dissenters' rights. A Marine Stockholder
may vote against the Plan and the Affiliation, abstain from voting on the Plan
and the Affiliation or refrain from voting on (by not returning the proxy or by
not voting at the meeting) the Plan and the Affiliation without losing his or
her right to assert dissenters' rights, as long as such Marine Stockholder's
Intent to Demand Payment is timely given. The Intent to Demand Payment should
be addressed to: Arthur C. Miles, Jr., President of Marine or Henry J. Conklin,
Corporate Secretary of Marine, 6395 Maddox Boulevard, Chincoteague Island,
Virginia 23336. A VOTE AGAINST OR AN ABSTENTION WITH REGARD TO THE AFFILIATION
AGREEMENT WILL NOT ITSELF CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO
DEMAND PAYMENT AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN
NOTICE OF INTENT TO DEMAND PAYMENT.
A Marine Stockholder of record may assert dissenters' rights as to fewer
than all the shares registered in his or her name only if the Marine
Stockholder dissents with respect to all shares beneficially owned by any one
person and notifies Marine in writing (delivered or mailed to the name and
address noted immediately above) of the name and address of each person on
whose behalf he or she asserts dissenters' rights. A beneficial stockholder of
Marine Common Stock may assert dissenters' rights as to shares held on his or
her behalf by a stockholder of record only if (i) he or she submits to Marine
the record stockholder's written consent to the dissent not later than the time
when the beneficial stockholder asserts dissenters' rights, and (ii) he or she
dissents with respect to all shares of which he or she is the beneficial
stockholder or over which he or she has power to direct the vote, and (iii) he
or she files an Intent to Demand Payment in a timely manner.
If the Affiliation is consummated, within 10 days after the Effective
Date, Mercshares is required to deliver a notice in writing (a "Dissenter's
Notice") to each Dissenting Stockholder who has filed an Intent to Demand
Payment and who has not voted such shares to approve the Plan. The Dissenter's
Notice shall (i) state where the demand for payment (the "Payment Demand")
shall be sent and where and when stock certificates shall be deposited; (ii)
supply a form for demanding payment; (iii) set a date by which Mercshares must
receive the Payment Demand (which may not be fewer than 30 nor more than 60
days after delivery of the Dissenter's Notice), and (iv) be accompanied by a
copy of Article 15. A Dissenting Stockholder who is sent a Dissenter's Notice
must submit the Payment Demand and deposit his stock certificates in accordance
with the terms of, and within the time frames set forth in, the Dissenter's
Notice. As part of the Payment Demand, the Dissenting Stockholder must certify
whether he acquired beneficial ownership of the shares before or after the date
of the first public announcement of the terms of the proposed Affiliation (the
"Announcement Date"), which was June 9, 1998.
Except with respect to shares of Marine Common Stock acquired after the
Announcement Date, Mercshares shall pay a Dissenting Stockholder the amount
Mercshares estimates to be the fair value of his or her shares, plus accrued
interest. Such payment shall be made within 30 days of receipt of the
Dissenting Stockholder's Payment Demand. As to shares of Marine Common Stock
acquired after the Announcement Date, Mercshares is only obligated to estimate
the fair value of the shares, plus accrued interest, and to offer to pay this
amount to the Dissenting Stockholder conditioned upon the Dissenting
Stockholder's agreement to accept it in full satisfaction of his or her claim.
If a Dissenting Stockholder believes that the amount paid or offered by
Mercshares is less than the fair value of his or her shares of Marine Common
Stock, or that the interest due is incorrectly calculated, that Dissenting
Stockholder may notify Mercshares in writing of his or her own estimate of the
fair value of his or her shares and the amount of interest due and demand
payment of such estimate (less any amount already received by the Dissenting
Stockholder) (the "Estimate and Demand"). The Dissenting Stockholder must
notify Mercshares of the Estimate and Demand within 30 days after the date
Mercshares makes or offers to make payment to the Dissenting Stockholder.
Within 60 days after receiving the Estimate and Demand, Mercshares must
either commence a proceeding in the appropriate circuit court to determine the
fair value of the Dissenting Stockholder's shares and accrued interest, or
Mercshares must pay each Dissenting Stockholder whose demand remains unsettled
the amount demanded. If a judicial determination of the "fair value" of Marine
Common Stock held by such Marine Stockholder is necessary, such a determination
may result in a value that is more than, less than, or equal to the value of
the consideration which would have been delivered by Mercshares pursuant to the
Affiliation. If a proceeding is commenced, the court must determine all costs
of the proceeding and must assess those costs against Mercshares, except that
the court may assess costs against all or some of the Dissenting Stockholders
to the extent the court finds that the Dissenting Stockholder did not act in
good faith in demanding payment of the Dissenting Stockholders' estimates.
15
<PAGE>
The foregoing discussion is a summary of the material provisions of
Article 15 and is not intended to be a complete statement of its provisions.
The foregoing discussion is qualified in its entirety by reference to the full
text of Article 15, which Marine Stockholders are strongly encouraged to review
carefully and which is included as Annex B to this Prospectus and Proxy
Statement. No further notice of the events giving rise to dissenters' rights or
any steps associated therewith will be furnished to Marine 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 AFFILIATION -- Certain Federal Income Tax Consequences."
CERTAIN OTHER AGREEMENTS
THE SUPPORT AGREEMENT
As a condition to Mercshares entering into the Affiliation Agreement,
the directors of Marine and persons related to them who owned an aggregate
of 85,528 shares as of June 9, 1998 (approximately 51%) of the outstanding
Marine Common Stock (the "Supporting Marine Affiliates") each entered into a
Support Agreement (the "Support Agreement") with Mercshares. Pursuant to the
Support Agreement, each of the Supporting Marine 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 Plan) which
would restrict, establish a right of first refusal to or otherwise relate to
the transfer or voting of the shares of Marine Common Stock owned or acquired
by such Supporting Marine Affiliate during the term of the Support Agreement;
(b) subject to the provisions of Section 1.10 of the Affiliation Agreement with
respect to the fiduciary obligations as directors of Marine, 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 Marine, and to use all commercially
reasonable efforts to assure that Marine takes no such steps; (c) to promptly
advise Mercshares of any such inquiry or proposal of which such Supporting
Marine Affiliate has knowledge; (d) to vote his or her shares of Marine Common
Stock in favor of the Plan and the transactions contemplated thereby, and, in
his capacity as a stockholder, to use his best efforts to cause the Affiliation
to be effected, subject to the provisions of Section 1.10 of the Affiliation
Agreement with respect to the fiduciary obligations as directors of Marine. 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 Marine 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 Marine Affiliates. See
"THE AFFILIATION -- Resale of Mercshares Common Stock After the Affiliation by
Controlling Persons."
THE EASTVILLE BANK MERGER
In September, 1998, Mercshares expects that The Eastville Bank, a
wholly-owned affiliate of Mercshares ("Eastville") will merge into F&M. At June
30, 1998, Eastville had total assets of approximately $31.1 million, deposits
of approximately $24.1 million, and loans of approximately $22.9 million.
DESCRIPTION OF MARINE
GENERAL
Marine was organized in 1997 as a Virginia corporation for the purpose of
serving as the parent holding company for Marine Bank, which was organized as a
Virginia state chartered bank on August 31, 1973. Marine does not engage in any
activities other than acting as a holding company for Marine Bank. Accordingly,
the principal business of Marine is conducted through Marine Bank. At June 30,
1998, Marine had 218 record holders of its capital stock.
As of June 30, 1998, Marine had total assets of approximately $23.5
million, total deposits of approximately $20.9 million, and total stockholders'
equity of approximately $2.4 million.
16
<PAGE>
Marine Bank is a commercial bank offering a wide range of services,
including demand and time deposits, as well as installment, mortgage and other
consumer and commercial lending services. Marine Bank makes seasonal and term
commercial loans, both alone and in conjunction with other banks or
governmental agencies.
Marine Bank's primary trade area is Accomack County on Virginia's Eastern
Shore.
The main office of Marine and Marine Bank is in Chincoteague Island,
Virginia. Marine Bank operates a branch in Wattsville, Virginia.
Marine and Marine Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. As a state member bank, Marine Bank is regulated and examined by
the Bureau of Financial Institutions of the Virginia State Corporation
Commission and the Board of Governors of the Federal Reserve System. Marine is
registered as a bank holding company under the BHCA and is, therefore, subject
to regulation and examination of the Board of Governors of the Federal Reserve
System.
BUSINESS
SERVICES OF MARINE BANK
Marine Bank provides service-intensive commercial and retail banking
services to small and medium sized businesses and to individuals. The following
types of services are offered by Marine Bank:
COMMERCIAL SERVICES
o 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
o Commercial checking, money market, savings accounts and certificates of
deposit
o Merchant Bank Card Services
o Night Depository
RETAIL SERVICES
o Transaction accounts, including checking and NOW accounts.
o Savings accounts
o Money market deposit accounts
o Certificates of deposit
o Individual retirement accounts
o Christmas clubs
o Installment loans and lines of credit
o Residential construction and first mortgage loans
o Travelers checks and safe deposit boxes
o Wire transfer services
LENDING ACTIVITIES
At June 30, 1998, Marine Bank's gross loan portfolio (excluding
non-accrual loans) totaled approximately $15.1 million, representing 64.2% of
its total assets of $23.5 million. The principal categories of loans in Marine
Bank's portfolio are residential real estate mortgage, consumer, commercial,
real estate development and construction, and commercial real estate.
17
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth Marine Bank's
loans by major categories as of June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
AMOUNT PERCENT
----------- ----------
(IN THOUSANDS)
<S><C>
Real Estate:
Development and construction ......................... $ 248 1.64%
Secured by farmland .................................. 67 .44%
Secured by 1-4 family residential properties ......... 10,606 70.06%
Other Real Estate .................................... 2,610 17.24%
Commercial and industrial loans ....................... 383 2.53%
All other loans ....................................... 1,224 8.09%
-------- -----
Totals ................................................ $ 15,138 100%
======== =====
</TABLE>
COMPETITION
While promotional activities emphasize the many advantages of dealing with
a locally-run institution closely attuned to the needs of its community, Marine
Bank faces strong competition in all areas of its operations. Marine Bank
competes principally with approximately four other commercial banks which
operate in the vicinity of its offices. In addition, Marine Bank competes with
one credit union and one savings bank. Marine Bank's most direct competition
for deposits comes from these financial institutions as well as mutual funds
and stockbrokers. Marine Bank competes with banking entities, mortgage banking
companies, and other institutional lenders for loans. The competition for loans
varies from time to time based on such factors as the general availability of
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 June 30, 1998, Marine Bank had 19 employees, of which 4 were
officers, 17 were full-time employees and 2 were part-time employees.
PROPERTIES
Marine Bank's main banking office is located at 6395 Maddox Boulevard in
Chincoteague Island, Virginia, and its branch office is located at 33013
Chincoteague Road, Wattsville, Virginia. Marine Bank owns both properties.
DIVIDENDS
Marine has declared and paid cash dividends on Marine Common Stock of
$0.31 per share for 1996, $0.31 per share for 1997, and $.15 for 1998. In
September 1998, Marine also declared a cash dividend of $.075 per share to be
paid in October 1998. Any future determination as to payment of cash dividends
will be at the discretion of Marine's Board of Directors and will, subject to
the Affiliation Agreement, depend on Marine's results of operations, financial
condition, capital and regulatory requirements and other factors deemed relevant
by Marine's Board of Directors. Since the execution of the Affiliation
Agreement, Marine has also been subject to certain contractual restrictions on
the declaration and payment of dividends. The Affiliation Agreement permits
additional dividends of up to $.075 per quarter to be declared and paid prior
to the effective date of the Affiliation. See "THE AFFILIATION -- Conditions to
Affiliation."
PRICE RANGE OF COMMON STOCK
There is no established public trading market for Marine Common Stock,
which is traded lightly in privately negotiated transactions. Management does
not have a history of the stock sale prices for these private trades.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the number of shares of Marine Common Stock
beneficially owned by directors and executive officers of Marine, and each
person known to Marine to beneficially own more than five percent of Marine
Common Stock as of June 30, 1998. Unless otherwise indicated, the individuals
named below have sole voting and investment power over all shares beneficially
owned by them.
18
<PAGE>
<TABLE>
<CAPTION>
SHARES OF MARINE
COMMON STOCK BENEFICIALLY OWNED
-------------------------------
NAME AND ADDRESS (1) NUMBER PERCENT OF CLASS
- -------------------- ---------- -----------------
<S><C>
James A. Bott, Jr., Director (2) ................................................... 9,896 5.95%
Henry J. Conklin, Director and Corporate Secretary (3) ............................. 21,712 13.07
Russell W. Everett, Sr., Director (4) .............................................. 24,496 14.74
Richard C. Hatfield, Director ...................................................... 9,640 5.80
Beverly K. Hornsby, Director (5) ................................................... 11,060 6.66
Arthur C. Miles, Jr., President and Director (6) ................................... 1,432 *
Robert L. Parks, Sr., Director (7) ................................................. 6,136 3.69
Michael T. Tolbert, Director ....................................................... 392 *
Media M. Savage (8)(9) ............................................................. 16,812 10.12
All directors, executive officers, and 5% stockholders as a group (12 persons) (10) 101,576 61.13
</TABLE>
- ---------
* Indicates holdings of less than one percent.
(1) Each stockholder's address is at Marine's principal executive office unless
otherwise noted.
(2) Includes 3,400 shares owned by H&H Pharmacy, Inc., which is controlled by
James A. Bott, Jr.
(3) Includes 21,112 shares owned jointly with spouse, Nancy B. Conklin.
(4) Includes 23,896 shares owned jointly with spouse, Martha Everett.
(5) Includes 7,428 shares owned jointly with spouse, Elizabeth B. Hornsby and
400 shares owned jointly with sister, Virginia H. Woodbury.
(6) Includes 632 shares owned jointly with spouse, Barbara J. Miles, 100 shares
owned jointly with daughter, Bonnie Elizabeth Miles, and 100 shares owned
jointly with son, Martin Guy Miles.
(7) Includes 5,136 shares owned jointly with spouse, Beulah M. Parks, and 400
shares owned jointly with daughter, Sylvia P. Milliner.
(8) Mrs. Savage's address is 5463 Woodland Drive, Chincoteague Island, Virginia
23336.
(9) Includes 2,680 shares owned jointly with Lawrence T. Savage, 200 shares
owned jointly with Louella Cole Hickman, 600 shares owned jointly with May
Lawrence Hickman, 800 shares owned jointly with Thomas M. Savage, 200
shares owned jointly with Aaron Thomas Savage, 200 shares owned jointly
with Anne Rebecca Hickman, and 24 shares owned jointly with Chelsie
Poliska.
(10) Includes shares owned as described in notes 1 through 7 and 9.
19
<PAGE>
SELECTED FINANCIAL INFORMATION
The income statement data, per share data, and balance sheet data
contained in the following summary financial data for the two years ended
December 31, 1997 are derived from the audited historical financial statements
of Marine. The financial data for the three years ended December 31, 1995 and
for the six months ended June 30, 1998 and 1997 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 Marine
included elsewhere in this Prospectus and Proxy Statement. Per share
information for all periods has been adjusted to reflect the issuance of shares
by The Marine BanCorp in its 1997 exchange of shares for all of the shares of
Marine Bank.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S><C>
INCOME STATEMENT DATA:
Net interest income ........................ $ 498 $ 513 $ 1,051 $ 990 $ 993 $ 1,203 $ 1,176
Provision for loan losses .................. 6 6 17 18 43 78 280
Noninterest income ......................... 84 68 147 130 110 100 197
Noninterest expense ........................ 406 405 822 814 929 979 1,040
Income tax expense ......................... 62 60 120 93 35 78 4
Net income ................................. 110 112 238 195 96 168 49
PER SHARE DATA:
Net income -- Basic and Diluted ............ 0.66 0.67 1.43 1.17 0.58 1.01 0.30
Cash dividends ............................. 0.15 -- 0.31 0.31 0.31 0.31 0.30
Book value at period end ................... 14.49 13.20 14.00 12.84 12.09 11.68 11.17
Average shares outstanding ................. 166,160 166,600 166,600 166,600 166,600 166,600 163,800
BALANCE SHEET DATA AT PERIOD END:
Total assets ............................... 23,509 23,288 22,462 22,937 21,892 21,108 23,864
Loans ...................................... 14,736 15,819 15,565 14,957 15,628 16,982 18,170
Securities ................................. 3,316 3,587 3,199 3,631 1,754 1,449 1,402
Deposits ................................... 20,910 20,826 19,907 20,131 19,682 17,714 21,730
Stockholders' equity ....................... 2,408 2,200 2,332 2,139 2,015 1,946 1,829
PERFORMANCE RATIOS:(1)
Return on average assets ................... 0.90% 1.00% 1.10% 0.90% 0.40% 0.80% 0.20%
Return on average equity ................... 9.10 10.20 10.20 9.10 4.80 8.60 2.70
Net interest margin ........................ 4.80 5.10 5.30 4.80 5.20 5.30 5.00
ASSET QUALITY RATIOS:(2)
Allowance for loan losses to period end
loans ..................................... 2.10 2.10 2.10 2.10 2.00 1.70 1.50
Allowance for loan losses to nonaccrual
loans ..................................... 16.34 515.40 354.30 N/A(3) N/A(3) 14.07 357.50
Nonperforming assets to period end loans
and other real estate owned(2) ............ 2.70 1.40 1.40 1.60 2.00 3.50 2.50
Net charge-offs to average loans ........... 0.10 -- 0.10 0.10 0.10 0.40 1.00
CAPITAL RATIOS:
Tier 1 capital ............................. 19.10 17.10 18.10 16.70 15.30 14.10 11.70
Total capital .............................. 20.30 18.30 19.00 17.90 16.50 15.40 12.90
</TABLE>
- ---------
(1) Annualized for the six months ended June 30, 1998 and 1997.
