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October 6, 2000
Proxy Statement of Prospectus of
The Bank of Fruitland Mercantile Bankshares Corporation
relating to relating to 1,100,000
special meeting of stockholders shares of common stock
To: The Stockholders of The Bank of Fruitland
The Bank of Fruitland's board of directors has unanimously approved a merger
agreement between The Bank of Fruitland, Peninsula Bank and Mercantile
Bankshares Corporation. Your vote is needed to adopt the merger agreement.
In the merger each of your shares of Fruitland common stock will be
exchanged for 2.5 shares of Mercantile common stock. Mercantile common stock
is traded on the Nasdaq National Market under the trading symbol "MRBK." In
general, the conversion of your Fruitland shares into shares of Mercantile
common stock will not be taxable. In the merger, Fruitland will merge into
Peninsula Bank, which is a bank wholly owned by Mercantile.
The merger cannot be completed unless it is approved by the holders of at
least two-thirds of the outstanding shares of Fruitland common stock. Only
stockholders who hold their shares of Fruitland common stock of record on the
close of business on October 6, 2000 will be entitled to vote at the special
meeting.
The board of directors of Fruitland is soliciting your proxy for the special
meeting of stockholders to approve the merger. After careful consideration,
your board of directors has unanimously determined the merger to be in the
best interest of Fruitland's stockholders and declared the merger advisable.
Fruitland's board strongly encourages you to vote "for" the merger.
This prospectus and proxy statement provides you with detailed information
concerning Fruitland, Mercantile and the merger. Please give the prospectus
and proxy statement your careful attention.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under
this prospectus and proxy statement or determined that this prospectus and
proxy statement is truthful and complete. Any representation to the contrary
is a criminal offense.
The date of this prospectus and proxy statement is October 6, 2000. This
prospectus and proxy statement is being mailed on or about this date.
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This prospectus and proxy statement incorporates important business and
financial information about Mercantile that is not included in or delivered
with this document. This information is available without charge to you upon
your written or oral request. You may obtain documents incorporated by
reference in this prospectus and proxy statement by requesting them in writing
or by telephone from Mercantile at the following address and phone number:
Mercantile Bankshares Corporation, Mercantile Bank & Trust Building, Two
Hopkins Plaza, P. O. Box 1477, Baltimore, Maryland 21203, Attention: Secretary
(410) 237-5900.
If you would like to request documents, please do so by November 2, 2000 in
order to receive them before the special meeting.
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The Bank of Fruitland
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Notice of Special Meeting of Stockholders
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A special meeting of stockholders of The Bank of Fruitland will be held at
Fruitland's main office located at 109 East Main Street, Fruitland, Maryland
21826, on November 9, 2000 at 3:00 p.m. for the following purposes:
1. To consider and approve the merger of The Bank of Fruitland into
Peninsula Bank and the Agreement and Plan of Affiliation and Merger dated
June 1, 2000, including the Agreement of Merger attached as an exhibit, a
copy of which is attached as Annex A to the accompanying prospectus and
proxy statement, under which each share of common stock of Fruitland, other
than shares held by Fruitland's stockholders who properly perfect their
dissenters' rights, automatically will convert into 2.5 shares of common
stock of Mercantile, except that 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 of the special
meeting.
Fruitland's stockholders may, if the merger is approved and consummated,
assert dissenters' rights under Title 3, Subtitle 7 of Part II of the Maryland
Financial Institutions Article. Objecting stockholders will be entitled to
payment of the fair value of only those shares of stock that are voted against
approval of the agreement. Exercise of these rights requires strict compliance
with the procedures set forth in the applicable statute. A copy of the
relevant provisions of the Financial Institutions Article and the Maryland
General Corporation Law is included as Annex C to the accompanying prospectus
and proxy statement.
The board of directors has fixed October 6, 2000, as the record date for the
special meeting and only holders of record of Fruitland common stock at the
close of business on that date are entitled to receive notice of and to vote
at the special meeting or at any adjournments or postponements of the special
meeting.
By Order of the board of directors
Henry E. Tilman, Jr.
President and Chief Executive
Officer
October 6, 2000
Please mark, sign, date and return your proxy promptly, whether or not you
plan to attend the special meeting.
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Table of Contents
<TABLE>
<S> <C>
Summary................................................................... 1
The companies........................................................... 1
The merger.............................................................. 1
Federal income tax consequences......................................... 2
Comparison of stockholder rights........................................ 2
Share price data........................................................ 2
Summary Historical Financial Data......................................... 4
Comparative Unaudited Per Share Data...................................... 5
The Bank of Fruitland Special Meeting..................................... 6
Date, place and time.................................................... 6
Purpose of the Fruitland special meeting................................ 6
Record date............................................................. 6
Voting information...................................................... 6
Solicitation of proxies................................................. 7
The Merger................................................................ 8
General................................................................. 8
Background of the merger................................................ 8
Recommendation of the Fruitland board of directors and reasons for the
merger................................................................. 8
Opinion of Fruitland's financial adviser................................ 9
Effective date.......................................................... 14
Procedures for exchange of certificates................................. 14
Certain federal income tax consequences................................. 15
Accounting treatment.................................................... 16
Resale of Mercantile common stock after the merger by controlling
persons................................................................ 16
Conditions to the merger................................................ 16
Treatment of employee benefit plans..................................... 16
Exclusive dealing....................................................... 17
Termination............................................................. 17
Rights of dissenting stockholders....................................... 18
Certain Other Agreements.................................................. 20
The support agreement................................................... 20
Affiliate undertakings.................................................. 20
Supplemental agreements................................................. 20
Comparison of Stockholder Rights of Holders of Mercantile Common Stock and
Fruitland Common Stock................................................... 21
Description of Mercantile Capital Stock................................... 23
Description of The Bank of Fruitland...................................... 24
Selected Financial Information............................................ 29
Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................ 30
Legal Matters............................................................. 42
Experts................................................................... 42
Forward Looking Statements................................................ 42
Where You Can Find More Information....................................... 42
Index to Financial Statements............................................. F-1
Annex A--Agreement and Plan of Affiliation and Merger..................... A-1
Annex B--Fairness Opinion of Feldman Financial Advisors, Inc. ............ B-1
Annex C--Dissenters' Rights Statutory Provisions.......................... C-1
</TABLE>
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Summary
This summary highlights selected information from this prospectus and proxy
statement. This summary may not contain all of the information that is
important to you. You should carefully read this entire prospectus and proxy
statement and the other documents to which we refer for a more complete
understanding of the merger. We also incorporate by reference important
business and financial information about Mercantile. See "Where You Can Find
More Information" on Page 42 on how to obtain copies of these documents.
The companies
Mercantile Bankshares Corporation (Page 42)
Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 237-5900
Mercantile is a Maryland corporation registered as a multi-bank holding
company. Its principal operations are conducted by 17 affiliated banks in
Maryland, three banks in Virginia and one bank in Delaware, all of which are
wholly-owned by Mercantile, and a wholly-owned mortgage banking company. At
June 30, 2000, Mercantile, including these affiliates, had total assets of
approximately $8.2 billion, deposits of approximately $6.1 billion, and loans
of approximately $6.1 billion.
Peninsula Bank is a wholly owned bank of Mercantile that operates 23 banking
offices in Maryland. At June 30, 2000, Peninsula Bank had total assets of
approximately $529.0 million, deposits of approximately $443.4 million, and
loans of approximately $389.2 million.