(2) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
(3) Non-accrual loans equal $0.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This discussion and analysis contains selected financial information for
Marine and Marine Bank. It does not purport to provide complete financial data
and should be read in conjunction with more detailed financial information and
Marine's financial statements contained elsewhere in this Prospectus and Proxy
Statement. The selected financial information for Marine for the periods ended
June 30, 1998 and 1997 has been derived from Marine's unaudited financial
statements. In the opinion of Marine's management, such data includes all
normal recurring adjustments necessary for the fair presentation of results of
operations for the interim periods. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the operating performance that
may be reported for the full year ended December 31, 1998.
Marine's net income for 1997 was $238,358, approximately $43 thousand
(22%) higher than 1996. Net income for 1996 was $98 thousand (102%) higher than
1995. The increase in net income during 1997 is primarily due to improved net
interest income and an increase of almost 25% in service charges and other
non-interest income. Non-interest expense increased by less than 1% for 1997 as
compared to the prior year. The increase in net income in 1996 was primarily
due to lower write-downs of Other Real Estate Owned ("OREO") than in 1995 and a
lower provision for loan losses. Management also made a concentrated effort to
reduce operating expenses without sacrificing service to customers during 1996.
During this time period, the net interest spreads have remained fairly
constant. Marine's results for the first six months of 1998 and 1997 have also
remained constant.
Marine's total assets and loan portfolio have generally experienced
gradual declines for the past five years. The decreases are due primarily to
increased competition in Marine's lending area and depressed loan demands in
the local market.
INTEREST REVENUE
Marine's interest and fees on loans increased $24 thousand from 1996 to
1997. This increase was primarily due to growth in the loan portfolio. Interest
rates remained constant in both years. For the first six months in 1998,
interest and fees on loans decreased $24 thousand when compared to the first
six months in 1997. This decrease was due to a decrease in the loan portfolio.
Marine increased its investment in federal funds sold throughout 1996 due
to the decline in loan demand. Loan demand improved somewhat during 1997,
resulting in a reduction in federal funds sold and the diversion of excess
funds to investment securities during the year. Interest earned on investment
securities increased proportionately during 1997. For the first six months of
1998, Marine continued to increase its investment in federal funds sold as the
demand for new loans declined, resulting in a reduction of approximately
$800,000 in the loan portfolio.
INTEREST EXPENSE
Marine experienced a slight decrease in interest expense from 1996 to 1997
due to a decrease in rates on certificates of deposits. Due to the lack of loan
demand, management priced certificates of deposit lower in order to keep them
in line with their earning potential, which was primarily federal funds and
investment securities. Interest expense for the first six months of 1998
declined approximately 3% from the first six months of 1997.
21
<PAGE>
NET INTEREST INCOME
The following table sets forth the changes in the components of net
interest income.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1998 COMPARED TO 1997 1997 COMPARED TO 1996
----------------------- ----------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
<S><C>
Interest Revenue
Loans ............................. $ (24,289) $ 26,206
Investment securities:
Fully Taxable .................. (33,463) 48,983
Tax-Advantaged ................. (5,000) 1,278
Federal funds sold ................ 50,415 (41,072)
Total interest revenue ......... (12,337) 35,395
Interest Expense
Checking accounts ................ 255 (6,834)
Savings deposits ................. 4,543 (2,847)
Time deposits .................... (2,952) (15,391)
Total interest expense ......... 1,846 (25,072)
---------- ---------
Net Interest Income ............... $ (14,183) $ 60,467
========== =========
</TABLE>
INCOME TAXES
In 1997 and 1996, Marine's effective tax rates were similar as the
temporary differences were insignificant.
LIQUIDITY
Liquidity represents the ability of Marine to meet present and future
financial obligations that arise during the normal course of business.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of customers, as well as to meet current and planned expenditures.
Marine derived liquidity through customer deposits, available lines of credit
with other financial institutions, the maturity distribution and classification
status (held to maturity vs. available for sale) of the investment portfolio,
loan repayments and income. Marine maintains a portfolio of readily marketable
investments that could be converted to cash on an immediate basis (except for
those pledged to secure public deposits of public funds and those designated
"Held to Maturity").
At June 30, 1998, Marine had available lines of credit of $700 thousand in
overnight federal funds. Management believes that its current capital, short
term investments, and lines of credit will satisfy its cash and capital needs
for the foreseeable future.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of Marine's earning assets and funding
sources. Marine's Asset/Liability Committee reviews the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with Marine's liquidity, growth and capital adequacy goals. It is
the objective of the Asset/Liability Committee to maximize net interest margins
during periods of volatile as well as stable interest rates, to attain earnings
growth and to maintain sufficient liquidity to satisfy depositors' requirements
and meet customers' credit needs.
The following table summarizes the anticipated maturity or repricing of
Marine's interest earning assets and interest-bearing liabilities as of June
30, 1998 and Marine's sensitivity gap. A positive sensitivity gap for any time
period indicates that more interest earning assets will mature or reprice
during that time period than interest bearing liabilities. During periods of
rising interest rates, a short-term negative interest sensitivity gap position
generally decreases net income, and during periods of falling interest rates, a
short term negative interest rate sensitivity gap position generally increases
net interest income. Two factors which have not been incorporated into the
table are prepayment and extension risk associated with changes in general
market rates.
22
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
INTEREST SENSITIVITY PERIOD
---------------------------------------------------------------------------------
DEMAND & 3 TO 1 TO 3 OVER
3 MONTHS 12 MONTHS YEARS 3 YEARS TOTAL
---------------- ---------------- --------------- --------------- ---------------
<S><C>
INTEREST EARNING
ASSETS
Investment Securities ................... $ 188,745 $ 760,665 $ 1,496,811 $ 870,163 $ 3,316,384
Federal Funds Sold ...................... 2,775,000 -- -- -- 2,775,000
Loans ................................... 1,903,383 2,470,866 9,736,303 942,539 15,053,091
------------ ------------ ------------ ----------- ------------
Total Interest Earning
Assets ................................ 4,867,128 3,231,531 11,233,114 1,812,702 $ 21,144,475
------------ ------------ ------------ ----------- ============
INTEREST BEARING
LIABILITIES
Savings ................................. 921,030 -- -- -- $ 921,030
MMDA .................................... 1,780,830 -- -- -- 1,780,830
NOW ..................................... 1,078,531 -- -- -- 1,078,531
CD's and other time deposits ............ 3,657,008 3,930,271 1,772,292 1,324,246 10,683,817
------------ ------------ ------------ ----------- ------------
Total Interest Bearing
Liabilities ........................... 7,437,399 3,930,271 1,772,292 1,324,246 $ 14,464,208
------------ ------------ ------------ ----------- ============
Interest Sensitivity GAP ................ $ (2,570,271) $ (698,740) $ 9,460,822 $ 488,456
============ ============ ============ ===========
Cumulative Interest Sensitivity GAP ..... $ (2,570,271) $ (3,269,011) $ 6,191,811 $ 6,680,267
============ ============ ============ ===========
Cumulative Interest Sensitivity GAP
Ratio .................................. -12.16% -15.46% 29.28% 31.59%
</TABLE>
The analysis provided in the foregoing table includes the following
assumptions: (1) fixed rate loans are scheduled by anticipated principal
repayment streams; (2) investment securities are scheduled by most likely call
date or maturity date; (3) due to their liquid nature, the entire balance of
Money Market Demand Accounts ("MMDA") and NOW accounts is assumed to be
sensitive within three months; (4) twenty-five percent of savings accounts are
considered rate sensitive, as a margin of safety, as the balances remain
approximately constant and rate changes are infrequent; and (5) Marine's goal is
generally to maintain a balanced cumulative gap position over the time periods
shown in order to mitigate the impact of interest rates on liquidity, interest
margins and operating results.
ANALYSIS OF INVESTMENT SECURITIES
The composition of Marine's investment portfolio as of June 30, 1998,
December 31, 1997 and 1996, and valued at amortized cost, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1998 1997 1996
------------- ------------- -------------
<S><C>
US Treasury ......................... $ 399,890 $ 398,788 $ 395,607
Federal Agency ...................... 1,554,442 1,398,245 2,343,287
Mortgaged-Backed Securities ......... 1,160,081 1,098,686 399,140
Equity Securities ................... 214,900 314,900 314,900
State and Municipal ................. -- -- 200,000
---------- ---------- ----------
$3,329,313 $3,210,619 $3,652,934
========== ========== ==========
</TABLE>
23
<PAGE>
At June 30, 1998, the amortized cost and estimated fair values of debt
securities by contractual maturity, are shown below:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S><C>
US Treasuries
Due in one year or less .................... $ 399,890 $ 140 $ -- $ 400,030
Federal Agency
Due after one year through five years ...... 1,554,442 1,529 214 1,555,757
Mortgaged-Backed
Due in one year or less .................... 360,145 488 -- 360,633
Due after one year through five years ...... 450,906 -- 959 449,947
Due after five years through ten years ..... 349,031 -- 16 349,015
---------- ------ ------ ----------
$3,114,414 $2,157 $1,189 $3,115,382
========== ====== ====== ==========
</TABLE>
ANALYSIS OF LOANS
The table below represents a breakdown of loan balances of Marine.
DECEMBER 31,
JUNE 30 ---------------------------
1998 1997 1996
------------- ------------- -------------
Commercial ............... $ 972,272 $ 1,311,336 $ 1,088,468
Installment, net ......... 998,228 985,684 1,062,810
Real Estate .............. 13,082,591 13,594,192 13,131,636
----------- ----------- -----------
$15,053,091 $15,891,212 $15,282,914
=========== =========== ===========
LOAN CONCENTRATIONS. Marine lends to customers located primarily in the
Chincoteague Island and Wattsville, Virginia area. The loan portfolio consists
primarily of real estate loans located in its trading area.
Marine has experienced a decline in loan demand during the first six
months of 1998. Competition for commercial loans has been very keen, resulting
in the investment of excess funds in federal funds in anticipation of improved
demand during the summer months.
The following table shows the contractual final maturities and interest
rate sensitivities of loans of Marine at June 30, 1998. Some loans may include
contractual installment payments which are not reflected in the tables until
final maturity. In addition, Marine's experience indicates that a significant
amount of loans will be extended or repaid prior to contractual final maturity.
Consequently, the table cannot necessarily be viewed as an accurate forecast of
future cash payments.
<TABLE>
<CAPTION>
IN ONE YEAR OR LESS AFTER 1 THROUGH 5 YEARS AFTER 5 YEARS
--------------------- ------------------------- --------------
FIXED FIXED FIXED TOTAL
--------------------- ------------------------- -------------- -------------
<S><C>
Commercial .......... $ 972,272 $ -- $ -- $ 972,272
Real Estate ......... 3,223,252 9,804,714 54,625 13,082,591
Installment ......... 178,725 807,025 12,478 998,228
---------- ----------- ------- -----------
$4,374,249 $10,611,739 $67,103 $15,053,091
========== =========== ======= ===========
</TABLE>
Marine does not seek to generate variable rate loans as is evidenced by
the current loan portfolio.
24
<PAGE>
The following table provides information concerning non-performing loans,
past due loans and other real estate owned:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1998 1997 1996
------------- ------------- -------------
<S><C>
Non-Performing Loans
Non-accrual Loans .......................................... $ 193,931 $ 92,344 $ --
Other Real Estate Owned ..................................... 222,018 126,416 242,816
--------- --------- ---------
Total Non-Performing Assets ................................. 415,949 218,760 242,816
Loans Past Due 90 Days or More .............................. -- 67,350 72,474
--------- --------- ---------
Total Non-Performing Assets and Past Due Loans .............. $ 415,949 $ 286,110 $ 315,290
========= ========= =========
Non-Performing Assets to Total Loans ........................ 2.76% 1.37% 1.58%
Non-Performing Assets and Past Due Loans to Total Loans ..... 2.76% 1.80% 2.06%
</TABLE>
NON-ACCRUAL LOANS. When scheduled principal and interest payments are 90
days or more past due on any loan not fully secured by collateral or not in the
process of collection, the accrual of interest income is discontinued and
recognized only as collected. The loan is restored to accrual status when all
amounts past due have been paid, and the borrower has demonstrated the ability
to service the debt on a current basis.
The increase in non-accrual loans during the first six month of 1998 is
due primarily to one real estate loan in the amount of $106,000 which was
foreclosed and sold in July of 1998 with full recovery of the amount of the
loan. During the first six months of 1998, Marine foreclosed on three real
estate properties, which accounts for the increase in OREO compared to December
31, 1997. Subsequent to June 30, 1998, the three properties were sold resulting
in full recovery of the book value.
Marine provides for loan losses based on a review of its loan portfolio
through the establishment of an allowance for loan losses (the Allowance) by
provisions charged against earnings. Net charge-offs are applied against the
Allowance and the Allowance balance is evaluated monthly by management and the
Board of Directors to determine its adequacy to absorb potential future
charge-offs of existing loans. The factors used by management and the Board in
determining the adequacy of the Allowance include historical relationships
among loans outstanding; credit loss experience and current level of the
Allowance; a continuing evaluation of non-performing loans and loans classified
by management as having potential for future deterioration taken into
consideration with the collateral value and financial strength of the borrower
and guarantors; and a continuing evaluation of the present and future economic
environment. Regular reviews of the loan portfolio's quality are conducted by
Marine's loan officers and the Board of Directors. In addition, bank regulatory
agencies periodically review the loan portfolio. At June 30, 1998, the
Allowance was 2.10% of total loans. The Allowance at June 30, 1998 is
considered by Marine's management and Board of Directors to be sufficient to
address the risks in the current portfolio.
25
<PAGE>
The following table presents certain information regarding Marine's loan
loss experience and the Allowance for Loan Losses.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1998 1997 1996
-------------- -------------- --------------
<S><C>
Allowance at Beginning of Year ....................... $ 325,964 $ 325,742 $ 322,709
Less Losses Charged Off:
Installment .......................................... 8,835 36,272 24,669
Real Estate .......................................... 2,314
Commercial ........................................... 2,082
Other ................................................ 10,000 438
---------- ----------
Total Losses Charged Off ............................. 18,835 36,272 29,503
---------- ---------- ----------
Recoveries of Loans Previously Charged Off:
Installment .......................................... 3,988 19,494 4,070
Commercial ........................................... 10,811
---------- ---------- ----------
Total Recoveries ..................................... 3,988 19,494 14,881
---------- ---------- ----------
Net Losses Charged Off ............................... 14,847 16,778 14,622
Provisions to Allowance Charged to Operating Expenses 6,000 17,000 17,655
---------- ---------- ----------
Allowance at End of Year ............................. $ 317,117 $ 325,964 $ 325,742
========== ========== ==========
Ratio of Net Charge offs to
Average Total Loans ................................. 0.09% 0.10% 0.09%
Ratio of Allowance to Non-Performing and
Past Due Loans ...................................... 76.23% 113.92% 103.31%
Ratio of Allowance to Loans .......................... 2.10% 2.05% 2.13%
</TABLE>
The Allowance of $317,117 at June 30, 1998 represented 2.10% of total
loans at June 30, 1998. At December 31, 1997, the Allowance was 2.05% of total
loans.
A breakdown of the Allowance is provided in the table below. However,
Marine's management and directors do not believe that the Allowance can be
fragmented by category with any precision that would be useful. The breakdown
of the Allowance is based primarily on those factors discussed previously in
evaluating the adequacy of the Allowance as a whole. Since all of those factors
are subject to change, the breakdown is not necessarily indicative of the
category of future credit losses. The following table presents the allocation
of the Allowance among the various loan categories.
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
--------------------- ---------------------------------------------
1997 1996
--------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ---------- ---------- ---------- ----------- ----------
<S><C>
Commercial .......... $ 20,454 6.5 $ 24,741 7.6 $ 23,193 7.1
Installment ......... 21,025 6.6 22,394 6.9 22,671 7.0
Mortgage ............ 275,638 86.9 278,829 85.5 279,878 85.9
-------- -------- --------
$317,117 100.0% $325,964 100.0% $325,742 100.0%
======== ======== ========
</TABLE>
The table below provides a percentage breakdown of Marine's loan portfolio
by category to total loans less unearned income:
DECEMBER 31,
JUNE 30, ----------------------
1998 1997 1996
----------- ---------- ----------
Commercial ............... 6.45% 7.59% 7.12%
Installment .............. 6.63 6.87 6.96
Mortgage ................. 86.92 85.54 85.92
------ ------ ------
100.00% 100.00% 100.00%
====== ====== ======
26
<PAGE>
DEPOSITS ANALYSIS
The following table sets forth Marine's average deposit balances and
average rates paid on deposits during the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
JUNE 30, 1998 1997 1996
----------------------- --------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
RATE BALANCE RATE BALANCE RATE BALANCE
--------- ------------- --------- ------------- --------- -------------
<S><C>
Demand Deposits ..................... $ 3,304,978 $ 2,664,770 $ 3,142,342
Interest-Bearing Deposits:
Checking ............................ 2.00% 1,034,004 2.01% 946,300 2.00% 980,913
Savings ............................. 2.38 3,599,899 2.56 3,500,445 2.66 3,457,332
Money Markets ....................... 3.00 1,497,492 3.08 1,563,971 3.25 1,700,854
Certificates of Deposit ............. 5.15 10,648,593 5.24 10,945,274 5.41 10,879,457
Other Time .......................... 3.75 51,494 4.40 52,250 4.20 51,400
----------- ----------- -----------
Total Interest-Bearing Deposits ..... 16,831,482 17,008,240 17,069,956
----------- ----------- -----------
Total Deposits ...................... $20,136,460 $19,673,010 $20,212,298
=========== =========== ===========
</TABLE>
Certificates of Deposits in the above schedule include deposits of
$100,000 or greater for the periods shown below:
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
- --------------- ------------------- ------------------
$995,068 $1,057,331 $1,337,551
OTHER BORROWED FUNDS
Marine had no other borrowed funds at June 30, 1998 or as of December 31,
1997, and 1996. For additional comments on other borrowed funds, see the
discussion under the heading " -- Liquidity."
CAPITAL ADEQUACY
The Federal Reserve Bank has historically determined the adequacy of a
bank's capital resources by comparison of its capital to its assets.
Specifically, capital adequacy is based on the ratios of Tier 1 capital to
risk-weighted assets and qualifying total capital to risk-weighted assets. The
Federal Reserve Bank's capital adequacy guidelines require Marine to maintain
specific minimum amounts of capital and additional amounts based upon the
amount and nature of their assets and commitments currently at risk. The rules
specify four categories of asset or commitment risk, with each category being
assigned a weight of 0% through 100% depending upon the risk involved. Each
asset or commitment of Marine is categorized and weighted appropriately, and
the capital of Marine is then compared to the aggregate value of such
risk-weighted assets or commitments to determine if additional capital is
required. At June 30, 1998, Marine's ratio of qualifying total risk-based
capital to risk-weighted assets was 20.34% as compared to the regulatory
guideline of 8%. Failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal bank
regulatory agencies.
The tables below represent Marine's capital position relative to its
various minimum statutory and regulatory capital requirements at June 30, 1998.
PERCENT OF
AMOUNT TOTAL ASSETS
------------- -------------
Tier 1 Capital ............................. $ 2,388,345 10.15%
Leverage Capital Ratio Requirement ......... 684,541 3.00%
----------- -----
Excess .................................... $ 1,703,804 7.15%
=========== =====
Average Total Assets ....................... $22,818,032
===========
27
<PAGE>
<TABLE>
<CAPTION>
% OF RISK-
AMOUNT BASED CAPITAL
------------- --------------
<S><C>
Tier 1 ................................................. $ 2,388,245 19.09%
Risk-Based Tier 1 Capital Requirement .................. 500,180 4.00%
----------- -----
Excess ................................................ $ 1,888,065 15.09%
=========== =====
Tier 1 Capital ......................................... $ 2,388,245 19.09%
Tier 2 Capital ......................................... 156,500 1.25%
----------- -----
Total Risk-Based Capital .............................. 2,544,745 20.34%
Fully Phased-In Risk-Based Capital Requirement ......... 1,000,360 8.00%
----------- -----
Excess ................................................ $ 1,544,385 12.34%
=========== =====
Risk Weighted Assets ................................... $12,504,500
===========
</TABLE>
Tier 1 Capital consists of capital stock, surplus, and undivided profits.
Tier 2 Capital consists of the allowable portion of the Allowance for Loan
Loss. Total Risk-Based Capital represents the sum of Tier 1 and Tier 2 capital.
28
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS OF HOLDERS OF
COMMON STOCK AND MARINE COMMON STOCK
The rights of Marine Stockholders currently are governed by Marine's
Articles of Incorporation and its Bylaws and the Virginia Stock Corporation Act
(the "VSCA"). Upon consummation of the Affiliation, Marine Stockholders will
become stockholders of Mercshares. Their rights as stockholders of Mercshares
will be governed by the Maryland General Corporation Law (the "MGCL"),
Mercshares' Charter and its Bylaws. The following is a summary comparison of
the material differences in the rights of holders of Marine Common Stock and
Mercshares Common Stock under governing provisions of their respective
constituent documents, and, with respect to Marine, the VSCA, 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
VSCA AND THE CONSTITUENT DOCUMENTS OF MARINE AND MERCSHARES.
DISSENTERS' RIGHTS
For a description of the rights of dissenting shareholders of Marine, see
"THE AFFILIATION -- 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 Marine Stockholders will be receiving Mercshares Common Stock
pursuant to the Affiliation, which stock is publicly traded and quoted on The
Nasdaq National Market under the symbol "MRBK," dissenters' rights with respect
to such transactions affecting Mercshares Common Stock will not be available.
STOCKHOLDER POWER TO CALL A SPECIAL MEETING
Under the MGCL, the board of directors and other persons specified in the
corporation's articles of incorporation or by-laws and the holder or holders of
25% or more of the voting stock of a corporation may call a special
stockholders' meeting. Under Marine's By-laws, the President or Secretary, a
majority of the Board of Directors, and, in the aggregate, not less than 10% of
the outstanding common stock of the corporation entitled to vote may call a
special meeting of the Stockholders. Upon consummation of the Affiliation, no
individual or group of former Marine Stockholders who become holders of
Mercshares Common Stock solely as a result of the Affiliation will own a
sufficient number of Mercshares Common Stock to call a special meeting of
stockholders.
NOTICE OF SPECIAL MEETING
Pursuant to the VSCA, notice of any special meeting of Marine Stockholders
must be mailed not less than 10 days nor more than 60 days prior to the date
fixed for the meeting. Under Mercshares' By-laws and the MGCL, notice for a
special meeting of holders of Mercshares Common Stock must be provided not less
than 10 days nor more than 90 days before the meeting.
PREFERRED STOCK
Marine's Articles of Incorporation do not authorize the issuance of
preferred stock. Mercshares' Articles of Incorporation authorize the issuance
of two million shares of preferred stock, no par value ("Mercshares Preferred
Stock"). Mercshares' Board of Directors may reclassify already classified, but
unissued, shares of Mercshares Preferred Stock and may alter the rights,
privileges and restrictions on the unissued Mercshares Preferred Stock.
Currently, no Mercshares Preferred Stock is outstanding.
INSPECTION OF STOCKHOLDER LISTS
Under the VSCA, Marine Stockholders may inspect a list of Marine
Stockholders during the 10-day period prior to any shareholder meeting at
Marine's principal place of business. Marine Stockholders of record for at
least six months or who hold at least 5% of all the outstanding shares may
inspect stockholder lists at any time, provided that the appropriate request is
made.
Under the MGCL, holders of Mercshares Common Stock may inspect stockholder
lists only if such stockholder has been a stockholder of record for at least
six months and owns 5% of the outstanding stock of the corporation, provided
that the appropriate request is made. Upon consummation of the Affiliation, no
former Marine Stockholder who becomes a holder of Mercshares Common Stock
solely as a result of the Affiliation will own a sufficient number of shares of
Mercshares Common Stock to have the right to inspect Mercshares' stockholder
lists.
29
<PAGE>
QUALIFICATION, AND NUMBER OF DIRECTORS
Neither Marine's nor Mercshares' Charters or Bylaws have stock ownership
requirements for their respective directors. The number of directors set forth
in Marine's Bylaws is nine. Currently, Marine has eight directors. Mercshares
currently has 17 directors and the number may be decreased or increased to not
less than seven nor more than 30 by amendment to the Bylaws.
INDEMNIFICATION
Under the VSCA, a corporation may indemnify a director against liability
if the director (1) conducted himself in good faith, (2) believed that his
official conduct was in the best interests of the corporation or that his or
her non-official conduct giving rise to a claim was not opposed to the
corporation's best interests, or (3) in the case of a criminal proceeding, had
no reasonable cause to believe his conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding in which the director is
adjudged liable on the basis that he received an improper personal benefit. A
director also cannot be indemnified in connection with a proceeding by or in
the right of the corporation in which the director is adjudged liable to the
corporation. However, except to the extent that the liability is a result of
the director's willful misconduct or knowing violation of law, in such a
proceeding the liability of the director may be limited to the lesser of (a)
the monetary amount specified in the corporation's articles of incorporation or
in a shareholder-approved bylaw provision or (b) the greater of $100,000 or the
amount of compensation the corporation paid such director over the twelve month
period preceding the act giving rise to the claim.
Under the MGCL, a corporation may indemnify any director, officer,
employee or agent made a party to any proceeding by reason of service in that
capacity unless (i) the act or omission of the director, officer, employee or
agent was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty;
(ii) the director, officer, employee or agent actually received an improper
personal benefit; or (iii) in a criminal proceeding, the director, officer,
employee or agent had reasonable cause to believe that the act or omission was
unlawful. However, in a proceeding by or in the right of the corporation,
indemnification may not be made in respect of a proceeding in which the
director, officer, employee or agent shall have been adjudged to be liable to
the corporation. Mercshares' Articles of Incorporation indemnify former and
current directors and officers to the maximum extent permitted under the MGCL,
and provides that Mercshares' Board of Directors may indemnify employees and
agents of Mercshares to the same extent as directors and officers.
Under the MGCL and Mercshares' Articles of Incorporation, the liability of
Mercshares' directors and officers to Mercshares or its stockholders for money
damages is limited: (i) to the extent it is proved that the person actually
received improper benefit or profit, for the amount of such benefit or profit,
and (ii) to the extent that a judgment adverse to the person is entered in a
proceeding based on a finding that such person's actions or failure to act was
the result of active and deliberate dishonesty and was material to the cause of
action and adjudicated at the proceeding.
STATE ANTI-TAKEOVER STATUTES
Both the MGCL and the VSCA 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 features and
consequences of those provisions, and is qualified in its entirety by reference
to the statutory provisions contained in the MGCL and the VSCA, respectively.
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. A similar
Virginia provision does not apply to Marine because Marine has fewer than 300
stockholders.
30
<PAGE>
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. A similar Virginia provision does not apply to
Marine because Marine has fewer than 300 stockholders.
DESCRIPTION OF MERCSHARES CAPITAL STOCK
GENERAL
Mercshares is authorized to issue up to 130,000,000 shares of Mercshares
Common Stock. On June 30, 1998, 71,784,995 shares of Mercshares Common Stock
were issued and outstanding. Mercshares is also authorized to issue 2,000,000
shares of Preferred Stock. The Mercshares Preferred Stock is subject to
classification and reclassification by the Board of Directors. No shares of
Mercshares Preferred Stock are issued and outstanding.
COMMON STOCK
The holders of Mercshares Common Stock are entitled to receive such
dividends as are declared by the Mercshares Board of Directors out of funds
legally available therefor. Each holder of Mercshares Common Stock is entitled
to one vote per share on all matters requiring a vote of stockholders. In the
event of liquidation, holders of Mercshares Common Stock will be entitled to
receive pro rata any assets distributable to stockholders in respect of shares
held by them. Holders of shares of Mercshares Common Stock do not have
preemptive rights except as may be granted by the Board of Directors. The
shares of Common Stock to be issued hereunder will be fully paid and
non-assessable. There is no provision for cumulative voting with respect to the
Mercshares Common Stock. Mercshares Common Stock is publicly traded and quoted
on The Nasdaq National Market under the symbol "MRBK."
PURCHASE RIGHTS
Certain rights which under certain circumstances are exercisable for the
purchase of Mercshares Preferred Stock or exchangeable for Mercshares Preferred
Stock or Mercshares Common Stock ("Rights") attach to each share of Mercshares
Common Stock (including shares of Mercshares Common Stock issuable pursuant to
the Affiliation Agreement) pursuant to the Shareholders Protection Rights
Agreement adopted by the Board of Directors of Mercshares in September, 1989,
as amended. In general, the Rights become exercisable within 10 days after a
person (together with any affiliate of such person) acquires or makes a tender
offer or an exchange offer for the beneficial ownership of 10% or more of the
outstanding Mercshares Common Stock or at such earlier or later time as the
Mercshares Board of Directors may determine. Until the Rights become
exercisable, they will not be separable from the Mercshares Common Stock and
will automatically trade with the Mercshares Common Stock. Shares of Mercshares
Common Stock issued to Marine Stockholders in exchange for Marine 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,
394,175 shares in 1997, and 1,317,500 shares through September 10, 1998.
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. As of
September 10, 1998, Mercshares was authorized by its Board to repurchase
1,973,853
31
<PAGE>
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 Marine Special Meeting.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered hereby and the Affiliation will be passed upon for Mercshares by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland. William J. McCarthy, a
principal of William J. McCarthy, P.C., which is a partner in Venable, Baetjer
and Howard, LLP, is a director of Mercshares.
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, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 have been audited by PricewaterhouseCoopers LLP, 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 Marine included in this Prospectus and Proxy
Statement for the two years ended December 31, 1997 have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, whose
report thereon is included for reference in reliance upon the report of said
firm and upon the authority of said firm as experts in auditing and accounting.
Representatives of PricewaterhouseCoopers LLP are expected to be present
at the Marine 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.
32
<PAGE>
THE MARINE BANCORP, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S><C>
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors ....................................................... F-2
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 and 1996 ...................................... F-3
Statements of Income for the Two Years Ended December 31, 1997 ....................... F-4
Statements of Changes in Stockholders' Equity for the Two Years Ended December 31,
1997................................................................................. F-5
Statements of Cash Flows for the Two Years Ended December 31, 1997 ................... F-6
Notes to Financial Statements ........................................................ F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance Sheets as of June 30, 1998 and 1997 .......................................... F-16
Statements of Income for the Six Months Ended June 30, 1998 and 1997 ................. F-17
Statements of Changes in Stockholders' Equity for the Six Months Ended
June 30, 1998 and 1997 .............................................................. F-18
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 ............. F-19
Notes to Unaudited Financial Statements .............................................. F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
BOARD OF DIRECTORS
THE MARINE BANCORP AND SUBSIDIARY
Chincoteague, Virginia
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position of
The Marine BanCorp and Subsidiary (the "Bank") at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
August 3, 1998
Baltimore, Maryland
F-2
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S><C>
ASSETS
Cash and due from banks ......................................................... $ 1,099,991 $ 927,750
Investment securities:
Securities available for sale .................................................. 2,684,101 581,537
Securities held to maturity .................................................... 514,900 3,049,783
Federal funds sold .............................................................. 1,200,000 1,850,000
Loans, net of unearned income ................................................... 15,565,248 14,957,172
Accrued interest ................................................................ 152,652 161,345
Premises and equipment .......................................................... 991,496 1,049,563
Other real estate owned ......................................................... 126,416 242,816
Deferred Federal income taxes ................................................... 67,469 67,188
Other assets .................................................................... 60,152 49,644
------------ ------------
Total assets ................................................................. $ 22,462,425 $ 22,936,798
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand ......................................................................... $ 2,910,367 $ 3,279,103
Interest checking .............................................................. 1,081,386 1,268,505
Savings and time:
Savings ........................................................................ 3,650,344 3,134,332
MMDA accounts .................................................................. 1,614,261 1,637,057
Certificates ................................................................... 10,626,368 10,788,577
Christmas club ................................................................. 23,835 23,295
------------ ------------
Total deposits ............................................................... 19,906,561 20,130,869
------------ ------------
Interest, taxes and other liabilities ........................................... 171,777 614,530
Dividends payable ............................................................... 51,646 52,063
------------ ------------
Total liabilities ............................................................ 20,129,984 20,797,462
------------ ------------
Stockholders Equity:
Common stock, $5 par value, authorized 600,000 and 200,000 shares, issued 166,600
and 41,650 shares in 1997 and 1996, respectively ............................... 833,000 208,250
Surplus ......................................................................... -- 289,527
Retained Earnings ............................................................... 1,514,723 1,663,234
Unrealized (losses) on securities, (net of tax benefit of $7,872 and $11,166) ... (15,282) (21,675)
------------ ------------
Total stockholders' equity ................................................... 2,332,441 2,139,336
------------ ------------
Total liabilities and stockholders' equity ................................... $ 22,462,425 $ 22,936,798
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
<S><C>
Interest income:
Interest and fees on loans ............................................. $1,482,872 $ 1,458,880
Investment securities -- U.S. Government Securities and Agency ......... 207,870 156,628
Mutual funds ........................................................... 17,509 17,554
Municipal funds ........................................................ 10,056 8,778
Federal funds sold ..................................................... 65,077 106,149
---------- -----------
1,783,384 1,747,989
Interest expense ........................................................ 732,858 757,930
---------- -----------
Net interest income ................................................. 1,050,526 990,059
Provision for possible loan losses ...................................... 17,000 17,655
---------- -----------
Net interest income after provision for
possible loan losses ............................................... 1,033,526 972,404
Service charges and other non interest income ........................... 146,597 117,677
Security gains (losses) -- realized ..................................... (24) 2,199
Gain on sale other than real estate owned ............................... -- 9,090
---------- -----------
Net revenue ......................................................... 1,180,099 1,101,370
---------- -----------
Non interest expense:
Salaries ............................................................... 329,648 333,625
Employee benefits and payroll taxes .................................... 86,095 86,078
Occupancy expenses ..................................................... 71,980 72,721
Depreciation ........................................................... 70,259 78,521
Unrealized losses on other real estate owned ........................... 5,500 --
Other operating expenses ............................................... 258,249 243,099
---------- -----------
821,731 814,044
---------- -----------
Income before income taxes .............................................. 358,368 287,326
Income taxes ............................................................ 120,010 92,599
---------- -----------
Net income .......................................................... $ 238,358 $ 194,727
========== ===========
Net income per share of common stock:
Basic .................................................................. $ 1.43 $ 1.17
Diluted ................................................................ $ 1.43 $ 1.17
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NET CHANGE
IN UNREALIZED
CAPITAL RETAINED LOSSES ON
STOCK SURPLUS EARNINGS SECURITIES TOTAL
----------- ------------- ------------- -------------- -------------
<S><C>
December 31, 1995 .................... $208,250 $ 289,527 $1,520,570 $ (3,762) $2,014,585
Net income for the year .............. -- -- 194,727 -- 194,727
Cash dividends declared .............. -- -- (52,063) -- (52,063)
Net change in unrealized losses on
securities available for sale, net of
tax of $11,166 ...................... -- -- -- (17,913) (17,913)
-------- ---------- ---------- --------- ----------
Balance at December 31, 1996 ......... 208,250 289,527 1,663,234 (21,675) 2,139,336
-------- ---------- ---------- --------- ----------
Common stock issued in formation
of holding company .................. 624,750 (289,527) (335,223) -- --
Net income for the year .............. -- -- 238,358 -- 238,358
Cash dividends declared .............. -- -- (51,646) -- (51,646)
Net change in unrealized losses on
securities available for sale, net of
tax of $7,872 ....................... -- -- -- 6,393 6,393
-------- ---------- ---------- --------- ----------
Balance at December 31, 1997 ......... $833,000 $ -- $1,514,723 $ (15,282) $2,332,441
======== ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S><C>
Cash flows from operating activities:
Net income ........................................................................ $ 238,358 $ 194,727
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization and premiums on securities ......................................... 253 601
Depreciation .................................................................... 70,259 78,522
Provision for deferred taxes .................................................... 4,320 6,796
Provision for possible loan losses .............................................. 17,000 17,655
Gain on sale of equipment and land .............................................. -- (9,090)
(Gain) losses on sales of investment securities ................................. 24 (2,199)
Unrealized loss on other real estate owned ...................................... 5,500 --
(Increase) decrease in accrued interest income .................................. 8,693 (14,036)
Decrease in income taxes refundable ............................................. -- 2,796
Increase in income taxes payable ................................................ 8,188 15,998
(Decrease) increase in other liabilities ........................................ (450,941) 455,785
------------ ------------
Net cash provided (used) by operating activities .............................. (98,346) 747,555
Cash flows from investing activities:
Proceeds from sales of investment securities -- held to maturity .................. 397,880 1,150,000
Proceeds from sales of investment securities -- available for sale ................ 1,650,000 (3,055,180)
Purchase of investment securities -- held to maturity ............................. (1,093,751) 27,467
Purchase of investment securities -- available for sale ........................... (500,000) 613,837
Net increase (decrease) in unrealized losses on available for sale securities ..... (9,686) 134,000
Net (increase) in loans ........................................................... (635,794) (49,345)
Proceeds from sale of other real estate owned ..................................... 111,000 (28,307)
Purchase of premises and equipment ................................................ (12,191) 14,535
Increase in other assets .......................................................... (10,500) (24,747)
------------ ------------
Net cash used by investment activities ........................................ (103,042) (1,217,740)
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................... (224,308) 448,698
Dividends paid .................................................................... (52,063) (52,063)
------------ ------------
Net cash provided (used) by financing activities ................................... (276,371) 396,635
------------ ------------
Net (decrease) in cash and federal funds ........................................... (477,759) (73,550)
Cash and cash equivalents at beginning of year ..................................... 2,777,750 2,851,300
------------ ------------
Cash and cash equivalents at end of year ........................................... $ 2,299,991 $ 2,777,750
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................................ $ 804,425 $ 771,293
============ ============
Income taxes .................................................................... $ 115,394 $ 83,396
============ ============
Noncash investing activities:
New loans on other real estate previously owned by the bank ..................... $ 60,600 $ 116,500
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
The Marine BanCorp (the "BanCorp") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary of The Marine Bank (the "Bank"). The Bank generates commercial,
mortgage and consumer loans and receives deposits from customers located
primarily in Chincoteague, VA and Wattsville, VA. The Bank operates under a
state bank charter and provides full banking services. As a state bank, the
Bank is subject to regulation by the Virginia Bureau of Financial Institutions
and the Federal Reserve Bank.