The Bank of Fruitland (Page 24)
109 East Main Street
Fruitland, Maryland 21826
(410) 749-1222
The Bank of Fruitland is a Maryland commercial bank that operates seven
banking offices. At June 30, 2000, The Bank of Fruitland had total assets of
approximately $139.7 million, deposits of approximately $118.8 million, and
loans, excluding loans held for sale, of approximately $112.0 million.
The merger (Page 8)
General. In the merger, The Bank of Fruitland will merge into Peninsula Bank.
Upon closing of the merger, you will receive 2.5 shares of Mercantile common
stock for each share of Fruitland common stock you own, plus cash instead of
fractional shares. The ratio of one Fruitland share for 2.5 Mercantile shares
is the exchange ratio. You should read the agreement and plan of affiliation
and merger attached as Annex A to this prospectus and proxy statement.
Two-thirds stockholder vote required (Page 6). Approval of the merger
requires the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Fruitland common stock. Directors and the chief executive
officer of Fruitland owning an aggregate of 169,108 shares, constituting
approximately 38.4% of the Fruitland common stock, have agreed to vote their
shares to approve the merger. Your failure to vote would have the effect of a
vote against the merger. The merger does not require the vote of Mercantile
stockholders.
Fruitland board unanimously recommends stockholder approval (Page
8). Fruitland's board of directors believes that the merger is in the best
interests of Fruitland and Fruitland's stockholders and unanimously recommends
that you vote for the merger.
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Exchange ratio is fair to Fruitland's stockholders according to Fruitland's
financial adviser (Page 9). Fruitland's board has received the opinion of its
financial adviser, Feldman Financial Advisors, Inc., that the exchange ratio is
fair to Fruitland's stockholders from a financial point of view. Its opinion is
attached as Annex B to this prospectus and proxy statement.
Conditions to merger (Page 16). The mutual obligation of Mercantile and
Fruitland to complete the merger is subject to the requisite approval of the
merger by Fruitland's stockholders. Additionally, the obligation of Mercantile
to complete the merger is subject to various conditions, including the receipt
of all appropriate regulatory approvals and that holders of not more than 20%
of the outstanding shares of Fruitland common stock shall have exercised
statutory dissenters' rights.
Regulatory approvals we must obtain for the merger to occur (Page 16). We
cannot complete the merger without the consent of the Federal Deposit Insurance
Corporation, the Virginia State Corporation Commission and the Maryland
Commissioner of Financial Regulation. We have made filings and notifications
for these purposes.
Accounting treatment (Page 16). Mercantile will account for the merger as a
purchase.
Dissenters' rights (Page 18). Maryland law permits holders of Fruitland
common stock to dissent from the merger and to have the fair value of their
Fruitland common stock appraised and paid to them in cash. To do this, holders
of these shares must follow required procedures, including voting against the
merger and making a written demand on Peninsula Bank for payment. If you hold
shares of Fruitland common stock and you dissent from the merger and follow the
required procedures, your shares of Fruitland common stock will not become
shares of Mercantile common stock. Instead, your only right will be to receive
the appraised value of your shares in cash. We have attached the applicable
provisions of Maryland law related to dissenters' rights as Annex C to this
prospectus and proxy statement.
No federal income tax on shares received in merger (Page 15)
We expect that the merger will qualify as a tax-free reorganization for
federal income tax purposes. Therefore, we expect that for federal income tax
purposes, you generally will not recognize any gain or loss on the conversion
of your shares of Fruitland common stock into shares of Mercantile common
stock. You will recognize gain or loss depending on your circumstances for any
cash you receive instead of fractional shares of Mercantile common stock or
cash you receive if you properly exercise dissenters' rights. Tax matters are
complicated and the tax consequences of the merger may vary among stockholders.
We urge you to contact your own tax adviser to understand how the merger will
affect you.
Comparison of stockholder rights (Page 21)
Upon completion of the merger, Fruitland's stockholders will become
stockholders of Mercantile, and their rights as stockholders of Mercantile will
be governed by the Maryland General Corporation Law, Mercantile's charter and
Mercantile's bylaws. The rights of Fruitland's stockholders differ from those
of the holders of Mercantile common stock in a number of areas.
Share price data
Mercantile common stock is publicly traded and quoted on The Nasdaq National
Market under the Symbol "MRBK." Fruitland common stock is not traded on any
exchange, and no established trading market exists for its common stock.
The closing price of shares of Mercantile common stock on June 1, 2000, the
last full trading day before the public announcement of the proposed merger,
was $34.125. The closing price of shares of Mercantile
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common stock on October 3, 2000, the latest practicable date prior to the date
of this prospectus and proxy statement, was $36.63.
Because the market price of Mercantile common stock can fluctuate, the market
value of the Mercantile common stock that Fruitland's stockholders will receive
in the merger may increase or decrease before the effective date of the merger.
Fruitland's stockholders are urged to obtain current market quotations for
Mercantile common stock.
3
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Summary Historical Financial Data
The following table presents selected historical financial data of Mercantile
and Fruitland. Mercantile's historical financial data for each of the annual
periods presented have been derived from its audited consolidated financial
statements previously filed with the Securities and Exchange Commission.
Mercantile's historical financial data for the six months ended June 30, 2000
and 1999 have been derived from its quarterly reports on Form 10-Q previously
filed with the Commission. Fruitland's selected historical financial data for
each of the annual periods presented have been derived from its consolidated
audited financial statements. Fruitland's historical financial data for the six
months ended June 30, 2000 and 1999 have been derived from Fruitland's
unaudited financial statements. In the opinions of the respective managements
of Mercantile and Fruitland, the data for interim periods include all normal
recurring adjustments necessary for a fair presentation of results for those
periods. Operating results for the six months ended June 30, 2000 for each
company are not necessarily indicative of the results that may be obtained for
the entire year ended December 31, 2000.
The summary historical financial data set forth below does not purport to be
complete. With respect to Mercantile, further information is presented in the
financial statements incorporated by reference in this prospectus and proxy
statement. See "Where You Can Find More Information" on Page 42. Fruitland's
audited financial statements for the three years ended December 31, 1999 and
its unaudited financial statements for each of the interim periods presented
are included elsewhere in this prospectus and proxy statement.