The majority of the Bank's loan portfolio consist of single-family
residential loans on the Island of Chincoteague. The Island's economy relies
heavily on tourism and commercial fishing. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio is
susceptible to changes in local market conditions.
FORMATION OF THE MARINE BANCORP:
In 1997, the Board of Directors of the Bank approved a plan whereby each
share of Bank common stock was converted into four shares of BanCorp common
stock. The Marine BanCorp became the parent of the Bank on October 31, 1997.
The reorganization was accounted for in a manner similar to a
pooling-of-interests. Accordingly, all the prior periods presented have been
restated as if the combination had occurred as of the beginning of the earliest
period presented. The Marine BanCorp had no activity or operations prior to the
consummation of the combination, therefore, the financial statements prior to
the reorganization reflect only the accounts and operations of the Bank.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of The Marine
BanCorp and its wholly-owned subsidiary, The Marine Bank, after elimination of
all material intercompany transactions and balances.
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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible loan loss and
valuation of foreclosed real estate.
INVESTMENTS IN SECURITIES:
The Bank's investments in securities are classified in two categories and
accounted for as follows:
o Securities to be held to maturity. Bonds, notes and debentures for which
the Bank has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts which are recognized in interest income using the straight line
method over the period to maturity.
o Securities available for sale. Securities available for sale consist of
certain debt and equity securities not classified as trading securities or
as securities to be held to maturity. Unrealized holding gains and losses,
net of tax, on securities available for sale are reported as a net amount
in a separate component of stockholders' equity until realized.
Gains and losses on the sales of securities are determined using the
specific-identification method.
LOANS AND ALLOWANCES FOR LOAN LOSSES:
Loans are stated at the amount of unpaid principal, reduced for unearned
discount and an allowance for loan losses. Unearned discount on installment
loans is recognized as an adjustment of yield over the life of the loan method.
The allowance for loan losses is established through a provision for loan
losses charge to expenses. Loans are charged against the allowance for loan
losses when management believes, after considering economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that collection of principal and interest is doubtful.
F-7
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- Continued
RETIREMENT PLAN:
The Bank makes the Virginia Bankers Group Deferred Income Plan available
for substantially all employees. Eligible employees may contribute up to 6% of
compensation, which the Bank will match at the rate of 50% of employee
contributions up to 3%. Additionally, the bank contributes 5% of the annual
compensation of participating employees. The cost to the bank for the plan was
$18,154 and $16,323, in 1997 and 1996, respectively.
INCOME TAXES:
Amounts provided for federal income taxes are based on earnings reported
for financial statement purposes, adjusted for permanent differences between
reported financial and taxable income. The differences relate primarily to
depreciable assets (use of different depreciation methods and lives for
financial statement and income tax purposes) and the provision for possible
loan losses (deductible for financial statement purposes but not for income tax
purposes). Deferred taxes are provided for temporary differences related to
certain income and expense items, which are recognized for financial accounting
purposes in one period and for tax purposes in another period.
EARNINGS PER SHARE:
Earnings per share is $1.43 and $1.17 for 1997 and 1996, respectively.
Earnings per share is calculated on the basis of the weighted average number of
shares outstanding. The effect of the four for one stock conversion has been
retroactively applied to 1996 earnings per share.
STATEMENT OF CASH FLOWS:
For the purposes of reporting cash flows, the bank considers cash and due
from banks and federal funds sold with a maturity of less than 91 days as cash
and cash equivalents.
F-8
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. INVESTMENT SECURITIES:
The amortized costs and estimated market value of securities at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
------------- ------------ ------------ ------------
<S><C>
1997:
Available for Sale:
Mutual Funds ......................... $ 300,000 $ -- $ (13,530) $ 286,470
Federal Agency ....................... 2,007,255 -- (9,030) 1,998,225
United States Treasury Notes ......... 400,000 -- (594) 399,406
---------- ------ --------- ----------
$2,707,255 $ -- $ (23,154) $2,684,101
========== ====== ========= ==========
Held to Maturity:
Federal Reserve Bank Stock ........... $ 14,900 $ -- $ -- $ 14,900
Federal Agency ....................... 500,000 -- (816) 499,184
---------- ------ --------- ----------
$ 514,900 $ -- $ (816) $ 514,084
========== ====== ========= ==========
1996:
Available for Sale:
Mutual Funds ......................... $ 300,000 $ -- $ (17,603) $ 282,397
Federal Agency ....................... 99,810 -- (670) 99,140
Municipal Bonds ...................... 200,000 -- -- 200,000
---------- ------ --------- ----------
$ 599,810 $ -- $ (18,273) $ 581,537
========== ====== ========= ==========
Held to Maturity:
United States Treasury Bill .......... $ 95,301 $ -- $ (274) $ 95,027
United States Treasury Notes ......... 300,307 402 (3,006) 297,703
Federal Reserve Bank Stock ........... 14,900 -- -- 14,900
Federal Agency ....................... 2,639,275 7,117 (15,000) 2,631,392
---------- ------ --------- ----------
$3,049,783 $7,519 $ (18,280) $3,039,022
========== ====== ========= ==========
</TABLE>
The Bank transferred securities with a book value of $1,892,980 from the
available for sale classification to held to maturity in 1996. As a result of
this transfer, the unrealized gain at the time of the transfer was amortized
over the remaining life of the securities. As of December 31, 1996, the
unamortized unrealized gain was $14,378. In 1997, the Bank transferred those
same securities from held to maturity back into the available for sale
classification. At December 31, 1997, the unamortized unrealized gain had been
realized. As a result of the Bank's inability to hold the securities to
maturity, all securities have been reclassified as available for sale with the
exception of Federal Reserve Bank and Federal Home Loan Bank stock in 1997.
The scheduled maturities of debt securities to be held to maturity and
debt securities available for sale at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------------
AVAILABLE FOR SALE AVAILABLE FOR SALE
-------------------------------- -------------------------------
AMORTIZED COST MARKET AMORTIZED COST MARKET
---------------- ------------- ---------------- ------------
<S><C>
Due in one year or less .................. $ 100,000 $ 99,578 $ 295,258 $ 293,197
Due from year to five years .............. 2,507,255 2,485,742 2,459,625 2,458,136
Due from five years to ten years ......... 100,000 98,781 280,000 272,789
---------- ---------- ---------- ----------
$2,707,255 $2,684,101 $3,034,883 $3,024,122
========== ========== ========== ==========
</TABLE>
F-9
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. INVESTMENT SECURITIES: -- Continued
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
HELD TO MATURITY HELD TO MATURITY
------------------------------- -------------------------------
AMORTIZED COST MARKET AMORTIZED COST MARKET
---------------- ------------ ---------------- ------------
<S><C>
Due in one year or less ......... $ 500,000 $ 499,184 $ 299,810 $ 299,140
--------- --------- --------- ---------
$ 500,000 $ 499,184 $ 299,810 $ 299,140
========= ========= ========= =========
</TABLE>
The Federal Reserve Bank stock has not been included above, as it has no
maturity. The schedule above also does not include maturities for the mutual
funds as they have various maturity dates.
At December 31, 1997 and 1996, the State of Virginia has political
subdivisions of the State of Virginia pledge a U.S. Treasury Note with a book
value of $200,000 and $200,350 and a market value of $199,124 and $197,344 to
the Treasury Board of Virginia as security for deposits.
3. LOANS:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S><C>
Loans consist of:
Real estate ............................. $13,594,192 $13,131,636
Commercial .............................. 1,311,336 1,088,468
Installment ............................. 1,092,385 1,170,818
Unearned income ......................... (106,701) (108,008)
----------- -----------
15,891,212 15,282,914
Less: allowance for loan losses ......... (325,964) (325,742)
----------- -----------
$15,565,248 $14,957,172
=========== ===========
</TABLE>
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S><C>
Balance, January 1 $ 325,742 $ 322,709
Additions:
Provision charged to operations .............. 17,000 17,655
Deductions:
Loans charged-off ............................ 36,272 29,503
Less-recoveries of charged-off loans ......... (19,494) (14,881)
--------- ---------
Balance, December 31 ........................... $ 325,964 $ 325,742
========= =========
</TABLE>
F-10
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. BANK PREMISES AND EQUIPMENT:
The Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight line method over the
estimated useful lives of the assets.
1997 1996
------------ ------------
Land .................................... $ 221,190 $ 221,190
Buildings ............................... 820,792 820,792
Improvements ............................ 134,167 125,588
Equipment-building ...................... 92,795 92,795
Furniture and equipment ................. 497,349 493,737
---------- ----------
1,766,293 1,754,102
Less: accumulated depreciation .......... 774,797 704,539
---------- ----------
$ 991,496 $1,049,563
========== ==========
6. INCOME TAXES:
At December 31, the following was included in the statement of earnings as
federal income taxes:
1997 1996
----------- ----------
Current federal income taxes ................... $123,582 $ 99,395
Deferred federal income tax (benefit) .......... (3,572) (6,796)
-------- --------
$120,010 $ 92,599
======== ========
As of December 31, the net deferred income tax asset consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S><C>
Deferred tax asset -- bad debts ..................................... $ 95,568 $ 95,491
Deferred tax asset -- unrealized loss on available for sale ......... 7,872 11,166
--------- ---------
103,440 106,657
Deferred tax liability -- depreciation .............................. (35,971) (39,469)
--------- ---------
$ 67,469 $ 67,188
========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Bank has various outstanding
commitments and contingent liabilities, such as commitments to extend credit,
standby letters of credit and guarantees, which are not reflected in the
financial statements. The Bank had outstanding standby letters of credit and
commitments to extend credit at December 31, 1997 and 1996 of $722,783 and
$456,200, respectively. No material losses are anticipated as a result of these
commitments.
The BanCorp entered into a five year employment contract with the current
Chief Executive Officer during the year ended December 31, 1997.
8. LOANS TO RELATED PARTIES:
During the normal course of banking business, loans are made to officers
and directors of the BanCorp, as well as to their related interests. In the
opinion of management, these loans are consistent with sound banking practices,
are within regulatory lending limitations and do not involve more than the
normal risk of collectibility. At December 31, 1997 and 1996, loans to
executive officers and directors of the BanCorp, including loans to their
related interests, totaled $809,529 and $702,430, respectively. Loan additions
and loan deletions were $50,569 and $191,681 for 1997 and $183,581 and $9,190
for 1996, respectively.
F-11
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. CERTIFICATES OF DEPOSIT:
Included in time deposits at December 31, 1997 and 1996 are certificates
of deposit greater than or equal to $100,000 in the aggregate amount of
$1,057,331 and $1,337,551, respectively.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of these instruments. Statement No. 107 excludes
certain financial instruments and all non financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The Bank prepared its estimated fair value disclosures for financial
instruments using the following methods and assumptions.
CASH: The carrying amounts reported in the statements of financial
condition for cash and due from banks approximate those assets' fair values.
TIME DEPOSITS: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits.
INVESTMENT SECURITIES: Fair values for investment securities are based on
quoted market prices.
LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair value for other loans (for example, fixed rate commercial real estate
and rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. The carrying amount of
accrued interest receivable approximates fair value.
DEPOSITS: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of fixed-term money market
accounts approximate their fair values. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of accrued
interest payable approximates its fair value.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate the
fair values.
F-12
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. FAIR VALUES OF FINANCIAL INSTRUMENTS: -- Continued
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- ------------- -------------
<S><C>
Financial assets:
Cash and due from banks .......... $ 1,099,991 $ 1,099,991 $ 927,750 $ 927,750
Investment securities ............ 3,184,101 3,183,285 3,631,320 3,639,604
Federal funds sold ............... 1,200,000 1,200,000 1,850,000 1,850,000
Loans ............................ 15,891,212 16,136,426 15,282,914 15,559,748
Accrued interest ................. 152,652 152,652 161,345 161,345
Financial liabilities:
Deposits ......................... 19,906,561 19,930,850 20,130,869 20,151,418
Accrued interest payable ......... 36,934 36,934 36,118 36,118
</TABLE>
11. NON PERFORMING ASSETS:
During 1997 and 1996, the Bank's non performing assets decreased 9% and
24%, respectively. These assets represent 1.4% and 1.5% of the total loan
portfolio for 1997 and 1996, respectively.
Non performing assets include non accrual loans and other real estate
owned (i.e., real estate acquired in foreclosure or in lieu of foreclosure).
A loan is generally classified as non accrual when principal or interest
is past due 90 days or more or when in the opinion of management, principal and
interest is not likely to be paid in accordance with its terms. All accrued and
uncollected interest on such loans is eliminated from the income statement and
is recognized only as collected.
Other real estate owned includes foreclosed property held pending
disposition. Real estate acquired through foreclosure is valued at the lower of
its fair value or the recorded investment in the related loans.
12. FEDERAL RESERVE BANKING SYSTEM:
As of June 1, 1995, The Marine Bank became a member of the Federal Reserve
Banking System. This system is the central banking system of the United States.
It was created by an act of Congress (Federal Reserve Act) in 1913. The system
includes national and state member banks.
13. REGULATORY CAPITAL:
The BanCorp is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank
("FRB"). Failure to meet the minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
BanCorp and the consolidated financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines involving 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 under the prompt corrective action guidelines 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 of: total risk-based
capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), and Tier 1 capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FRB, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well capitalized, the Bank
will have
F-13
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. REGULATORY CAPITAL: -- Continued
to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as disclosed in the table below. There are no conditions or events since
the most recent notification that management believes have changed the Bank's
prompt corrective action category.