<TABLE>
<CAPTION>
As of or for the
six months ended
June 30, As of or for the year ended December 31,
--------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Mercantile Bankshares
Corporation
Net Interest Income..... $ 197,114 $ 179,742 $ 369,086 $ 353,365 $ 336,049 $ 310,581 $ 286,788
Provision for Loan
Losses................. 8,429 3,043 12,056 11,489 13,703 14,666 7,988
Other Operating Income.. 61,158 57,674 121,991 108,693 98,653 89,428 80,906
Income before Income
Taxes.................. 131,566 120,326 248,601 231,564 207,595 186,928 166,009
Net Income.............. 84,122 76,090 157,737 147,128 132,043 117,400 104,432
Cash Dividends Declared
and Paid on
Common Stock........... 33,973 32,041 65,133 61,538 55,277 46,579 41,013
Basic Net Income Per
Share of Common Stock.. 1.23 1.09 2.27 2.05 1.85 1.64 1.46
Diluted Net Income Per
Share of Common Stock.. 1.22 1.08 2.25 2.04 1.84 1.64 1.46
Per Share Cash Dividends
Declared and Paid on
Common Stock........... 0.50 0.46 0.94 0.86 0.77 0.65 0.57
Total Assets............ 8,238,956 7,614,970 7,895,024 7,609,563 7,170,669 6,642,681 6,349,103
Loans................... 6,120,111 5,363,310 5,718,942 5,220,890 4,978,522 4,582,712 4,301,270
Long-Term Debt.......... 82,547 90,885 82,683 40,934 50,016 49,395 25,623
The Bank of Fruitland
Net Interest Income..... $ 3,157 $ 3,056 $ 6,258 $ 5,628 $ 5,149 $ 4,564 $ 4,461
Provision for Loan
Losses................. 150 90 490 108 96 91 90
Other Operating Income.. 822 943 1,219 862 532 413 414
Income before Income
Taxes.................. 1,233 1,526 2,276 2,426 2,247 2,153 2,134
Net Income.............. 778 939 1,436 1,523 1,419 1,369 1,359
Cash Dividends Declared
and Paid on Common
Stock.................. 321 385 704 675 650 403 210
Basic Net Income Per
Share of Common Stock.. 1.77 2.13 3.26 3.46 3.23 3.11 3.09
Diluted Net Income Per
Share of Common Stock.. 1.77 2.13 3.26 3.46 3.23 3.11 3.09
Per Share Cash Dividends
Declared and Paid on
Common Stock(1)........ 0.73 0.88 1.60 1.53 1.48 0.91 0.48
Total Assets............ 139,685 138,609 145,251 129,859 117,786 104,670 102,320
Loans................... 113,207 104,267 111,566 102,558 89,370 83,264 74,975
Long-Term Debt.......... 6,000 -- 8,000 -- -- -- --
</TABLE>
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(1) Fruitland's per share data for 1995 through 2000 have been adjusted to give
retroactive effect to the 100% stock dividend in 1998, the 10% stock
dividend in 1998, the 100% stock dividend in 1999, and the 100% stock
dividend in 2000.
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Comparative Unaudited Per Share Data
The following unaudited consolidated financial information reflects certain
comparative per share data relating to the merger. You should read this
information together with Mercantile's historical financial statements
contained in Mercantile's filings with the Securities and Exchange Commission
and Fruitland's historical financial statements contained elsewhere in this
prospectus and proxy statement. See "Where You Can Find More Information" on
Page 42.
The following information is not necessarily indicative of the results of
operations or combined financial position that would have resulted had the
merger occurred at the beginning of the periods indicated, nor is it
necessarily indicative of results of operations in future periods.
The table below presents selected comparative consolidated unaudited per
share information:
. for Mercantile on a historical basis and on a pro forma combined basis
assuming the merger had been effective during the period presented and
accounted for as a purchase; and
. for Fruitland on a historical basis and a pro forma equivalent basis.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
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<S> <C> <C>
Per Common Share:
Basic Net Income:
Fruitland--historical........................ $1.77 $3.26
Fruitland pro forma equivalent(1)............ 3.05 5.65
Mercantile--historical....................... 1.23 2.27
Mercantile pro forma combined(2)............. 1.22 2.26
Diluted Net Income:
Fruitland--historical........................ 1.77 3.26
Fruitland--pro forma equivalent(1)........... 3.03 5.60
Mercantile--historical....................... 1.22 2.25
Mercantile--pro forma combined(2)............ 1.21 2.24
Cash Dividends Declared:
Fruitland--historical........................ 0.73 1.60
Fruitland pro forma equivalent(1)............ 1.25 2.35
Mercantile--historical....................... 0.50 0.94
Mercantile pro forma combined(3)............. 0.50 0.94
Book Value:
Fruitland--historical........................ 32.43 31.39
Fruitland pro forma equivalent(1)............ 37.95 36.30
Mercantile--historical....................... 14.85 14.19
Mercantile pro forma combined(4)............. 15.18 14.52
</TABLE>
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(1) Fruitland pro forma equivalent amounts represent Mercantile's pro forma
combined information multiplied by the exchange ratio of 2.5 shares of
Mercantile common stock for each share of Fruitland common stock.
(2) Pro forma combined basic and diluted income per share represents historical
basic and diluted net income per share of Mercantile adjusted for the
impact of the purchase of Fruitland.
(3) Pro forma combined dividends per share represent historical dividends per
share paid by Mercantile. At the current quarterly rate, the annual
dividends would be $1.04 per share.
(4) Pro forma combined book value per share represents historical book value
per share of Mercantile adjusted for the impact of the purchase of
Fruitland.
5
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The Bank of Fruitland Special Meeting
Date, place and time
The special meeting will be held at Fruitland's main office located at 109
East Main Street, Fruitland, Maryland 21826 on November 9, 2000, at 3:00 p.m.
Purpose of the Fruitland special meeting
At the Fruitland special meeting, Fruitland's stockholders will consider and
vote upon the proposal to approve the merger of Fruitland into Peninsula Bank
and the merger agreement under which each share of Fruitland common stock,
other than shares held by Fruitland's stockholders who properly perfect their
dissenters' rights, automatically shall become and be converted into 2.5
shares of Mercantile common stock and cash in lieu of fractional shares of
Mercantile common stock.
Record date
Fruitland's board of directors has fixed the close of business on October 6,
2000 as the record date for determining holders entitled to notice of and to
vote at the special meeting. Accordingly, only holders of record of Fruitland
common stock at the close of business on the record date will be entitled to
notice of, and to cast their vote at, the special meeting. As of October 6,
2000, there were 440,000 shares of Fruitland common stock issued and
outstanding held by approximately 90 holders of record.
Voting information
Each holder of record of shares of Fruitland common stock on the 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 Fruitland special
meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the shares of Fruitland common stock outstanding on the record
date is necessary to constitute a quorum at the special meeting.
The approval of the merger requires the affirmative vote of the holders of
at least two-thirds of the outstanding shares of Fruitland common stock
entitled to vote on the merger.
As of June 2, 2000, the directors and the chief executive officer of
Fruitland owning an aggregate of 169,108 shares, or approximately 38.4%, of
Fruitland's common stock had executed agreements with Mercantile agreeing to
vote their shares of Fruitland common stock to approve the merger. See
"Certain Other Agreements--The support agreement."
All shares of Fruitland common stock represented by properly executed
proxies will, unless these proxies have been previously revoked, be voted in
accordance with the instructions indicated in these proxies. If no
instructions are indicated, these shares of Fruitland common stock will be
voted to approve the merger. Fruitland does not know of any matters other than
as described in the notice of the special meeting that are to come before the
special meeting. If any other matter or matters are properly presented for
action at the special meeting, the persons named in the enclosed form of proxy
and acting thereunder will have the discretion to vote on all matters in
accordance with their best judgment, unless this authorization is withheld.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise by:
. Giving written notice of revocation on or prior to the date of the
special meeting to the corporate secretary of Fruitland;
. Signing and returning a later dated proxy; or
. Voting in person at the special meeting--mere attendance at the special
meeting will not in and of itself have the effect of revoking the proxy.
6
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Votes cast by proxy or in person at the special meeting will be tabulated to
determine whether or not a quorum is present. Where, as to any matter
submitted to Fruitland's stockholders for a vote, proxies are marked as
abstentions, or Fruitland's stockholders appear in person but abstain from
voting, these abstentions will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. If a
broker indicates on the proxy that it does not have discretionary authority as
to certain shares to vote on a particular matter, those shares are also
treated as shares that are present and entitled to vote for quorum purposes.
Because the required vote of Fruitland's stockholders on the merger is based
upon the total number of outstanding shares of Fruitland common stock, the
failure to submit a proxy card, or the failure to vote in person at the
special meeting if a proxy card is not submitted, the abstention from voting
and any broker non-vote would have the same effect as a vote against the
merger.
Solicitation of proxies
Proxies are being solicited by and on behalf of the Fruitland board of
directors, and Fruitland will bear the costs of its solicitation of proxies.
Solicitations may be made by mail, telephone, or personally by directors,
officers and employees of Fruitland, none of whom will receive additional
compensation for performing these services. In addition, Fruitland will make
arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse
these parties for their expenses. Mercantile will pay all the expenses of
printing and mailing the prospectus and proxy statement.
7
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The Merger
The following is a description of the terms of the merger. This description
does not purport to be complete and is qualified by reference to the merger
agreement, which is attached to this prospectus and proxy statement as Annex A
and which is incorporated into this description by reference.
General
The merger agreement provides that, subject to the satisfaction or waiver of
the conditions set forth in the agreement, Fruitland will become affiliated
with Mercantile by Fruitland's merger into Peninsula Bank. The separate
existence of Fruitland will cease and Peninsula Bank will be the surviving
corporation. Each share of Fruitland common stock, other than shares held by
Fruitland's stockholders who properly perfect their dissenters' rights,
automatically will become and be converted into 2.5 shares of Mercantile
common stock and the right to receive cash payment for fractional shares held.
Certificates for Fruitland common stock shall be exchanged for certificates of
Mercantile common stock as described below.
Fruitland's stockholders will own less than one percent of the outstanding
Mercantile common stock following the merger, and the percentage of total
assets and the percentage of total liabilities represented by Fruitland in
Mercantile will each be approximately 1.7 percent.
Fruitland's board of directors has concluded that the terms of the merger
and the merger agreement are advisable and are fair to, and in the best
interests of, Fruitland and Fruitland's stockholders. After the merger, the
former stockholders of Fruitland who become holders of Mercantile common stock
will be stockholders in a larger entity with its common stock traded on The
Nasdaq National Market. Each Fruitland stockholder who becomes a holder of
Mercantile common stock will possess the same rights as other holders of
Mercantile common stock, and former Fruitland stockholders as a group will no
longer be taking action at the Fruitland corporate level. See "Comparison of
Stockholder Rights of Holders of Mercantile Common Stock and Fruitland Common
Stock" and "Description of Mercantile Capital Stock."
Background of the merger
From time to time the board of directors of Fruitland has considered whether
it would be in the best interest of the Fruitland stockholders for the bank to
remain independent or to be acquired by or affiliate with an outside entity.
Fruitland had informally discussed the possibility of affiliation with
Mercantile for many years. Fruitland also had similar informal discussions
with other institutions.
In mid April, 2000, John B. Long, II, chairman of the board of directors of
Fruitland, contacted H. Furlong Baldwin, chairman and chief executive officer
of Mercantile, to renew discussions with Mercantile. Mr. Long and Mr. Baldwin
met at the end of April and reviewed the possibility of an affiliation in
detail, and Mr. Baldwin suggested the proposal for merger of Fruitland into
Peninsula Bank, with a fixed exchange ratio under which the Fruitland
stockholders would receive 2.5 shares of Mercantile common stock for each
outstanding share of Fruitland stock. This proposal was the subject of further
deliberation at regular and special meetings of the Fruitland board.
In May, 2000, Mercantile provided Fruitland with definitive agreement
drafts. The parties and their representatives, including Fruitland's
independent financial advisor, Feldman Financial Advisors, Inc., fully
discussed and negotiated these documents during May, and they submitted the
agreements in final form to the boards of directors of the respective parties.
The board of directors of Fruitland met on June 1, 2000, and Fruitland's board
reviewed the terms of the merger and related considerations. Feldman Financial
presented a financial analysis of the merger and expressed its oral opinion
that the exchange ratio in the merger was fair from a financial point of view
to the stockholders of Fruitland. The Fruitland board unanimously approved the
merger agreement. The boards of directors of Mercantile and Peninsula also
approved the agreement on June 1, 2000.
Recommendation of the Fruitland board of directors and reasons for the merger
Based on the following, Fruitland's board of directors approved the merger
agreement and unanimously recommends that the holders of Fruitland common
stock vote "for" the merger.
8
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In reaching its determination that the terms of the merger are fair to, and
in the best interests of, Fruitland and its stockholders, Fruitland's board of
directors considered a number of factors, including the following:
. Financial Terms. Based on historical trading ranges for Mercantile
common stock and factors considered in the Feldman Financial analysis,
the Fruitland board concluded that the value to be received by the
Fruitland stockholders represents a fair multiple of Fruitland's book
value and earnings. The board also considered the advantage that the
transaction would qualify as a tax-free reorganization for federal
income tax purposes.
. Information concerning Mercantile. The Fruitland board considered, among
other things, the favorable position of Mercantile among its peer group
of national and regional financial institutions in terms of
profitability, capital adequacy and asset quality. The historical
dividends per share, net income per share and book value per share of
Mercantile common stock to be received by Fruitland stockholders, after
giving effect to the exchange ratio, would represent a substantial
increase in the historical dividends, net income and book value per
share of Fruitland common stock, although there can be no assurance that
pro forma amounts are indicative of actual future amounts. The Fruitland
board considered the marketability and liquidity of Mercantile common
stock, which is publicly traded and quoted on The Nasdaq National
Market. In addition, the board considered the diversification of risk
associated with Mercantile's ownership of 21 affiliated banks serving a
broad geographic area that encompasses most of Maryland and parts of
Virginia and Delaware.
. Other considerations. The Fruitland board identified benefits to
customers, employees and the communities served by Fruitland in
operating as part of Peninsula Bank, with an expanded range of products
and services, access to Mercantile's financial and managerial resources,
and expanded geographical coverage, all of which will help provide
Fruitland operations with resources needed to meet competitive
challenges arising from recent and anticipated changes in the banking
and financial services industry. It was also important to the Fruitland
board that Mercantile allows Peninsula and its other banking affiliates
to operate with a substantial degree of local autonomy.
. Other possible affiliations. The Fruitland board has followed and been
aware of the consolidation trends in the banking industry, the
identities of possible affiliation partners other than Mercantile, the
prospects of such other possible affiliation partners and factors
bearing on whether such potential partners could or would make an offer
comparable in quality to the Mercantile offer. Based on the factors
discussed above, including the quality of the market for Mercantile
common stock in terms of number of shares outstanding, trading volume
and liquidity, the Fruitland board did not perceive other affiliation
possibilities as presenting the advantages of the Mercantile offer.
Fruitland's board of directors did not assign any specific or relative
weight to each of the above factors in its considerations. We cannot guarantee
that any of the positive results suggested above will be achieved.
Opinion of Fruitland's financial advisor
Fruitland retained Feldman Financial on May 19, 2000 as an independent
financial advisor in connection with Fruitland's board of directors'
consideration of a possible business combination with Mercantile. Feldman
Financial is a nationally recognized investment banking firm that is regularly
engaged in the valuation of financial institutions and their securities for
mergers and acquisitions, corporate reorganizations, initial public offerings
and other corporate transactions.
At the June 1, 2000 meeting of Fruitland's board, Feldman Financial
delivered an oral opinion to Fruitland's board, which opinion was subsequently
confirmed in writing, that as of such date and subject to certain
considerations set forth in the opinion, the exchange ratio in the merger
agreement was fair from a financial point of view to Fruitland's stockholders.
Feldman Financial subsequently confirmed its June 1, 2000 opinion by delivery
to Fruitland's board of a written opinion dated as of the date of this
prospectus and proxy statement, which is substantially identical to the June
1, 2000 opinion.