The Bank's actual and required amounts and ratios are as follows:
<TABLE>
<CAPTION>
MINIMUM LEVEL
TO BE WELL
MINIMUM LEVEL CAPITALIZED UNDER THE
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTIVE PROVISIONS
------------------------ ----------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ---------- ------------- --------- ------------- ----------
<S><C>
As of December 31, 1997:
Total risk-based capital
(to risk-weighted assets) ....... $2,451,431 19.0% $1,018,640 8.0% $1,273,301 10.0%
Tier 1 Capital
(to risk-weighted assets) ....... 2,302,268 18.1% 509,320 4.0% 763,981 6.0%
Tier 1 Capital
(to adjusted total assets) ...... 2,302,268 10.5% 874,560 4.0% 1,093,200 5.0%
</TABLE>
14. THE MARINE BANCORP (PARENT CORPORATION ONLY) CONDENSED FINANCIAL STATEMENT:
Condensed Statement of Financial Condition as of December 31, 1997:
<TABLE>
<S><C>
Assets:
Cash ................................................................. $ 60,808
Investment in Marine Bank ............................................ 2,303,268
Organizational expenses, net ......................................... 20,011
----------
Total assets ....................................................... $2,384,087
==========
Liabilities and Stockholders' Equity:
Liabilities .......................................................... $ 51,646
Stockholders' equity
Common stock ........................................................ 833,000
Surplus ............................................................. 238,358
Undivided profits ................................................... 1,276,365
Unrealized (loss) gain in subsidiary's securities available-for sale (15,282)
----------
Total stockholders' equity ......................................... 2,332,441
----------
Total liabilities and stockholders' equity ......................... $2,384,087
==========
</TABLE>
Condensed Statements of Income for the year ended December 31, 1997:
<TABLE>
<S><C>
Amortization of organizational expenses $ 690
Other expenses ..................................................... 137
----------
Total expenses ................................................. 827
----------
Loss before equity in undistributed net income of subsidiary ....... (827)
Equity in undistributed net income of subsidiary ................... 239,185
----------
Net income ..................................................... $ 238,358
==========
</TABLE>
F-14
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. THE MARINE BANCORP (PARENT CORPORATION ONLY) CONDENSED FINANCIAL
STATEMENT: -- Continued
Condensed Statements of Cash Flows for the year ended December 31, 1997:
<TABLE>
<S><C>
Cash flows from operating activities:
Net income .......................................... $ 238,358
Amortization of organizational expenses ............. 690
Equity in undistributed earnings of
wholly-owned subsidiary ............................ (239,185)
Dividends from subsidiary ........................... 81,646
Decrease in organizational expenses, net ............ (20,701)
----------
Net cash provided by operating activities ......... 60,808
Cash at beginning of year ............................. --
----------
Cash at end of year ................................... $ 60,808
==========
</TABLE>
15. SUBSEQUENT EVENT:
In June 1998, the BanCorp announced its plan of affiliation with
Mercantile Bankshares Corporation, Baltimore, Maryland, in a tax free exchange
of stock. Under terms of the agreement, Mercantile Bankshares Corporation will
issue up to 124,620 shares of common stock representing an exchange of .75
shares for each outstanding share of common stock of the BanCorp. Required
applications to various regulatory agencies have been filed. It is anticipated
that the affiliation will be completed by the fourth quarter of 1998.
F-15
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
BALANCE SHEETS
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(BANK ONLY)
1998 1997
--------------- ---------------
<S><C>
ASSETS
Cash and due from banks ............................................. $ 1,213,681 $ 1,372,761
Investment securities:
Securities available for sale ...................................... 3,301,484 3,572,474
Securities to be held to maturity .................................. 14,900 14,900
Federal funds sold .................................................. 2,775,000 1,025,000
Loans, net of unearned income ....................................... 14,735,974 15,819,481
Accrued interest .................................................... 165,542 189,317
Premises and equipment .............................................. 963,973 1,008,949
Other real estate owned ............................................. 222,018 166,916
Deferred Federal income taxes ....................................... 67,469 67,188
Other assets ........................................................ 49,068 51,210
------------ ------------
Total assets .................................................... $ 23,509,109 $ 23,288,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand ............................................................. $ 3,682,283 $ 3,486,656
Interest checking .................................................. 1,078,531 998,751
Savings and Time:
Savings .......................................................... 3,684,120 3,289,511
MMDA accounts .................................................... 1,780,830 1,530,463
Certificates ..................................................... 10,606,257 11,444,837
Christmas Club ................................................... 77,560 76,065
------------ ------------
Total deposits .................................................. 20,909,581 20,826,283
Interest, taxes and other liabilities ............................... 166,900 261,927
Dividends payable ................................................... 24,924 --
------------ ------------
Total liabilities ............................................... 21,101,405 21,088,210
------------ ------------
Stockholders' Equity:
Common stock -- 166,160 shares outstanding at June 30, 1998 ......... 833,000 208,250
Less: Treasury stock ............................................. (2,200) --
Surplus ............................................................. -- 289,527
Retained Earnings ................................................... 1,587,557 1,775,122
Unrealized (Losses) on securities, net .............................. (10,653) (72,913)
------------ ------------
Total stockholders' equity ...................................... 2,407,704 2,199,986
------------ ------------
Total liabilities & stockholders' equity ........................ $ 23,509,109 $ 23,288,196
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
F-16
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(BANK ONLY)
1998 1997
-------------- ------------
<S><C>
INTEREST INCOME
Interest and fees on loans ........................................... $ 711,637 $ 735,926
Investment securities:
U.S. Government Securities & Agency ................................ 76,575 107,700
Mutual Funds ....................................................... 6,268 8,606
Municipal Funds .................................................... -- 5,000
Federal funds sold ................................................... 63,369 12,954
---------- ---------
857,849 870,186
INTEREST EXPENSE ...................................................... 359,361 357,515
---------- ---------
Net interest income .................................................. 498,488 512,671
PROVISION FOR POSSIBLE LOAN LOSSES .................................... 6,000 6,000
---------- ---------
Net interest income after provision for possible loan losses ......... 492,488 506,671
SERVICE CHARGES AND OTHER NON INTEREST INCOME ......................... 83,608 68,108
SECURITY GAINS (LOSSES)-REALIZED ...................................... 1,480 2,133
---------- ---------
Net revenue .......................................................... 577,576 576,912
NON INTEREST EXPENSE
Salaries ............................................................. 165,501 162,421
Employee benefits and payroll taxes .................................. 43,106 40,600
Occupancy expenses ................................................... 34,208 36,371
Depreciation ......................................................... 34,614 40,614
Other operating expenses ............................................. 128,900 124,771
---------- ---------
406,329 404,777
---------- ---------
Income before income taxes ............................................ 171,247 172,135
Income taxes .......................................................... 61,572 60,247
---------- ---------
NET INCOME ............................................................ $ 109,675 $ 111,888
========== =========
Net income per share of common stock:
Basic ................................................................ $ 0.66 $ 0.67
Diluted .............................................................. $ 0.66 $ 0.67
</TABLE>
See accompanying notes to unaudited financial statements.
F-17
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CAPITAL TREASURY RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
------------ ------------ ------------ -------------- -------------- --------------
<S><C>
BALANCE AT DECEMBER 31, 1996 ............ $ 208,250 $ -- $ 289,527 $ 1,663,234 $ (21,675) $ 2,139,336
Plus net income for the six months
ending June 30, 1997 ................. 111,888 111,888
Net change in unrealized losses on
securities available for sale ........ (51,238) (51,238)
---------- -----------
BALANCE AT JUNE 30, 1997 ................ $ 208,250 $ -- $ 289,527 $ 1,775,122 $ (72,913) $ 2,199,986
========= ======== ========= =========== ========== ===========
BALANCE AT DECEMBER 31, 1997 ............ $ 833,000 $ -- $ -- $ 1,506,327 $ (15,282) $ 2,324,045
Plus net income for the six months ending
June 30, 1998 .......................... 109,675 109,675
Less treasury stock purchased ........... (2,200) -- (3,521) (5,721)
Less cash dividends declared ............ (24,924) (24,924)
Net change in unrealized losses on
securities available for sale .......... 4,629 4,629
---------- -----------
BALANCE AT JUNE 30, 1998 ................ $ 833,000 $ (2,200) $ -- $ 1,587,557 $ (10,653) $ 2,407,704
========= ======== ========= =========== ========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-18
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(BANK ONLY)
1998 1997
--------------- ---------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................... $ 109,675 $ 111,888
Adjustments to reconcile net income to net cash provided by operating
Amortization of premiums ............................................... 95 127
Depreciation ........................................................... 34,614 40,614
Provision for possible loan losses ..................................... 6,000 6,000
(Gain) Losses on sales of investment securities ........................ (1,480) (2,133)
(Increase) Decrease in accrued interest income ......................... (12,890) (27,972)
(Decrease) Increase in other liabilities ............................... (13,273) (352,603)
------------ -----------
Net cash provided (used) by operating activities ....................... 122,741 (224,079)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities -- Held to maturity ....... 500,000 397,880
Proceeds from sales of investment securities -- Available for sale ..... 600,277 200,000
Purchase of investment securities -- Held to maturity .................. -- (199,813)
Purchase of investment securities -- Available for sale ................ (1,230,509) (400,000)
Net increase (decrease) in unrealized losses on available for sale ..... (4,629) 40,072
Net (increase) decrease in loans ....................................... 838,121 (911,834)
Proceeds from sale of Other Real Estate Owned .......................... 42,655 75,900
Purchases of Other Real Estate ......................................... (138,256) --
Purchases of premises and equipment .................................... (3,933) --
(Increase) decrease in other assets .................................... 16,570 (1,566)
------------ -----------
Net cash provided (used) by investing activities ....................... 620,296 (799,361)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits .................................... 1,003,020 695,414
Dividends paid ......................................................... (51,646) (52,063)
Treasury Stock purchased ............................................... (5,721) --
------------ -----------
Net cash provided by financing activities .............................. 945,653 643,351
------------ -----------
Net increase (decrease) in cash and federal funds ...................... 1,688,690 (380,089)
Cash and federal funds at beginning of period .......................... 2,299,991 2,777,850
------------ -----------
Cash and federal funds at end of period ................................ $ 3,988,681 $ 2,397,761
============ ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-19
<PAGE>
THE MARINE BANCORP AND SUBSIDIARY
NOTES TO (UNAUDITED) FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of The Marine Bancorp management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been made. Operating results for the six month periods ended
June 30, 1998 and 1997, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998 or for future periods.
2. ACQUISITION OF THE MARINE BANK
During 1997, the Board of Directors of The Marine Bank approved a plan
whereby each share of the Marine Bank was converted into four shares of
Corporation Common Stock of The Marine Bancorp and the business of the Bank
thereafter would be conducted under a holding company structure. The Marine
Bancorp became the parent of The Marine Bank on October 31, 1997.
The financial statements presented for the six months ended June 30, 1997
include the transactions of The Marine Bank, only. The 1998 financial
statements include the accounts of The Marine Bancorp and its wholly owned
subsidiary, The Marine Bank, after elimination of all material intercompany
transactions and balances.
3. COMPREHENSIVE INCOME
For the six months ended June 30, 1998, Comprehensive Income was $114,304,
which includes net income and the change in the market value of available for
sale securities.
F-20
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION AND MERGER
AMONG MERCANTILE BANKSHARES CORPORATION,
FARMERS & MERCHANTS BANK-EASTERN SHORE,
THE MARINE BANCORP, INC., AND THE MARINE BANK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
------- ------- ----
<S><C>
1.1 The Affiliation and Mergers ........................................................ A-1
1.2 Conversion Rate .................................................................... A-1
1.3 Commercially Reasonable Efforts Requirement ........................................ A-1
1.4 Stockholder List ................................................................... A-1
1.5 Representations of the Corporation; Antidilution ................................... A-1
(a) Representations
(1) Bank Holding Company Status ................................................... A-1
(2) FDIC and FRB Application ...................................................... A-1
(3) Good Standing ................................................................. A-1
(4) Capitalization ................................................................ A-1
(5) SEC Registration of Common Stock .............................................. A-2
(6) Financial Statements .......................................................... A-2
(7) Material Adverse Changes ...................................................... A-2
(8) No Conflicting Agreements ..................................................... A-2
(9) Validly Issued Stock .......................................................... A-2
(10) Due Authorization ............................................................. A-2
(b) Antidilution ................................................................... A-2
1.6 Representations of Marine Holding and the Bank ..................................... A-3
(a) Corporate Status of Marine Holding ............................................. A-3
(b) Corporate Status of Bank ....................................................... A-3
(c) Capitalization ................................................................. A-3
(d) Number of Stockholders ......................................................... A-3
(e) List of Shareholders ........................................................... A-3
(f) Unpaid Dividends ............................................................... A-3
(g) Compliance with Laws and Regulations ........................................... A-3
(h) Employment Agreements, Leases, Material Contracts, List of Securities, Community
Reinvestment Act Statement, Financial Reports, Material Adverse Changes, Losses and
Liabilities .................................................................... A-3
(i) Accuracy of Financial Statements ............................................... A-4
(j) Stock Issuance, Distributions since March 31, 1998 ............................. A-4
(k) Litigation ..................................................................... A-4
(l) Tax Returns and Liability ...................................................... A-4
(m) Brokers ........................................................................ A-4
(n) Employee Benefit Plans ......................................................... A-4
(o) Employee Benefit Plan Representations .......................................... A-5
(p) Title to Assets ................................................................ A-5
(q) No Conflicting Agreements; Business Combination Matters ........................ A-5
(r) Personal Property .............................................................. A-6
(s) Zoning Laws, Etc. .............................................................. A-6
(t) Title to Offices ............................................................... A-6
(u) Conditions of Buildings ........................................................ A-6
(v) Environmental Matters .......................................................... A-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECTION SUBJECT PAGE
------- ------- ----
<S><C>
1.7 Access to Records and Information; Operation of Business ........................ A-6
(a) Access ...................................................................... A-6
(b) Operations .................................................................. A-6
1.8 Audits, Capital Account Requirement, etc. ....................................... A-7
1.9 Regulatory Approvals ............................................................ A-8
1.10 Exclusive Dealing ............................................................... A-8
1.11 Conditions to Corporation's Obligation and F&M's Obligations .................... A-8
(a) FRB and FDIC Approval ....................................................... A-8
(b) Other Regulatory Approvals .................................................. A-8
(c) SEC Registration Statement .................................................. A-8
(d) Agreements With Respect to SEC Rule 145 ..................................... A-8
(e) Consents .................................................................... A-9
(f) Legal Proceedings and Impediments ........................................... A-9
(g) Dividends ................................................................... A-9
(h) Stock Issuance, Evidences of Indebtedness, Distributions .................... A-9
(i) Compensation; Employee Benefit Plan Changes ................................. A-9
(j) Investment Practices ........................................................ A-9
(k) Other Approvals ............................................................. A-9
(l) Limit on Dissenters ......................................................... A-9
(m) Office Openings and Closings ................................................ A-9
(n) Tax Opinion ................................................................. A-9
(o) Representation Update and Certificate re Representations and Conditions ..... A-10
1.12 Conditions to Marine Holding's and the Bank's Obligations ....................... A-10
(a) FRB and FDIC Approval ....................................................... A-10
(b) Other Regulatory Approvals .................................................. A-10
(c) SEC Registration Statement .................................................. A-10
(d) Tax Opinion ................................................................. A-10
(e) Representation Update and Certificate........................................ A-10
1.13 Confidentiality ................................................................. A-11
1.14 Employee Benefit Matters ........................................................ A-11
(a) Qualified Plan .............................................................. A-11
(b) Corporation's Cash Balance Plan ............................................. A-11
(c) Other Benefits .............................................................. A-11
2.1 Effective Date .................................................................. A-11
2.2 Corporation's and F&M's Obligations in Accomplishing the Affiliation ............ A-12
2.3 Marine Holding's and the Bank's Obligations in Accomplishing Affiliation ........ A-12
2.4 Stockholder Approval ............................................................ A-12
2.5 Effect of the Affiliation ....................................................... A-12
2.6 Terms of the Affiliation ........................................................ A-12
2.7 Confirmatory Deeds .............................................................. A-12
2.8 Procedural Matters .............................................................. A-12
3.1 Termination for Regulatory Reasons .............................................. A-13
3.2 Termination by Consent or Due to Passage of Time ................................ A-13
3.3 Termination with Respect to Acquisition Proposal ................................ A-13
3.4 Amendment ....................................................................... A-13
3.5 Expenses; Limited Liability ..................................................... A-13
3.6 Notices ......................................................................... A-13
</TABLE>
ii
<PAGE>
SECTION SUBJECT PAGE
------- ------- ----
3.7 Counterparts ................................... A-14
3.8 Binding Effect; No Third Party Rights .......... A-14
3.9 Governing Law .................................. A-14
Exhibit A Holding Company Plan of Merger ................. A-15
Exhibit B Bank Merger Plan of Merger ..................... A-17
iii
<PAGE>
AGREEMENT AND PLAN OF
AFFILIATION AND MERGER
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 9th day of June, 1998, by and among Mercantile Bankshares Corporation, a
body corporate of the State of Maryland (the "Corporation"), Farmers &
Merchants Bank-Eastern Shore, a Virginia Bank ("F&M"), The Marine BanCorp, Inc.
("Marine Holding"), and The Marine Bank, a Virginia bank (the "Bank").
WITNESSETH, that for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable consideration,
and in the expectation of the delivery of a Support Agreement, to be dated and
delivered as of the date hereof, between the Corporation and certain
stockholders of Marine Holding, the parties hereto agree as follows:
ARTICLE I
GENERAL PROVISIONS
1.1. THE AFFILIATION AND MERGERS. Subject to the terms, provisions, and
conditions of this Agreement, the Bank shall become affiliated with the
Corporation by Marine Holding's merger into the Corporation (the "Holding
Company Merger"), which will be followed by the Bank's merger into F&M (the
"Bank Merger"), pursuant to the procedures described in Article II of this
Agreement, the Holding Company Plan of Merger attached as Exhibit A hereto (the
"Holding Company Plan of Merger"), and the Bank Merger Plan of Merger attached
as Exhibit B hereto (the "Bank Plan of Merger"). The Holding Company Plan of
Merger and the Bank Plan of Merger are hereinafter referred to, collectively,
as the "Plans of Merger"). The Bank Merger and the Holding Company Merger are
hereinafter referred to, collectively, as the "Affiliation".
1.2. CONVERSION RATE. The Affiliation shall be accomplished on the basis
of seventy-five hundredths (.75) of a share of the Corporation's Common Stock,
$2.00 par value per share (the "Common Stock"), for each share of common stock
of Marine Holding that is outstanding on the Effective Date, hereinafter
defined, immediately prior to the Holding Company Merger becoming effective
(the "Conversion Rate"). Fractional shares shall be treated as provided
elsewhere herein. The Conversion Rate may be adjusted pursuant to Section
1.5(b);
1.3. COMMERCIALLY REASONABLE EFFORTS REQUIREMENT. The Corporation, F&M,
Marine Holding, 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,
Marine Holding 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 Marine Holding and the number of shares held by
each.