9
<PAGE>
The full text of Feldman's Financial written opinion dated as of the date of
this prospectus and proxy statement, which sets forth a description of the
procedures followed, assumptions made, matters considered and limitations on
the review undertaken, is attached as Annex B to this prospectus and proxy
statement. You should read the opinion carefully and in its entirety. Feldman
Financial's opinion is directed to Fruitland's board and addresses only the
fairness of the exchange ratio to Fruitland's stockholders from a financial
point of view. The opinion does not address the underlying business decision
of Fruitland to engage in the merger and does not constitute a recommendation
to any Fruitland stockholder as to how to vote at the special meeting with
respect to the merger or any other matter. The summary of Feldman's
Financial's opinion set forth in this prospectus and proxy statement is
qualified in its entirety by reference to the full text of the opinion.
In arriving at its opinion, Feldman Financial reviewed the merger agreement,
as well as certain publicly available business and financial information
relating to Fruitland and Mercantile. Feldman Financial also reviewed certain
other information related to Fruitland, and met with the senior management of
Fruitland to discuss the future prospects of Fruitland. Feldman Financial also
considered certain financial and stock data of Fruitland and Mercantile and
compared that data with similar data for other publicly held companies in
businesses similar to those of Fruitland and Mercantile, and considered the
financial terms of other merger and acquisition transactions that were
recently effected. Feldman Financial also considered such other information,
studies, analyses and examinations, and general financial, economic and market
criteria, which it deemed relevant.
With respect to certain financial forecasts of Fruitland, Feldman Financial
discussed financial projections with Fruitland's senior management for the
purpose of reviewing the future prospects of Fruitland. Feldman Financial
assumed that, as of the date such projections were prepared, they were
reasonably prepared reflecting the best estimates and judgments of the
management of Fruitland as to the future operating and financial performance
of Fruitland. Further, there will usually be differences between prospective
and actual results because events and circumstances frequently do not occur as
expected, and those differences may be material. Mercantile did not provide
internal financial forecasts. The projections were based on numerous variables
and assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions, and
accordingly, actual results could vary significantly from those set forth in
these projections.
In preparing its opinion, Feldman Financial assumed and relied upon the
accuracy and completeness of all financial and other information that it
received, reviewed, or discussed. Feldman Financial did not assume any
responsibility for independently verifying such information, did not undertake
an independent evaluation or appraisal of the assets or liabilities of
Fruitland or Mercantile, and was not furnished with any such appraisal or
evaluation. Feldman Financial was not retained to and did not review any
individual loan credit files. Feldman Financial is not an expert in the
evaluation of allowances for loan losses, and it has not made an independent
evaluation of the adequacy of the allowance for loan losses of Fruitland or
Mercantile. Feldman Financial has assumed that the respective allowances for
loan losses of both Fruitland and Mercantile are adequate to cover losses both
independently and on a combined basis. Feldman Financial's opinion was
necessarily based upon financial, economic, market and other conditions as
they existed and could be evaluated on the date of its opinion. Feldman
Financial did not express any opinion as to the value of Fruitland or
Mercantile common stock or the prices at which Fruitland or Mercantile common
stock may be sold at any time.
In formulating its opinion to Fruitland's board, Feldman Financial prepared
a variety of financial and comparative analyses, including those described
below. The following is a summary of the material financial analyses performed
by Feldman Financial but is not a comprehensive description of the analyses
underlying Feldman Financial's opinion. The preparation of a fairness opinion
is a complex process involving various determinations as to the most relevant
and appropriate methods of financial analyses and the application of these
methods to the particular circumstances. Therefore, such an opinion is not
readily susceptible to partial analysis or summary description. Accordingly,
Feldman Financial believes that its analyses must be considered as a whole and
selecting portions of the analyses and factors, without considering all
factors and analyses, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion.
10
<PAGE>
Transaction Summary. Feldman Financial reviewed the financial terms of the
proposed business combination. Based upon a closing price of $35.25 for
Mercantile common stock on August 22, 2000 and an exchange ratio of 2.5 shares
of Mercantile common stock for each share of Fruitland common stock there was
an implied value of $88.13 per share of Fruitland common stock, or an implied
aggregate value of $38.8 million based upon 440,000 fully diluted common
shares outstanding for Fruitland. Based upon this analysis and the June 30,
2000 financial statements for Fruitland, the following transaction ratios were
calculated by Feldman Financial.
<TABLE>
<S> <C>
Implied Value Per Share/Last Twelve Months EPS..................... 30.41x
Implied Value Per Share/Projected 2000 EPS......................... 24.92x
Implied Value Per Share/Book Value Per Share....................... 271.8%
Implied Value Per Share/Tangible Book Value Per Share.............. 271.8%
Implied Aggregate Value/Total Assets............................... 27.76%
Implied Aggregate Value/Total Deposits............................. 32.64%
</TABLE>
Comparable Company Analysis. Feldman Financial performed comparative
analyses involving Fruitland, Mercantile, and various public company
comparative groups. The discussion of these comparisons below provide only
selected financial data and are not meant to be an extensive comparison of
Fruitland or Mercantile with any group as a whole or any individual company.
No company used in the comparable transaction analyses is identical to
Fruitland or the merger. Accordingly, an analysis of the results involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the various companies, as well as other factors
that may affect trading values or announced merger values of Fruitland or
Fruitland comparable companies.
Feldman Financial compared certain financial performance and market
valuation data of Fruitland with corresponding publicly available information
of 12 publicly traded banking institutions based in Maryland, Virginia,
Delaware, New Jersey, Pennsylvania, North Carolina and Washington, DC with
asset sizes between $100 million and $250 million and that were profitable for
the twelve month period ending June 30, 2000 as indicated by a return on
equity greater than 5.00%. Fruitland comparative companies included:
Abigail Adams National Annapolis National Bancorp
Bridge View Bancorp Central Virginia
Century Bancshares ECB Bancorp
Fauquier Bankshares Madison Bancshares Group
Marathon Financial Corporation Shore Financial Corporation
Sussex Bancorp SVB Financial Services
11
<PAGE>
The table below presents the comparisons of selected financial and market
ratios of Fruitland comparable companies with Fruitland as of or for the
twelve months ended June 30, 2000. Market data was based upon the closing
prices as of August 22, 2000 for the comparable companies and was the exchange
ratio multiplied by the Mercantile stock price for Fruitland. The median data
for Fruitland comparable companies were utilized for this presentation.
<TABLE>
<CAPTION>
Bank of Comparable
Fruitland Companies
------------ ------------
<S> <C> <C>
Total Assets..................................... $139,685,000 $184,854,000
Total Equity..................................... $ 14,267,000 $ 15,828,000
Equity/Assets.................................... 10.21% 9.02%
Tangible Equity/Tangible Assets.................. 10.21% 9.02%
Deposits/Assets.................................. 85.1% 87.2%
Return on Average Assets......................... 0.92% 0.98%
Return on Average Equity......................... 9.15% 10.11%
Non-Performing Assets/Assets..................... 0.52% 0.31%
Reserves/Non-Performing Assets................... 183% 204%
Market Value($M)(1).............................. $ 38.78 $ 17.67
Prices EPS(1).................................... 30.41x 12.39x
Price/Book Value(1).............................. 271.8% 117.9%
Price/Tangible Book(1)........................... 271.8% 122.2%
Price/Assets(1).................................. 27.76% 9.66%
</TABLE>
--------
(1) Fruitland market data based upon the exchange ratio and implied value as
of August 22, 2000.
Feldman Financial also compared certain financial performances and market
valuation data of Mercantile with corresponding publicly available information
of 12 publicly traded banking institutions headquartered in Maryland,
Virginia, Delaware, New Jersey, Pennsylvania, North Carolina and Washington,
DC with asset sizes between $4 billion and $12 billion and that were
profitable for the twelve month period ending June 30, 2000 as indicated by a
return on equity greater than 5.00%. The Mercantile comparative companies
included:
Centura Banks Commerce Bancorp
First Citizens Bancshares First Commonwealth Financial
First Virginia Banks Fulton Financial
Hudson United Provident Bankshares
Riggs National Corporation Susquehanna Bancshares
Valley National Wilmington Trust
The table below presents the comparison of selected financial and market
ratios of Mercantile comparable companies with Mercantile as of or for the
twelve months ended June 30, 2000. Market data was based upon the closing
prices as of August 22, 2000. The median data for the Mercantile comparable
companies were utilized for this presentation.
<TABLE>
<CAPTION>
Comparable
Mercantile Companies
-------------- --------------
<S> <C> <C>
Total Assets................................. $8,238,956,000 $6,828,517,000
Total Equity................................. $1,010,354,000 $ 512,176,000
Equity/Assets................................ 12.26% 7.38%
Tangible Equity/Tangible Assets.............. 11.74% 6.66%
Deposits/Assets.............................. 74.34% 73.70%
Return on Average Assets..................... 2.11% 1.07%
Return on Average Equity..................... 16.73% 14.14%
Non-Performing Assets/Assets................. 0.34% 0.38%
Reserves/Non-Performing Assets............... 455.2% 226.2%
Market Value($M)............................. $ 2,479 $ 1,278
Prices EPS................................... 14.69x 14.41x
Price/Book Value............................. 237.4% 195.4%
Price/Tangible Book.......................... 249.5% 218.7%
Price/Assets................................. 29.12% 13.30%
</TABLE>
12
<PAGE>
Stock Trading History. Feldman Financial reviewed the stock trading history
of Fruitland and Mercantile. Fruitland is a closely held institution not
listed on the national exchanges or Nasdaq. As such, there was limited
liquidity in holding common stock of Fruitland. Management believes those
limited number of trades that take place do not necessarily indicate prices at
which the common stock would sell in an arms length transaction.
Feldman Financial compared the market performance of the common stock of
Mercantile with the movement of certain stock indices, including the Standard
& Poor's 500 index, the SNL Regional Bank Stock Index and the common stock
performance of the Mercantile Comparative Group discussed above for the 52-
week period ended August 22, 2000.
<TABLE>
<CAPTION>
One-Year
Change
--------
<S> <C>
Mercantile...................................................... 5.0%
S&P 500......................................................... 13.4%
SNL Regional Index.............................................. 35.1%
Mercantile Comparative Companies................................ (17.4)%
</TABLE>
Comparable Transaction Analysis. Feldman Financial reviewed other publicly
available information for transactions that were announced after January 1,
1999 and involved acquisitions of 82 commercial banks nationally and 9
commercial banks headquartered in Maryland, Virginia, Delaware, New Jersey,
Pennsylvania, North Carolina and Washington DC with asset sizes between $100
million and $250 million and were profitable prior to the merger announcement.
The discussion of these comparisons below provides only selected data and is
not meant to be an extensive comparison of the merger with any group of
transactions as a whole or any individual transaction. No transaction used in
the comparable transaction analyses is identical to Fruitland or the merger.
Accordingly, an analysis of the results involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the various companies as well as other factors that may affect trading values
or announced merger values of Fruitland or the comparable transactions
reviewed.
The various offer price ratios analyzed were based upon information
available at the time of announcement. Feldman Financial compared the ratios
of price to book value, price to tangible book value, price to last twelve
months earnings, and tangible book premium to core deposits as offered in the
comparable transactions to the corresponding ratios offered in the merger to
Fruitland.
<TABLE>
<CAPTION>
Fruitland Nationwide Regional
Transaction Transactions Transactions
----------- ------------ ------------
<S> <C> <C> <C>
Price/Book Value...................... 2.72x 2.28x 2.09x
Price/Tangible Book Value............. 2.72x 2.34x 2.30x
Price/LTM EPS......................... 30.4x 20.6x 24.4x
Tangible Book Premium/Core Deposits... 20.6% 16.2% 13.0%
</TABLE>
Discounted Dividend Stream and Terminal Value Analysis. Feldman Financial
performed a discounted cash flow analysis to determine a range of present
values per share of Fruitland common stock on a trading basis, assuming
Fruitland continued to operate as an independent company and sold at the end
of the fifth projection year under various scenarios. This range was
determined by adding (i) the present value of the estimated future dividend
stream that Fruitland could generate over the five-year period from 2000
through 2004, and (ii) the present value of the terminal value of common stock
at the end of year 2005. The earnings projections that formed the basis for
the dividends and the terminal values were based on annual growth rates of
5.0%. To approximate the terminal value of Fruitland common stock at the end
of the projection period, Feldman Financial applied a range of market
valuation ratios representing price to earnings multiples from 12.0 to 22.0
times and price to book ratios from 160% to 260%. The dividend stream and
terminal values were then discounted to present values using discount rates
from 10% to 14%, which were chosen to reflect different assumptions regarding
rates of return that may be required by investors holding Fruitland common
stock. Based on the above assumptions, this present value analysis yielded a
market valuation range for Fruitland common stock of $35.52 to $79.27 per
share.
13
<PAGE>
This analysis is dependent upon certain assumptions such as growth rates of
assets and earnings, future composition of assets, net interest spreads, non-
interest income and expenses, required rates of return, dividend payout
ratios, the ability and prices to sell Fruitland common stock at a future date
and others. As such, the results may not be an accurate indicator of actual
values and future results.
Pro Forma Merger Analysis. Feldman Financial performed a pro forma merger
analysis, combining Fruitland and Mercantile's balance sheet and projected
earnings based upon certain assumptions provided by the management of
Fruitland and publicly available data for Mercantile. The analysis was based
upon an exchange ratio of 2.5 shares of Mercantile common stock for each share
of Fruitland common stock and assumptions regarding the accounting and tax
treatment of the merger. This analysis indicated that the merger would be
accretive to Fruitland's stockholders on book value, earnings per share and
dividend basis for the estimated 2000 period on a pro forma basis relative to
Fruitland's projected results before the impact of nonrecurring merger-related
charges. The analysis included estimates of expected cost savings resulting
from the merger. The actual results achieved by Fruitland stockholders may
vary from the estimated results and the variations may be material.
In performing its analyses, Feldman made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Fruitland or Mercantile. The
analyses performed by Feldman Financial are not necessarily indicative of
actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as a part of Feldman Financial's evaluation of the fairness from a
financial point of view of the exchange ratio to Fruitland stockholders and
were conducted in connection with the rendering of Feldman Financial's
opinion. As described above, Feldman Financial's opinion and the information
provided by Feldman Financial to Fruitland's board were among various factors
taken into consideration by Fruitland's board in making its determination to
approve the merger agreement. The exchange ratio was determined through
negotiations between Fruitland and Mercantile.
Feldman Financial assumed that all of the representations and warranties
contained in the merger agreement and all related agreements are true and
correct in all material respects, that each party will perform all of the
covenants required to be performed by it under these agreements and that
conditions precedent in the merger agreement are not waived. Feldman Financial
also assumed that there were no material changes in Fruitland's or
Mercantile's assets, liabilities, operating results, business or prospects
since the date of the last publicly available financial statements or internal
financial statements made available by them.