1.5. REPRESENTATIONS OF THE CORPORATION; ANTIDILUTION.
(a) The obligations of Marine Holding and 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. F&M is a Virginia bank,
the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC"), and is not a member of the Federal Reserve
System.
(2) The Corporation will cause the filing of any required
applications with the FDIC and the Board of Governors of the Federal
Reserve System (the "FRB") for approval of the Affiliation and
prosecute such applications in good faith and with diligence.
(3) The Corporation and F&M, respectively, are corporations duly
organized, validly existing, and in good standing under the laws of
the State of Maryland and the Commonwealth of Virginia, respectively,
and have the corporate power and authority to carry on their
respective businesses as they are now conducted.
(4) At April 30, 1998, 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 April 30, 1998, no shares of Mercantile Preferred were
outstanding, 71,973,937 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.
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(5) The Corporation with the assistance and cooperation of Marine
Holding and the Bank and their 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 Holding Company Merger
and shall use all commercially reasonable efforts to have the
Registration Statement declared effective by the SEC. The Corporation
and Marine Holding 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 Marine Holding 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 the other
party's officers or authorized representatives. The Corporation,
relying on the information provided by Marine Holding pursuant to
Section 1.4, shall promptly take all such actions, with the assistance
and cooperation of Marine Holding 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 Marine Holding (i) copies of
its consolidated financial statements for the year ended December 31,
1997 containing the following consolidated financial statements of the
Corporation (collectively, the "Corporation's Audited Financial
Statements"): consolidated balance sheets as of December 31, 1997 and
1996 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, 1997, 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 three months ended March 31, 1998
containing a consolidated balance sheet as of March 31, 1998 and
statements of consolidated income, consolidated cash flows, and
consolidated changes in stockholders' equity for the three months then
ended (the "Corporation's March 31, 1998 Financial Statements"). All
of the Corporation's Audited Financial Statements and the
Corporation's March 31, 1998 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 March 31, 1998, there has not been any material adverse
change in the Corporation's consolidated balance sheet, consolidated
income statement, financial position, or results of operations. 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 March 31, 1998 Financial
Statements and that is not disclosed therein, other than liabilities
arising since the respective dates thereof in the ordinary course of
business, which are not materially adverse.
(8) Neither the execution and delivery of this Agreement nor the
carrying out of the transactions contemplated hereunder will result in
any material violation, termination, modification of, or be in
conflict with, any terms of the Corporation's or F&M's Charter or
Bylaws, or any contract or other instrument to which the Corporation
or F&M is a party, or of any judgment, decree, or order applicable to
the Corporation or F&M, or result in the creation of any material
lien, charge, or encumbrance upon any of the properties or assets of
the Corporation or F&M.
(9) The Common Stock deliverable pursuant to this Agreement will
be, prior to its issuance, duly authorized for issuance and will, when
issued and delivered in accordance with this Agreement, be duly and
validly issued, fully paid and nonassessable.
(10) The execution, delivery, and performance of this Agreement by
the Corporation and F&M have been duly authorized by their respective
Boards of Directors and require no action on the part of the
stockholders of the Corporation. This Agreement constitutes a valid
and binding obligation of each of the Corporation and F&M, enforceable
against the Corporation and F&M in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally
or by general equitable principles.
(b) Nothing in this Agreement shall limit the right of the Corporation
to issue or repurchase any of its stock or other securities in any manner
and for any consideration permitted by law either in connection with
acquisitions of new affiliates or otherwise, prior to or after the
Effective Date, as hereinafter defined; provided, however, that if the
Corporation takes any action which establishes, prior to the Effective
Date, as hereinafter defined, a record date or effective date for a stock
dividend on the Common Stock, a split or reverse split of the Common Stock,
or any distribution
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<PAGE>
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 Marine Holding will be converted in the Merger
into the same number of shares of Common Stock (whether such number is
greater or less than the number otherwise provided for herein) that the
owner of such shares would have owned immediately after the record date or
effective date of such event had the Effective Date occurred immediately
before such record date or effective date, and the Conversion Rate shall be
adjusted accordingly. Marine Holding and the Bank hereby agree to any
revision in the Conversion Rate and payment arrangements pursuant to the
foregoing provisions of Section 1.5(b).
1.6. REPRESENTATIONS OF MARINE HOLDING AND THE BANK. The obligations of
the Corporation and F&M under this Agreement are based upon and subject to the
correctness and accuracy of the following representations of Marine Holding and
the Bank:
(a) Marine Holding is a Virginia stock corporation, legally formed,
validly existing, and in good standing under the laws of Virginia. It is a
registered bank holding company under the Bank Holding Company Act of 1956,
as amended. Marine Holding has one office, which is located in
Chincoteague, Virginia. It has no subsidiaries or other affiliated
companies other than the Bank, and is not a partner or coventurer in any
joint venture or other business enterprise.
(b) The Bank is a Virginia bank, without trust powers, legally formed,
validly existing, and in good standing under the laws of Virginia, the
deposits of which are insured by the FDIC, and is a member of the Federal
Reserve System. The Bank has the corporate power and authority to carry on
its business as it is now conducted. The Bank owns two banking offices,
with its main office in Chincoteague, Virginia, and a branch office located
in Wattsville, Virginia. The Bank has no subsidiaries or other affiliated
companies, except Marine Holding, and is not a general partner or
coventurer in any joint venture or other business enterprise.
(c) The authorized capital stock of Marine Holding consists of 600,000
shares of common stock, $5.00 par value per share, of which 166,160 shares
are issued and outstanding. All of the outstanding shares of Marine Holding
common stock are in certificate form, were validly issued and are fully
paid and nonassessable. The authorized capital stock of the Bank consists
of 200,000 shares of common stock, $5.00 par value per share, of which
41,650 shares are issued and outstanding. All of the issued and outstanding
shares of the Bank are in certificate form, were validly issued, are fully
paid and nonassessable, and are owned both of record and beneficially by
Marine Holding, free and clear of any liens or encumbrances of any kind or
nature. Neither Marine Holding nor the Bank has any options, calls,
warrants, commitments or agreements of any character to which either is a
party or by which either is bound calling for the issuance, sale, or
transfer of shares of capital stock of Marine or the Bank or of any
security representing the right to purchase or receive, or convert into any
capital stock of Marine Holding or the Bank.
(d) Marine Holding has less than 300 stockholders of record and
beneficially and its securities are not subject to registration under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(e) The list of stockholders to be furnished by Marine Holding pursuant
to Section 1.4 hereof will be true, correct and complete.
(f) 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 Marine Holding.
(g) Marine Holding and the Bank have each complied in all material
respects with all laws and regulations applicable to them, and their
respective properties and operations, and all valid orders of regulatory
authorities having jurisdiction over them and have received no notice of
any asserted violations of the same.
(h) Marine Holding has previously furnished to the Corporation copies of
its and the Bank's Charters 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 Marine Holding
and/or the Bank and each of their respective present or former directors,
officers and employees relating to his compensation, employment or
severance, copies of all leases, mortgages, agreements deeds, title
policies, title opinions, and title reports with respect to their banking
and other offices, copies or descriptions of all other material contracts
and leases, a list of all securities held by Marine Holding and the Bank on
May 29, 1998, a copy of the Bank's Community Reinvestment Act Statement,
(together with all related documents required to be made available for
public inspection, copies of the Bank's year-end Consolidated Reports of
Condition and Income ("Call Reports") filed with the FRB for all years
subsequent to 1992, copies of all interim call reports filed by the Bank
with the FRB in 1997 and 1998 (the Bank's March 31, 1998 Call Reports being
hereinafter referred to as the "Bank's March 31, 1998 Call Reports"),
copies of all reports filed by Marine Holding with
A-3
<PAGE>
the FRB since Marine Holding's formation, copies of all annual reports to
stockholders provided to Marine Holding and Bank stockholders after
December 31, 1995, copies of the Bank's audited financial statements for
the years ended December 31, 1993, 1994, 1995, and 1996 and of Marine
Holding's audited consolidated financial statements for the year ended
December 31, 1997, together with the notes thereto, certified by Ginsberg,
Nottingham & Mapp, independent certified public accountants (the said
Marine Holding audited consolidated financial statements for the year ended
December 31, 1997 being hereinafter referred to as "Marine Holding's
December 31, 1997 Financial Statements"), a copy of the most recent
management letter rendered by the Marine Holding's independent certified
public accountants, copies of the Bank's Federal and Virginia income and
franchise tax returns for the years 1994, 1995, and 1996 and of Marine
Holding's Federal and Virginia income and franchise tax returns for the
year 1997. Since December 31, 1997, there has been no material adverse
change in the respective balance sheets, income statements, financial
positions, results of operation, or businesses of Marine Holding or the
Bank. No material loss is presently realizable or anticipated with respect
to any asset included in Marine Holding's December 31, 1997 Financial
Statements or the Bank's March 31, 1998 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 Marine Holding's December 31, 1997 Financial Statements or the Bank's
March 31, 1998 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.
(i) All of the financial statements previously provided to the
Corporation pursuant to subparagraph (h) 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 Marine Holding
and the Bank, respectively, at the close of business at the dates thereof
and for the periods covered thereby.
(j) Since December 31, 1997, neither Marine Holding nor the Bank has
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.
(k) There is no material litigation or regulatory or other proceeding
pending against or threatened against Marine Holding or the Bank, and
Marine Holding and the Bank are 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.
(l) Marine Holding and the Bank have timely filed with the appropriate
governmental agencies all tax returns required to be filed and have paid
all taxes shown to be due on such returns. Neither Marine Holding nor the
Bank has any material liability for taxes except as set forth and provided
for in Marine Holding's December 31, 1997 Financial Statements and the
Bank's March 31, 1998 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 Marine Holding's December 31, 1997 Financial Statements and the
Bank's March 31, 1998 Call Reports. Neither Marine Holding nor the Bank is
aware of any currently pending or threatened investigations or proceedings
concerning their respective tax returns by any governmental agency. The
Bank's Federal and Virginia tax returns for the years 1994 through 1997 and
Marine Holding's Federal and Virginia tax returns for the year 1997 have
all been timely filed.
(m) There is no finder or broker acting, or who acted, for Marine Holding
or the Bank, or, to the knowledge of the directors of Marine Holding and
the Bank, for any stockholder of Marine Holding, in connection with the
transactions contemplated by this Agreement.
(n) Except as set forth in a schedule previously provided by Marine
Holding (the "Benefit Plan Schedule"), Marine Holding and the Bank do not
sponsor or maintain and are not required to contribute to and have 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
A-4
<PAGE>
all of the current or former employees, leased employees, officers or
directors of Marine Holding or the Bank, or the beneficiaries of such
persons (such plans, programs and arrangements set forth in such Benefit
Plan Schedule, collectively, the "Employee Plans").
(o) Each Employee Plan and any related funding arrangement is in
compliance with all applicable requirements of ERISA, the Internal Revenue
Code of 1986, as amended (the "Code"), and other applicable laws, and each
Employee Plan has been administered 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; Marine Holding and the Bank have timely made (and at
the Effective Date will have timely made) all contributions required to be
made to any Employee Plan; except for claims for benefits in the ordinary
course of plan administration, there is no litigation or other legal
proceeding pending or threatened against or with respect to any Employee
Plan or its fiduciaries and no facts exist which could give rise to such
proceedings or litigation; all reports, returns, forms, notifications or
other disclosure materials required to be filed with any governmental
entity or distributed to employees with respect to any Employee Plan have
been timely filed or distributed and are accurate and complete; no
nonexempt "prohibited transaction" (as defined in Section 4975 of the Code
or Section 406 of ERISA) has occurred or will occur prior to the Effective
Date with respect to any Employee Plan subject to such rules, 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 as previously disclosed to the Corporation, neither Marine Holding
nor the Bank is subject to any legal obligation to continue any Employee
Plan either before or after the Effective Date and any such Employee Plan,
in any manner and without the consent of any employee or beneficiary, may
be amended or terminated.
(2) Marine Holding has previously delivered to the Corporation
complete copies of: each Employee Plan; all related summary plan
descriptions; all related trust agreements or other funding arrangements,
including, but not limited to, insurance policies; for the five (5) most
recent plan years, all annual reports (5500 series) for each Employee
Plan that have been filed with any governmental agency; and all other
material documents relating to any Employee Plan as may reasonably be
requested by the Corporation.
(3) The only Employee Plan currently maintained or contributed to by
Marine Holding or the Bank which is intended to be qualified under
Section 401(a) of the Code is the Virginia Bankers Group Deferred Income
Plan, 401k plan (the "Qualified Plan"); the Qualified Plan, as amended to
comply with the Tax Reform Act of 1986, the Unemployment Compensation
Amendments of 1992, the 1993 Omnibus Budget Reconciliation Act, and any
other applicable legislation (including any regulations issued
thereunder), has received a favorable determination letter from the
Internal Revenue Service with respect to its tax-qualified status, and
Marine Holding has delivered to the Corporation complete copies of all
such determination letters and all material correspondence relating to
the applications therefor; nothing has occurred since the date of the
most recent applicable determination letter nor will occur prior to the
Effective Date that would adversely affect the tax-qualified status of
the Qualified Plan.
(4) Marine Holding and the Bank do not have any obligation, and have
not made any representation, in connection with any medical, death or
other welfare benefits for their employees after they retire, except to
the extent required under the group health plan continuation requirements
of Section 601 of ERISA.
(p) Marine Holding and the Bank each has good and marketable title to all
of its respective material property and assets, including those reflected
on Marine Holding's December 31, 1997 Financial Statements and the Bank's
March 31, 1998 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(t) 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).
(q) The execution, delivery and performance of this Agreement have been
duly authorized by Marine Holding's and the Bank's respective Boards of
Directors, and, except for approval by Marine Holding as the Bank's sole
stockholder and by the stockholders of Marine Holding, require no further
corporate action. This Agreement and Marine Holding are not subject to the
provisions of Articles 14 and 14.1 of Chapter 9 of Title 13.1 of the Code
of Virginia (the "Virginia Stock Corporation Act"), being the Affiliated
Transactions statute and the Control Share Acquisitions statute,
respectively. 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 Marine Holding or the Bank, or the terms of any material
contract or other instrument to which Marine Holding or the Bank is a
party, or of any judgment, decree, order or regulatory agreement applicable
to Marine Holding or the Bank, or result in the creation of any material
lien, charge, or encumbrance upon any of the properties or assets of Marine
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<PAGE>
Holding or the Bank. No consent to this Agreement by any private party is
required under any contract, lease, mortgage or other instrument to which
Marine Holding or the Bank is a party. This Agreement constitutes a valid and
binding obligation of Marine Holding and the Bank, enforceable against each
of them 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.
(r) The tangible personal property of Marine Holding and the Bank is in
good operating condition and repair, subject to ordinary wear and tear.
(s) There is no material violation of any zoning, building, fire or other
regulatory laws, statutes, ordinances or regulations relating to Marine
Holding's or the Bank's offices or other real property; no condemnation
proceeding exists or, to the knowledge of Marine Holding or the Bank, is
threatened that would preclude or impair the use of Marine Holding's and the
Bank's offices as presently being used in the conduct of their respective
businesses.
(t) The Bank has good and merchantable fee simple title to the real estate
for all of the offices of Marine Holding and the Bank, free and clear of
liens and encumbrances of every kind and nature except use, occupancy and
similar restrictions of public record that are generally applicable to
properties in the immediate neighborhood or subdivision in which the real
property is located, easements and encumbrances that are of record or that
may be observed by an inspection of the property, and such utility and other
easements and encumbrances as do not materially adversely affect the fair
market value of the real property.
(u) All electrical, plumbing, heating, air conditioning and other
mechanical systems and related equipment in Marine Holding's and the Bank's
banking and other offices are in good working order, subject to ordinary wear
and tear, and the roofs of the office buildings are waterproof and their
basements, if any, are not subject to water seepage.
(v)(1)(i) all real estate (including, without limitation, offices and
foreclosed properties) owned by Marine Holding or 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) all property in which the Bank holds a security interest is in
compliance with applicable environmental laws and regulations.
1.7. ACCESS TO RECORDS AND INFORMATION; OPERATION OF BUSINESS.
(a) From the date of this Agreement until the Effective Date, as
hereinafter defined, Marine Holding will, itself, and will cause the Bank to
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 Marine Holding and the Bank and
furnish to the Corporation such information with respect to Marine Holding's
and the Bank's assets, liabilities and business as the Corporation may from
time to time request in order to perform the audits and examinations
described in Section 1.8 hereof, to obtain all required approvals of the
Affiliation by the FRB, the FDIC, the Virginia State Corporation Commission
(the "Commission"), the Maryland Commissioner of Financial Regulation (the
"Maryland Commissioner") (if required by law), 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, Marine Holding will do and
will cause the Bank to do, and will otherwise cause to be done all things
necessary to:
(1) preserve and keep in full force and effect the corporate existence
of Marine Holding and the Bank;
(2) operate their respective businesses only in the usual, regular and
ordinary manner and consistently with past operations and practices,
including, without limitation, following the Bank's current lending
practices with regard to the setting of rates, credit standards and
collection procedures; and use all commercially reasonable efforts to
preserve their present relationships with persons having business dealings
with them;
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(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 their books, accounts and records in the usual regular
and ordinary manner, on a basis consistent with prior years; comply in
all material respects with all material laws and contractual obligations,
and perform all of the material obligations relating to their respective
businesses without material default;
(5) not enter into any material agreement or incur any material
obligation other than in the ordinary course of their respective
businesses;
(6) not make or commit to make any capital expenditures aggregating in
excess of $25,000;
(7) not pledge, sell, lease, transfer, dispose or otherwise encumber
any of their respective property or assets other than in the ordinary
course of business;
(8) not issue any shares of their capital stock, any securities
convertible into or exchangeable for shares of their 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,
warrants or rights to acquire any of the foregoing;
(9) not amend their Charters or Bylaws;
(10) except as provided in Section 1.10, not provide for the
consolidation with or merger of Marine Holding or the Bank or a share
exchange or any other reorganization involving Marine Holding or Bank
capital stock with or into another corporation, or the liquidation or
dissolution of Marine Holding or the Bank;
(11) not create any subsidiary, affiliate or other related business
entity or enter into any partnership or joint venture; 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 1.10.