Fruitland's board retained Feldman Financial to act as financial advisor to
Fruitland in connection with the merger based upon Feldman Financial's
experience and expertise and its familiarity with Fruitland and transactions
similar to the merger. Pursuant to a letter agreement dated May 19, 2000
between Fruitland and Feldman Financial, the Bank of Fruitland has agreed to
pay Feldman Financial a professional fee of $37,500, of which $17,500 will be
payable upon consummation of the merger. The letter agreement with Feldman
Financial also provides that Fruitland will reimburse Feldman Financial for
its reasonable out-of-pocket expenses incurred in connection with its
engagement and indemnify Feldman Financial and any related parties against
certain expenses and liabilities, which may include certain liabilities under
securities laws.
Effective date
As soon as practicable after the performance of all agreements and
obligations of the parties under the merger agreement, upon fulfillment or
waiver of all conditions precedent contained in the merger agreement, and
after the Maryland Commission of Financial Regulation has approved the
Agreement of Merger between Peninsula Bank and Fruitland, Peninsula Bank and
Fruitland will file the Agreement of Merger with the State Department of
Assessments and Taxation of Maryland. The merger will become effective on the
date and time as set forth in the Certificate of Merger issued by the Maryland
Commissioner of Financial Regulation.
Procedures for exchange of certificates
On and after the effective date of the merger, certificates for shares of
Fruitland common stock will represent the right to receive certificates
representing the number of whole shares of Mercantile common stock and cash in
14
<PAGE>
lieu of fractional shares. Certificates representing shares of Fruitland
common stock may be exchanged after the effective date by surrendering these
certificates to The Bank of New York, acting as exchange agent, or any other
exchange agent as Mercantile may select, in exchange for new certificates
representing the appropriate number of whole shares of Mercantile common stock
determined by the exchange ratio and for cash in lieu of any fractional
shares.
No certificates for fractional shares of Mercantile common stock will be
issued but, in lieu of fractional shares, and solely as a mechanism for
rounding shareholdings to whole shares, Mercantile will pay cash for
fractional shares on the basis of the closing price for Mercantile common
stock as reported by The Nasdaq National Market on the effective date of the
merger (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 Fruitland common stock
representing these fractional shares. No holder will be entitled to dividends,
voting rights or any other rights of stockholders in respect of any fractional
share.
Shortly after the effective date of the merger, Fruitland's stockholders
will receive transmittal forms and instructions as to the time and method of
surrendering their certificates. Until surrendered, certificates formerly
representing shares of Fruitland common stock, other than shares of dissenting
stockholders, will be deemed for all corporate purposes to evidence the number
of whole shares of Mercantile 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 Mercantile common stock pending exchange of certificates representing
shares of Fruitland common stock will be retained by Mercantile or the
exchange agent until surrender of the certificates, at which time those
dividends and any other distributions will be paid without interest.
Fruitland's stockholders should not forward stock certificates until they
have received transmittal forms and instructions. Fruitland's stockholders
should not return stock certificates with the enclosed proxy.
Certain federal income tax consequences
The following is a summary of the anticipated material federal income tax
consequences of the merger; it is not intended to be a complete description of
those consequences. The matters set forth in paragraphs below are based upon
the opinion of Venable, Baetjer and Howard, LLP, counsel to Mercantile:
. The merger of Fruitland and Peninsula Bank will qualify as a tax-free
reorganization within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, to which Mercantile, Peninsula Bank, and
Fruitland will each be a party;
. No gain or loss will be recognized by Mercantile, Peninsula Bank, or
Fruitland in the merger;
. No gain or loss will be recognized by Fruitland's stockholders upon
receipt by them of Mercantile common stock in exchange for Fruitland
common stock in the merger;
. The tax basis of the Mercantile common stock received by Fruitland's
stockholders will be the same as the tax basis of the Fruitland common
stock surrendered and exchanged for the Mercantile common stock,
decreased by the amount of any cash received and increased by the amount
of gain recognized, if any; and
. Provided that the Fruitland common stock is held as a capital asset, the
holding period of the Mercantile common stock received by Fruitland's
stockholders will include the holding period during which the Fruitland
common stock surrendered in exchange for the Mercantile common stock was
held.
Fruitland's obligation to close the merger is subject to the receipt of an
opinion of Venable, Baetjer and Howard, LLP, counsel to Mercantile, or any
other qualified law firm as Fruitland selects, with respect to the federal
income tax consequences of the merger, substantially to the effect of the
paragraphs above. This opinion will not address the state, local or foreign
tax aspects of the merger.
15
<PAGE>
Any cash received by Fruitland's 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 these Fruitland stockholders. The
receipt of this 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 this cash may be treated as a dividend and taxed as ordinary
income in certain limited situations.
The discussion set forth above is included for general information only. It
does not address the state, local or foreign tax aspects of the merger. In
addition, it does not discuss the federal income tax considerations that may
be relevant to certain persons, and may not apply to certain holders subject
to special tax rules, including dealers in securities and foreign holders. The
discussion is based upon currently existing provisions of the Internal Revenue
Code, existing U.S. Treasury regulations and current administrative rulings
and court decisions, all of which are subject to change and any change could
affect the continuing validity of this discussion.
Each Fruitland stockholder should consult his or her own tax adviser with
respect to the specific tax consequences of the merger to him or her,
including the application and effect of state, local and foreign tax laws.
Accounting treatment
The merger will be treated as a purchase for accounting purposes. Under the
purchase method of accounting, the amount by which the purchase price paid by
Mercantile exceeds the fair value of the net assets acquired will be recorded
as goodwill. Mercantile currently expects that based on preliminary purchase
accounting estimates the merger would result in identifiable intangibles and
goodwill approximating $23,000,000, which would be amortized over an estimated
period of not more than 15 years.
Resale of Mercantile common stock after the merger by controlling persons
Under federal securities laws there are certain potential limitations on the
sale of Mercantile common stock received in the merger that will affect
certain of Fruitland's stockholders who may be controlling persons of
Fruitland. Mercantile and Fruitland believe that the only Fruitland
stockholders who may be deemed controlling persons subject to these
limitations are the directors and certain executive officers of Fruitland who
have been advised of these restrictions and have agreed in writing to them.
Conditions to the merger
Completion of the merger is conditioned upon, among other things, approval
of the merger by an affirmative vote of at least two-thirds of the outstanding
shares of Fruitland common stock entitled to vote on the merger and certain
regulatory consents and approvals, including the consent of the Federal
Deposit Insurance Corporation, the Virginia State Corporation Commission and
the Maryland Commissioner of Financial Regulation. Mercantile is not obligated
to complete the merger if holders of more than 20% of the outstanding shares
of Fruitland common stock exercise statutory dissenters' rights. Each of
Mercantile's and Fruitland's obligation to complete the merger is also subject
to the satisfaction or waiver of certain further conditions, which are set
forth in detail in the merger agreement, a copy of which is attached as Annex
A to this prospectus and proxy statement.
Treatment of employee benefit plans
Under the merger agreement and at the option of Mercantile, Fruitland's
qualified 401(k) plan is expected to be merged into Mercantile's 401(k) plan,
and employees of Fruitland and BF Financial Services, Inc., a wholly-owned
subsidiary of Fruitland, will be given credit for service with Fruitland and
its subsidiary for purposes of eligibility to participate and vesting. If in
the judgment of Mercantile, it is not technically feasible or desirable to
merge the plans, Fruitland's qualified plan will be frozen or terminated, with
its assets held for distribution to the participants.