1.8. AUDITS, CAPITAL ACCOUNT REQUIREMENT, ETC. Immediately upon the
execution of this Agreement, Marine Holding shall take such action, and shall
cause the Bank to 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 Marine Holding and the Bank for the calendar years
ended December 31, 1995, 1996 and 1997, and for any subsequent period and (b)
to update any such examination and audit from time to time, at any time at, or
prior to, the Effective Date. If any such examination or audit, or update
thereof, shall disclose, in the opinion of the Corporation, (1) that the
stockholders' equity of Marine Holding, determined in accordance with generally
accepted accounting principles, consistently applied is less than $2,332,441;
or (2) that since December 31, 1997 there has been a material adverse change in
the balance sheet, income statement, financial position, results of operations,
or business of the Bank or Marine Holding; or (3) that any inability of
independent public accountants to certify financial statements of Marine
Holding or the Bank for any period (or any qualification to such a
certification) would materially interfere with or prevent the Corporation,
before or after the Effective Date, from complying with requirements of the SEC
(or other requirements) for the preparation and publication of certified or
other required financial statements, whether for Marine Holding, 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 March 31,
1998 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 March 31, 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 Marine Holding's and
the Bank's securities supplied by Marine Holding to the Corporation pursuant to
Section 1.6(h) hereof are inaccurate, as of their respective date, in any
material respect, then the Corporation and F&M shall have the right by written
notice to Marine Holding and 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.
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1.9 REGULATORY APPROVALS. When requested by the Corporation, and through
counsel for the Corporation, Marine Holding and 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 EXCLUSIVE DEALING. The Board of Directors of Marine Holding 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 Marine Holding, with the intent that this
Agreement be conclusive and binding, subject to the terms and conditions
hereof. 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 Marine Holding nor the Bank nor any of their respective
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 Marine
Holding'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, F&M, or
their affiliates and agents, in connection with any potential Acquisition
Proposal, unless an unsolicited Acquisition Proposal is made and the Board of
Directors of Marine Holding shall conclude, based on a written opinion of
counsel, which may be based with respect to financial matters on the written
opinion of a duly qualified and independent financial advisor of Marine
Holding, that their fiduciary obligations require consideration of such
Acquisition Proposal because such Acquisition Proposal may be in the best
interest of Marine Holding's stockholders and is more favorable to Marine
Holding'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 Marine Holding
or the Bank, (B) sale, lease or other disposition directly or indirectly by
merger, consolidation, share exchange or otherwise of assets of Marine Holding
or the Bank representing 10% or more of the consolidated assets of Marine
Holding (including capital stock of the Bank) or 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 Marine Holding or the Bank, (D) transaction in
which any person shall acquire beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act), or the right to acquire beneficial
ownership, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to acquire
beneficial ownership, of 20% or more of Marine Holding's or the Bank's
outstanding capital stock. Marine Holding and the Bank shall promptly advise
the Corporation of, and communicate to the Corporation the terms of, any such
inquiry or proposal addressed to Marine Holding or the Bank or of which Marine
Holding or the Bank, or their respective officers, directors, employees,
agents, or representatives (including, without limitation, any investment
banker) has knowledge. Marine Holding's and the Bank's Boards of Directors
shall use all commercially reasonable efforts to cause their respective
officers, directors, employees, agents and representatives to comply with the
requirements of this Section 1.10.
1.11 CONDITIONS TO THE CORPORATION'S AND F&M'S OBLIGATIONS. The
obligations of the Corporation and F&M 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 FRB and the FDIC shall have
given any required approvals to permit the Affiliation and such approvals
shall have become effective and all required waiting times with respect
thereto shall have expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Commission, the Maryland Commissioner (if required by law),
the Delaware Bank Commissioner (if required by law), and Pennsylvania
banking authorities (if required by law), and any other appropriate Federal
regulatory agencies 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 stockholders who are affiliates of Marine Holding 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.
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(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 December 31, 1997, Marine Holding shall not have
authorized or distributed any of its assets to its stockholders by way of
dividends or otherwise, except for a semi-annual cash dividend not to
exceed fifteen cents ($0.15) per share to be declared in June or July,
1998, and regular cash dividends for any full calendar quarter occurring
before the Effective Date that begins after June 30, 1998 at an effective
quarterly rate of not more than seven and one-half cents ($.075) per share.
(h) That since December 31, 1997, Marine Holding and the Bank shall not
have issued or authorized the issuance of additional shares of their
respective capital stock of any class, or options to buy shares of said
stock, or warrants or rights to subscribe thereto, or securities converted
into such capital stock, 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 capital stock, or repurchased or redeemed any of
their capital stock, or changed their respective capitalization, or made
any distribution of their earnings or assets other than as provided in
Section 1.11. (g) above, or as otherwise agreed in writing by the
Corporation, and Marine Holding shall not have sold, transferred, pledged
or granted any option or other rights with respect to the capital stock of
the Bank held by Marine Holding.
(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 Marine Holding or 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
Marine Holding or 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 Marine Holding 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 Marine Holding and the Bank shall not
have adopted or entered into any new employment, stock option, stock
purchase, employee stock ownership, profit sharing, pension, retirement,
bonus, group life or health insurance or other benefit plan, agreement or
arrangement.
(j) That between December 31, 1997 and the Effective Date, no change
shall have been made in Marine Holding's or the Bank's investment practices
and policies.
(k) That there are granted or issued any such consents or approvals,
governmental or otherwise (including, without limitation, lessor consents),
which are necessary to permit or enable F&M, as successor to the Bank in
the Bank Merger, and the Corporation, as successor to Marine Holding in the
Holding Company Merger, to conduct after the Effective Date, all and every
part of the business and activities conducted by the Bank and Marine
Holding, respectively, prior to the Effective Date in the manner in which
such activities and business were then conducted by the Bank and Marine
Holding, respectively, and at the offices at which they were then
conducted.
(l) That the holders of no more than 10% of Marine Holding's common stock
shall have (i) before the Marine Holding's stockholders vote is taken on
the Affiliation, delivered written notice of intent to demand cash payment
for their shares pursuant to Article 15 of the Virginia Stock Corporation
Act, and (ii) not voted in favor of the Affiliation.
(m) That the Bank shall not have applied for or opened any new, or closed
any existing, branch offices without the written consent of the
Corporation.
(n) That the Corporation and F&M shall have received from Venable,
Baetjer and Howard, LLP (or such other qualified law firm as the
Corporation shall select) an opinion (i) with respect to the federal income
tax consequences of the Holding Company Merger substantially to the effect
that the Holding Company Merger will qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code, that the
Corporation and Marine Holding will each be a party thereto, and that no
gain or loss will be recognized by the Corporation or Marine Holding as a
result of the Holding Company Merger; and (ii) with respect to the federal
income tax consequences of the Bank Merger substantially to the effect that
the Bank Merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(D) of the Internal Revenue Code, that F&M and the Bank
will each be a party thereto, and that no gain or loss will be recognized
by F&M, the Corporation, or the Bank as a result of the Bank Merger.
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(o) That the representations of Marine Holding and 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
Marine Holding 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 and F&M.
1.12 CONDITIONS TO MARINE HOLDING'S AND THE BANK'S OBLIGATIONS. The
obligation of Marine Holding and the Bank under this Agreement are subject to
the following conditions:
(a) That pursuant to applicable statutes, the FRB and the FDIC shall have
given any required approvals to permit the Affiliation and such approvals
shall have become effective and all required waiting times with respect
thereto shall have expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Commission, the Maryland Commissioner (if required by law),
and the Delaware Bank Commissioner (if required by law), Pennsylvania
banking authorities (if required by law), and any other appropriate Federal
regulatory agencies 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 Marine Holding shall have received an opinion of Venable,
Baetjer and Howard, LLP (or such other qualified law firm as Marine Holding
shall select) 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 Holding Company Merger will qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Internal Revenue Code;
(2) the Corporation and Marine Holding will each be a party thereto;
(3) no gain or loss will be recognized by the Corporation or Marine
Holding as a result of the Holding Company Merger;
(4) no gain or loss will be recognized by the stockholders of Marine
Holding upon receipt by them of Common Stock in exchange for common stock
of Marine Holding;
(5) the basis of the Common Stock received by such stockholders of
Marine Holding will be the same as the basis of the common stock of
Marine Holding surrendered by such stockholders in exchange for the
Common Stock;
(6) provided that Marine Holding'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
Marine Holding which is surrendered in exchange for such Common Stock.
(e) That the representations of the Corporation and F&M 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 the request of Marine Holding, and as
of the Effective Date, the President of the Corporation shall deliver a
written certificate to Marine Holding that, to his knowledge, information
and belief, the representations of the Corporation and F&M set forth in
this Agreement (other than in Section 1.5(a)(4)) are true and correct in
all material respects as if made on and as of the date of such certificate
and that the conditions set forth herein required to have been met by the
Corporation by such date have, without exception, been met.
Condition (e) may be waived by Marine Holding and the Bank.
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1.13 CONFIDENTIALITY
Between the date of this Agreement and the Effective Date, the Corporation
and F&M, on the one hand, and Marine Holding and the Bank, on the other hand,
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.
1.14 EMPLOYEE BENEFIT MATTERS
(a) QUALIFIED PLAN. It is the current intention of the Corporation and
F&M and expectation of the parties that effective as of the Effective Date
(or as soon thereafter as is practicable in the judgment of the
Corporation), Marine Holding's Qualified Plan will be merged with and into
the Corporation's 401(k) plan. If the plans are merged, the terms of the
merger will comply with applicable requirements of the Internal Revenue
Code, including Sections 401(a), 414(1) and 411(d)(6), and will provide
that employees of Marine Holding and the Bank will be given credit under
the Corporation's 401(k) plan for service with Marine Holding and the Bank
for purposes of eligibility to participate and vesting. In the event that,
in the judgment of the Corporation, it is not technically feasible or
desirable to merge the plans, Marine Holding's Qualified Plan will be
frozen or terminated.
(b) CORPORATION'S CASH BALANCE PLAN. Effective as of the first January
1st following the Effective Date, employees of the Bank will become
eligible to participate in the Corporation's cash balance plan according to
its applicable provisions. Employees of Marine Holding and the Bank will be
given credit under the Corporation's cash balance plan for service with
Marine Holding and the Bank for purposes of eligibility to participate and
vesting.
(c) OTHER BENEFITS. Except with respect to (i) Marine Holding's Qualified
Plan described in Section 1.14(a) above (the disposition of which shall be
governed by Section 1.14(a) above), (ii) the Corporation's cash balance
plan described in Section 1.14(b) above (eligibility for participation in
and vesting under which shall be governed by Section 1.14(b) above), and
(iii) executive plans, programs and arrangements, eligibility for
participation in which is determined in the discretion of F&M and/or the
Corporation, after the Effective Date, employees of the Bank shall be
entitled to participate in F&M's employee benefit plans and programs on
substantially the same basis as similarly situated employees of F&M (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.) F&M agrees to treat service with the
Bank before the Effective Date as service with F&M for purposes of all such
employee benefit and seniority based plans and programs.
ARTICLE II
AFFILIATION
The following terms, provisions and conditions are in addition to those
contained in Articles I and III of this Agreement:
2.1. EFFECTIVE DATE. Subject to the terms and conditions contained in this
Agreement, as soon as practicable after the performance of all agreements and
obligations of the parties hereunder and upon fulfillment or waiver of all
conditions precedent contained herein, and, except as may be otherwise
determined by the Corporation, as of the last business day of a month, the
Corporation and Marine Holding will execute and deliver Articles of Merger in
such form(s) as in the opinion of counsel to the Corporation may be required by
Virginia and Maryland law (the "Articles"), and any other documents required by
law to effectuate the Holding Company Merger, and will file the Articles with
the Commission and with the State Department of Assessments and Taxation of the
State of Maryland. The effective date and time of the Holding Company Merger
(the "Effective Date") shall be the effective date and time set forth in the
Articles as filed with the Maryland State Department of Assessments and
Taxation and the Commission, but, in no event, shall such effective date and
time be
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prior to the effective date and time of the Certificate of Merger issued by the
Commission with respect to the Holding Company Merger. The effective date and
time of the Bank Merger shall be the effective date and time set forth in the
Certificate of Merger issued by the Commission pursuant to applicable
provisions of Virginia law. The Bank Merger shall be made effective as soon as
practicable after the Holding Company Merger becomes effective, as determined
by the Corporation.
2.2. CORPORATION'S AND F&M'S OBLIGATIONS IN ACCOMPLISHING THE AFFILIATION.
In order to effect the Affiliation as aforesaid, the Corporation and F&M, as
the case may be, to any extent required by law will (i) prepare and file with
the FRB, the FDIC and the Commission, applications requesting approval of the
Affiliation and the Bank Merger; (ii) cause the Corporation's Maryland banking
affiliates to file with the Maryland Commissioner, an application for approval
of the affiliation of such Maryland banking affiliates with Marine Holding and
the Bank, and; (iii) prepare and file any other necessary regulatory
applications and use their best efforts to obtain approval of all such
applications.
2.3. MARINE HOLDING'S AND THE BANK'S OBLIGATIONS IN ACCOMPLISHING THE
AFFILIATION. At such times as shall be requested by the Corporation, Marine
Holding and the Bank and their respective management and directors shall, (i)
cooperate with and assist the Corporation and F&M in the preparation and filing
with the Commission of an application requesting approval of the Corporation's
acquisition of Marine Holding and the Bank pursuant to Section 6.1-399 of the
Code of Virginia, or any successor statute thereto, and of the Bank Merger;
(ii) cause the publication of any newspaper notices required by law or by the
Commission with respect to the Affiliation; (iii) duly call and convene a
meeting of Marine Holding's stockholders to vote on the Affiliation and, in
connection therewith and subject to the fiduciary duties of the Board of
Directors of Marine Holding (as advised in writing by its counsel), but only as
such fiduciary duty is encompassed in, contemplated by, and within the scope of
Section 1.12, approve and recommend this Agreement, the Holding Company Plan of
Merger, and the Affiliation to Marine Holding's stockholders and use their best
efforts to obtain a favorable vote thereon; and (iv) cause Marine Holding to
approve the Bank Merger as the Bank's sole stockholder. In connection with the
submission of the Holding Company Plan of Merger to the stockholders of Marine
Holding pursuant to the Virginia Stock Corporation Act, Marine Holding agrees
that its Board of Directors will not take any action that would have the effect
of requiring that the Holding Company Plan of Merger be approved by more than
two-thirds of the votes entitled to be cast on the matter nor impose any
condition to its submission of the Holding Company Plan of Merger to the
stockholders of Marine Holding.
2.4. STOCKHOLDER APPROVAL. The Affiliation is subject to the additional
nonwaivable condition that this Agreement, the Holding Company Plan of Merger,
and the Affiliation shall have been approved by the stockholders of Marine
Holding by not less than two-thirds of the votes entitled to be cast on the
matter at a meeting of Marine Holding's stockholders duly called for that
purpose and duly constituted, at which a quorum is present and acting
throughout, subject, however, to the rights of the Corporation under Section
1.13(l) hereof.
2.5. EFFECT OF THE AFFILIATION. Upon the Effective Date, Marine Holding
shall be merged with and into the Corporation, and upon the effective date of
the Bank Merger, the Bank shall be merged into F&M in accordance with this
Agreement and the Plans of Merger and pursuant to the applicable provisions of
Chapter 9 of Title 13.1 of the Virginia Stock Corporation Act and, with respect
to the Holding Company Merger, the Maryland General Corporation Law, and with
the effect provided in said provisions. The Corporation shall be the successor
corporation in the Holding Company Merger (or, under Virginia law, the
"surviving" corporation); no amendments to its charter will be effected by the
Holding Company Merger. F&M shall be the surviving corporation in the Bank
Merger, no amendments to its charter will be effected by the Bank Merger.
2.6. TERMS OF THE AFFILIATION. On the Effective Date and immediately upon
the Holding Company Merger provided for in this Agreement becoming effective
with the effect set forth in Section 3-114 of the Maryland General Corporation
Law, or any successor statutory provisions thereto, and in consideration
thereof, the terms of the Holding Company Merger shall be as set forth in the
Holding Company Plan of Merger. The terms of the Bank Merger shall be as set
forth in the Bank Plan of Merger.
2.7. CONFIRMATORY DEEDS. When and as requested by the Corporation or F&M,
Marine Holding and the Bank shall execute and deliver or cause to be executed
and delivered, all such deeds and other instruments, and take or cause to be
taken all such further or other actions, as the Corporation or F&M may deem
necessary or desirable in order to vest or perfect in or confirm of record or
otherwise to F&M as survivor in the Bank Merger, or the Corporation, as
successor (and survivor) in the Holding Company Merger, title to and possession
of all real estate and other property of the Bank and of Marine Holding,
respectively, and otherwise to carry out the intent and purposes of this
Agreement and the Plans of Merger.
2.8 PROCEDURAL MATTERS. The Corporation, at its option, may revise the
sequence of events or other procedural matters relating to the accomplishment
of the Affiliation in such manner as it may reasonably determine will best
facilitate accomplishment of the Affiliation.
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ARTICLE III
MISCELLANEOUS
3.1. TERMINATION FOR REGULATORY REASONS. If, at any time, the Corporation
receives information from any regulatory authority, which by law is required to
approve the Affiliation or any other aspect of 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 and F&M 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 Marine Holding and 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 this Agreement and of
the Holding Company Plan of Merger by the stockholders of Marine Holding, this
Agreement may be terminated by mutual consent of the parties. Moreover, the
Corporation and F&M on the one hand, and Marine Holding and the Bank on the
other, shall be entitled to terminate this Agreement after May 31,1999, 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 in writing.
3.3 TERMINATION WITH RESPECT TO ACQUISITION PROPOSAL. This Agreement may
be terminated by the Corporation and F&M if the Directors of Marine Holding
recommend to its stockholders, or Marine Holding or the Bank accepts, an
Acquisition Proposal and may be terminated by Marine Holding and the Bank if,
in compliance with Section 1.10 hereof, Marine Holding's Directors recommend to
its stockholders, or Marine Holding or the Bank accept, an Acquisition
Proposal. In any such case, Marine Holding and the Bank shall pay the
Corporation a termination fee in the amount of $200,000 and shall also pay
their own expenses as provided in Section 3.5 below.
3.4. AMENDMENT. This Agreement may be amended, but only in writing
approved by Marine Holding, the Bank, the Corporation, and F&M, 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 Marine Holding have
approved the Holding Company Merger, no amendment shall be made that alters the
conversion rate set forth in Section 1.2 (except pursuant to Section 1.5(b)) or
that is otherwise prohibited by the Virginia Stock Corporation Act.
3.5. EXPENSES; LIMITED LIABILITY. Each party to this Agreement, being the
Corporation and F&M, on the one hand, and Marine Holding and the Bank, on the
other hand, shall pay its own expenses relating hereto, including fees and
disbursements of its respective counsel and of any investment or financial
advisor retained by it; provided, however, that, subject to the provisions of
the next sentence of this Section 3.5, in the event the transactions hereunder
are not consummated, other than pursuant to Section 3.3, the Corporation will
pay for the preparation of the regulatory filings referred to herein and for
the filing fees relating thereto, the printing and mailing of the Proxy
Statement, and all fees and disbursements of accountants (not including routine
auditing fees) for either of the parties hereto. The termination of this
Agreement in accordance with the terms of Sections 3.1, 3.2 or 3.3 shall create
no liability on the part of any party, except as set forth in Section 3.3, or
on the part of any party's directors, officers, stockholders, agents or
representatives; provided, however, that if this Agreement is terminated under
any of such provisions or otherwise by the Corporation and F&M by reason of a
material breach by Marine Holding or the Bank, or by Marine Holding or the Bank
by reason of a material breach by the Corporation or F&M, 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:
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If to the Corporation or F&M:
Mercantile Bankshares Corporation
Attention: Alan D. Yarbro, Esq.
General Counsel and Secretary
Two Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-237-5347
Copy to:
Venable, Baetjer and Howard, LLP
Attention: Lee M. Miller, Esq.
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-244-7742
If to Marine Holding or the Bank:
The Marine BanCorp, Inc.
P.O. Box 145
Chincoteague, Virginia 23336
Attention: Arthur C. Miles, Jr.
President and Chief Executive Officer
Fax No. 757-336-1579
or to such other address as shall hereafter be provided in writing by the
Corporation or the Marine Holding, respectively. Any notice or communication
given pursuant to this Agreement shall be deemed to have been given on the day
it is mailed or telecopied, as the case may be.
3.7. 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, F&M, Marine Holding 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 and permitted assigns, any rights or remedies under of or
by reason of this Agreement.
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 with
respect to the pertinent regulatory and merger requirements of the Commonwealth
of Virginia.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
MERCANTILE BANKSHARES CORPORATION
By: /s/ H. Furlong Baldwin (SEAL)
______________________
H. Furlong Baldwin
Chairman of the Board and Chief
Executive Officer
THE MARINE BANCORP, INC.
By: /s/ Arthur C. Miles, Jr. (SEAL)
________________________
Arthur C. Miles, Jr.
President and Chief Executive Officer
FARMERS & MERCHANTS BANK-EASTERN SHORE
By: /s/ H. B. Rew, Jr. (SEAL)
__________________
H. B. Rew, Jr.
President and Chief Executive Officer
THE MARINE BANK
By: /s/ Arthur C. Miles, Jr. (SEAL)
________________________
Arthur C. Miles, Jr.
President and Chief Executive Officer
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EXHIBIT A
PLAN OF MERGER
OF
THE MARINE BANCORP, INC.
WITH AND INTO
MERCANTILE BANKSHARES CORPORATION
1. THE PARTIES. The Marine BanCorp, Inc., a Virginia corporation and
federally registered bank holding company ("Marine"), shall merge (the
"Merger") with and into Mercantile Bankshares Corporation, a Maryland
corporation and federally registered bank holding company ("Mercantile")
(collectively, the "Constituent Corporations"). Mercantile shall be (and is
hereinafter called when reference is made to it after the consummation of the
Merger) the surviving corporation (the "Surviving Corporation").
2. EFFECTIVE DATE. The Merger shall be effective on [ , 1998
at , m.] (the "Effective Date").
3. CONVERSION AND EXCHANGE OF SHARES.
(a) Each share of the common stock of Mercantile issued and outstanding
immediately prior to the Effective Date shall remain issued and outstanding
after the Merger as one share of common stock of the Surviving Corporation,
without any action on the part of the holder thereof.
(b) Subject to Subparagraph 3(d) below, each share of the issued and
outstanding common stock of Marine (other than shares with respect to which
dissenters' rights are exercised pursuant to Subparagraph 3(c) hereof and
shares owned by Mercantile, or any direct or indirect subsidiary of
Mercantile, other than in a fiduciary capacity), for all corporate purposes
and without any further action on the part of the holders thereof, shall
automatically become and be converted into seventy-five hundredths (.75) of a
share of the common stock of the Surviving Corporation. All shares of the
common stock of Marine owned by Mercantile or any direct or indirect
subsidiary of Mercantile, other than in a fiduciary capacity, shall, by
virtue of the Merger be cancelled, and shall not be converted into common
stock of the Surviving Corporation. Certificates representing shares of
common stock of Marine which have been converted to shares of common stock of
the Surviving Corporation shall thereafter represent shares of the common
stock (and the right to cash for fractional shares) in the aforementioned
proportions. Such certificates may at any time after the Effective Date be
surrendered to The Bank of New York, acting as exchange agent, or such other
or additional exchange agent as Mercantile may select (the "Exchange Agent"),
and exchanged by the holders thereof for new certificates representing the
appropriate number of whole shares of common stock of the Surviving
Corporation determined by the above conversion formula and for cash in lieu
of any fractional shares as set forth in Subparagraph 3(d) below. No
dividends or other distributions shall be paid on any person's converted
shares until such person has been issued a new certificate in the name of the
Surviving Corporation. When the new certificates have been issued, the
holders thereof shall be entitled to and shall be paid, without interest, the
amount of all dividends or other distributions that have theretofore, but
after the Effective Date, become payable to holders of record after the
Effective Date with respect to the number of whole shares of common stock
represented by the certificate issued upon such surrender or exchange.
(c) The holder of any shares of common stock of Marine with respect to
which the holder exercises dissenters' rights consistently with the
requirements of Article 15 of Chapter 9 of Title 13.1 of the Code of
Virginia, 1950, as amended (the "Virginia Stock Corporation Act"), shall be
entitled to receive from the Surviving Corporation, in cash, the fair value
of his shares of the common stock of Marine, determined in accordance with
the provisions of Article 15 of the Virginia Stock Corporation Act, or any
successor statute thereto, plus interest as provided therein.
(d) In order to save the expense and inconvenience of issuing and
transferring fractional shares, no fractional shares of the Surviving
Corporation's common stock, or certificates therefore, will be issued, but,
in lieu thereof, and solely as a mechanism for rounding shareholdings to
whole shares, the Surviving Corporation will pay cash for such fractional
shares on the basis of the closing price for Mercantile's common stock (as
reported by 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 Marine 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.
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4. ARTICLES OF INCORPORATION AND BYLAWS. On the Effective Date, the
Articles of Incorporation and Bylaws of Mercantile in effect immediately
prior to the Effective Date shall be the Articles of Incorporation and
Bylaws of the Surviving Corporation until amended, supplemented, or
restated in accordance with applicable law.
5. BOARD OF DIRECTORS; OFFICERS. The directors and officers of Mercantile
who hold office immediately prior to the Effective Date shall thereafter be
the directors and officers of the Surviving Corporation until their
successors be elected and qualify.
6. FURTHER ASSURANCES. If at any time the Surviving Corporation shall
consider or be advised that any further assignments, conveyances or
assurances are necessary or desirable to vest, perfect or confirm the
Surviving Corporation with title to any property or rights of the
Constituent Corporations, or otherwise carry out the provisions hereof, the
proper officers and Directors of Marine or Mercantile, as the case may be,
before the Effective Date and thereafter the officers of the Surviving
Corporation acting on behalf of Marine or Mercantile, as the case may be,
shall execute and deliver any and all proper assignments, conveyances and
assurances, and do all things necessary or desirable to vest, perfect or
confirm the Surviving Corporation with title to such property or rights and
otherwise carry out the provisions hereof.
7. MODIFICATION AND AMENDMENT. Any of the terms and provisions of this
Plan of Merger may be amended at any time prior to the issuance of a
Certificate of Merger by the Virginia State Corporation Commission, by a
writing executed by the Constituent Corporations; PROVIDED, HOWEVER, that
after the stockholders of Marine have approved the Plan of Merger, no
amendment in this Plan of Merger shall be made that alters the conversion
rate or kind of shares to be received as set forth in Paragraph 3 (except
pursuant to the anti-dilution provisions contained in Section 1.5(b) of
that certain Agreement and Plan of Affiliation and Merger among the
Constituent Corporations, Farmers & Merchants Bank-Eastern Shore, and The
Marine Bank dated June 9, 1998, a copy of which has been provided to each
shareholder together herewith, which provision is incorporated herein by
reference) or that is otherwise prohibited by the Virginia Stock
Corporation Act.
8. TERMINATION AND ABANDONMENT. This Plan of Merger may be terminated and
the Merger abandoned at any time prior to the Effective Date by the mutual
consent in writing of the Constituent Corporations or otherwise in
accordance with the Agreement and Plan of Affiliation and Merger referred
to above.
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EXHIBIT B
PLAN OF MERGER
OF
FARMERS AND MERCHANTS BANK-EASTERN SHORE
AND
THE MARINE BANK
1. THE PARTIES. The Marine Bank, a Virginia corporation authorized to
engage in the banking business ("Marine"), shall merge with and into Farmers &
Merchants Bank-Eastern Shore, a Virginia corporation authorized to engage in
the banking business. Farmers and Merchants Bank-Eastern Shore shall be the
surviving corporation. The merger shall become effective, with the effect
provided in the Virginia Stock Corporation Act, at the date and time when a
Certificate of Merger issued by the Virginia State Corporation Commission
becomes effective (the "Effective Date"). (Farmers and Merchants Bank-Eastern
Shore is hereinafter referred to as "F &M Bank" prior to the Effective Date and
as the "Surviving Bank" following the Effective Date of the merger.)
2. ARTICLES OF INCORPORATION; BYLAWS; OFFICES, DIRECTORS, AND OFFICERS. On
the Effective Date, the Articles of Incorporation of F&M Bank then in effect
shall become the Articles of Incorporation of the Surviving Bank and the Bylaws
of F&M Bank then in effect shall become the Bylaws of the Surviving Bank; the
main office of F&M Bank shall become the main office of the Surviving Bank and
its branches shall become branches of the Surviving Bank; the main office of
Marine and its current branch office and any other branch offices opened prior
to the Effective Date shall become branch offices of the Surviving Bank; and
the directors of F&M Bank immediately prior to the Effective Date shall become
the directors of the Surviving Bank, until their successors are elected and
qualified.
3. CONVERSION AND EXCHANGE OF SHARES.
(a) The manner of converting and exchanging the shares of the
corporations which are parties to the merger shall be as follows:
(i) Each share of issued and outstanding capital stock of Marine,
consisting of a single class of common stock, par value $5.00 per share,
shall be cancelled; and
(ii) Each outstanding share of capital stock of F&M Bank, par value
$5.00, on the Effective Date, shall remain outstanding as one (1) share of
capital stock of the Surviving Bank, par value $5.00 per share, such that
the authorized capital of the Surviving Bank shall consist of 1,200,000
shares of capital stock, par value $5.00 per share, and the outstanding
capitalization of the Surviving Bank shall consist of 720,000 shares of
capital stock, $5.00 par value, for a total stated capitalization of
$3,600,000.
4. Effect of Merger. The effect of the merger provided for herein is that
the assets and liabilities of Marine will be transferred to the Surviving Bank,
which will continue to be a wholly owned subsidiary of Mercantile Bankshares
Corporation, a Maryland corporation (the "Mercantile"). Marine will cease to
exist as a separate corporate entity.
5. Termination and Abandonment. The consummation of the merger provided for
herein is subject to the terms and conditions of, and may be terminated and the
merger abandoned as provided for in, the Agreement and Plan of Affiliation and
Merger among Mercantile, F&M Bank, The Marine BanCorp, Inc., a Virginia
corporation and Marine's sole stockholder, and Marine dated June 9, 1998.
6. Modification and Amendment. Any of the terms and provisions of this Plan
of Merger may be amended at any time prior to the issuance of a Certificate of
Merger by the Virginia State Corporation Commission, by a writing executed by
the parties hereto, subject to the restrictions of the Virginia Stock
Corporation Act.
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ANNEX B
ARTICLE 15
DISSENTERS' RIGHTS.
ss. 13.1-729. DEFINITIONS. -- In this article:
"CORPORATION" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"DISSENTER" means a shareholder who is entitled to dissent from corporate
action under ss.13.1-730 and who exercises that right when and in the manner
required by ss. 13.1-732 through 13.1-739.
"FAIR VALUE," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"INTEREST" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"RECORD SHAREHOLDER" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"BENEFICIAL SHAREHOLDER" means the person who is a beneficial owner of
share held by a nominee as the record shareholder.
"SHAREHOLDER" means the record shareholder or the beneficial shareholder.
ss. 13.1-730. RIGHT TO DISSENT. -- A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by ss. 13.1-718 or
the articles of incorporation and the shareholder is entitled to vote on
the merger or (ii) if the corporation is a subsidiary that is merged with
its parent under ss. 13.1-719;
2. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
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2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other corporation
or limited liability company which, at the record date fixed to determine
the shareholders entitled to receive notice of and to vote at the meeting
at which the plan of merger or share exchange is to be acted on, were
either listed subject to notice of issuance on a national securities
exchange or held of record by at least 2,000 record shareholders or
members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction and is
not approved by a majority of "disinterested directors" as such terms are
defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
ss. 13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholders' written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
ss. 13.1-732. NOTICE OF DISSENTERS' RIGHTS. -- A. If proposed corporate
action creating dissenters' rights under ss.13.1-730 is submitted to a vote at a
shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under ss. 13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in writing
all record shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in ss. 13.1-734.
ss. 13.1-733. NOTICE OF INTENT TO DEMAND PAYMENT. -- A. If proposed
corporate action creating dissenters' rights under ss. 13.1-730 is submitted to
a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights (i) shall deliver to the corporation before the vote is
taken written notice of his intent to demand payment for his shares if the
proposed action is effectuated and (ii) shall not vote such shares in favor of
the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
ss. 13.1-734. DISSENTERS' NOTICE. -- A. If proposed corporate action
creating dissenters' rights under ss. 13.1-730 is authorized at a shareholders'
meeting, the corporation, during the ten-day period after the effectuation of
such corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of ss. 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
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2. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before
or after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
ss. 13.1-735. DUTY TO DEMAND PAYMENT. -- A. A shareholder sent a
dissenters' notice described in ss. 13.1-734 shall demand payment, certify that
he acquired beneficial ownership of the shares before or after the date
required to be set forth in the dissenters' notice pursuant to subdivision 3 of
subsection B of ss. 13.1-734, and, in the case of certificated shares, deposit
his certificates in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent
that these rights are canceled or modified by the taking of the proposed
corporate action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
ss. 13.1-736. SHARE RESTRICTIONS. -- A. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss. 13.1-737. PAYMENT. -- A. Except as provided in ss. 13.1-738, within
thirty days after receipt of a payment demand made pursuant to ss. 13.1-735,
the corporation shall pay the dissenter the amount the corporation estimates to
be the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in
the city or county where the corporation's principal office is located, or, if
none in this Commonwealth, where its registered office is located or (ii) at
the election of any dissenter residing or having its principal office in the
Commonwealth, by the circuit court in the city or county where the dissenter
resides or has its principal office. The court shall dispose of the complaint
on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the
shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under ss.
13.1-739; and
4. A copy of this article.
ss. 13.1-738. AFTER-ACQUIRED SHARES. -- A. A corporation may elect to
withhold payment required by ss. 13.1-737 from a dissenter unless he was the
beneficial owner of the shares on the date of the first publication by news
media or the first announcement to shareholders generally, whichever is
earlier, of the terms of the proposed corporate action, as set forth in the
dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss. 13.1-739.
ss. 13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
- -- A. A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
his estimate (less any payment under ss. 13.1-737), or reject the corporation's
offer under ss. 13.1-738 and demand payment of the
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fair value of his shares and interest due, if the dissenter believes that the
amount paid under ss. 13.1-737 or offered under ss.13.1-738 is less than the
fair value of his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered
payment for his shares.
ss. 13.1-740. COURT ACTION. -- A. If a demand for payment under
ss.13.1-739 remains unsettled, the corporation shall commence a proceeding
within sixty days after receiving the payment demand and petition the circuit
court in the city or county described in subsection B of this section to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under ss. 13.1-738.
ss. 13.1-741. COURT COSTS AND COUNSEL FEES. -- A. The court in an
appraisal proceeding commenced under ss. 13.1-740 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under ss.
13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed did not act in good faith with respect to the rights provided
by this article.
C. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A of ss. 13.1-737 the court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
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