16
<PAGE>
In addition, employees of Fruitland and its subsidiary will become eligible
to participate in Mercantile's cash balance pension plan and employees of
Fruitland and its subsidiary will be given credit for service with Fruitland
and its subsidiary for purposes of eligibility to participate and vesting but
not for benefit accrual purposes.
Except with respect to Fruitland's qualified 401(k) and Mercantile's
qualified 401(k) and cash balance pension plans, which will be treated as
described above, and executive plans, programs and arrangements, eligibility
for participation in which is determined in the discretion of Peninsula Bank
and/or Mercantile, after the effective date, employees of Fruitland and its
subsidiary who are employed by Peninsula Bank will be entitled to participate
in Peninsula Bank's employee benefit plans and programs on substantially the
same basis as similarly situated employees of Peninsula Bank. Except as
described above with respect to service credits in Mercantile's 401(k) and
cash balance pension plans, Peninsula Bank has agreed to treat service with
Fruitland and its subsidiary before the effective date of the merger as
service with Peninsula Bank for purposes of all employee benefit and
seniority-based plans and programs.
Exclusive dealing
Fruitland has agreed that while the merger agreement is in effect, neither
Fruitland nor any of its officers, directors, employees, agents or
representatives shall, directly or indirectly:
. Encourage, solicit or initiate the submission of any "acquisition
proposal" (as defined below) 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
. Recommend any acquisition proposal to Fruitland's 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 Fruitland board of directors concludes, 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 adviser to Fruitland, that its fiduciary
obligations require consideration of the acquisition proposal because it
may be in the best interests of Fruitland's stockholders and is more
favorable to Fruitland's stockholders from a financial point of view
than the merger.
The merger agreement defines an "acquisition proposal" as including any
proposed:
. Merger, consolidation, share exchange or similar transaction involving
Fruitland;
. Sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of Fruitland
representing 10% or more of the consolidated assets of Fruitland;
. Issue, sale or other disposition of securities--or options, rights or
warrants to purchase, or securities convertible into, these securities--
representing 10% or more of the voting power of Fruitland; or
. Any transaction in which any person or group acquires beneficial
ownership--as that term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934--or the right to acquire beneficial ownership, of
20% or more of Fruitland's outstanding capital stock.
Fruitland has agreed that it will promptly advise Mercantile of, and
communicate to Mercantile the terms of, any inquiry or proposal addressed to
Fruitland or of which Fruitland or its respective officers, directors,
employees, agents, or representatives, including, without limitation, any
investment banker, has knowledge.
Termination
The parties to the merger agreement may terminate and abandon the merger at
any time prior to the effective date by mutual consent even if Fruitland's
stockholders have approved the merger.
17
<PAGE>
Mercantile and Peninsula Bank may also terminate the merger agreement at any
time prior to the effective date if:
. Mercantile receives information from any regulatory authority, which by
law is required to approve or otherwise act upon the merger or any other
aspect of the transactions provided for in the merger agreement, or
which has authority to challenge the validity of the merger or
transactions in judicial proceedings or otherwise, that provides a
substantial basis for concluding that the required regulatory approval
will not be granted or these transactions will be so challenged;
. Fruitland's board of directors recommends to Fruitland's stockholders,
or Fruitland accepts, a competing acquisition proposal.
Fruitland may terminate the merger agreement if, in compliance with the
provisions of the merger agreement, Fruitland's board of directors recommends
to Fruitland's stockholders, or it accepts, an acquisition proposal.
Mercantile or Fruitland may also terminate the merger agreement if the
merger is not closed by April 30, 2001. The merger agreement provides that in
the case of a termination by Mercantile and Peninsula Bank by reason of
Fruitland's recommendation or acceptance of an acquisition proposal, Fruitland
will pay Mercantile a termination fee of $400,000. The merger agreement also
provides that if the merger agreement is terminated by Mercantile or Peninsula
Bank by reason of a material breach by Fruitland, or by Fruitland by reason of
a material breach by Mercantile or Peninsula Bank, and the breach involves an
intentional, willful or grossly negligent misrepresentation or breach of
covenant, the breaching party will 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 effectiveness of the merger,
including the fees of the non-breaching party's counsel, accountants,
consultants and other advisers and representatives.
Rights of dissenting stockholders
Under the appraisal rights provisions of the Financial Institutions Article,
the Maryland General Corporation Law and relevant case law, certain relevant
sections of which are attached as Annex C to this prospectus and proxy
statement, each holder of Fruitland common stock will be entitled to demand
and receive payment of the "fair value" of his or her shares in cash, if he or
she:
. Votes against the merger;
. Does not accept any offer by Peninsula Bank to pay what Peninsula
considers to be the fair value of his or her shares; and
. Within 30 days after the effective date of the merger as set forth in
the Certificate of Merger issued by the Maryland Commissioner of
Financial Regulation, makes written demand on Peninsula Bank for payment
of his or her shares and surrenders his or her stock certificates.
For these purposes, abstentions and broker non-votes will not suffice as
votes against the merger. A vote against the merger must be cast by checking
the box marked "Against" on a proxy card properly submitted prior to the
special meeting or by personal vote at the special meeting. Any Fruitland
stockholder who fails to comply with the requirements described above will be
bound by the terms of the merger.
A vote against the merger will not itself constitute a timely written notice
of intent to demand payment.
Upon determination of the effective date of the merger in the Certificate of
Merger issued by the Maryland Commissioner of Financial Regulation, Peninsula
Bank will promptly deliver or send by certified mail, return receipt
requested, to each Fruitland stockholder who has voted against the merger,
written notice of the effective date of the merger. Peninsula Bank may offer
to pay in cash to the Fruitland stockholders who have voted against
18
<PAGE>
the merger not more than what Peninsula Bank considers to be the fair value of
the Fruitland common stock as of the time of the special meeting.
The fair value of shares for which Fruitland stockholders make a payment
demand is determined as of the date of the Fruitland special meeting. The
determination of the fair value is made by a panel of three appraisers, one of
whom is selected by the owners of two-thirds of the appraisal shares, one of
whom is selected by the board of directors of Peninsula Bank, and one of whom
is selected by the other two appraisers.
Upon the determination of the fair value of the appraisal shares, the
appraisers must give notice of the determination to Peninsula Bank and to each
Fruitland stockholder who made a payment demand.
Within five days after the appraisers have given notice of their fair value
determination, a demanding Fruitland stockholder who is dissatisfied with the
determination may notify the Maryland Commissioner of Financial Regulation who
will have the appraisal shares reappraised. The reappraisal is final and
binding as to the value of the appraisal shares of such dissatisfied demanding
Fruitland stockholder.
If the panel of appraisers fail to make a fair value determination within 90
days after the effective date, the Financial Institutions Article provides
that the Maryland Commissioner of Financial Regulation will have an appraisal
made. This appraisal is final and binding as to the value of all appraised
shares. Peninsula Bank must pay the expenses of each appraisal made.
This summary of the rights of Fruitland stockholders requesting appraisal
contains all material information relating to the exercise of appraisal rights
but does not purport to be a complete statement of the procedures to be
followed by stockholders desiring to exercise their rights of appraisal. The
preservation and exercise of appraisal rights are conditioned on strict
adherence to the applicable provisions of the Financial Institutions Article
and the Maryland General Corporation Law. Each Fruitland stockholder desiring
to exercise appraisal rights should refer to Title 3, Subtitle 7, Part II,
entitled "Rights of Objecting Stockholders" of the Financial Institutions
Article, and relevant sections of Title 3, Subtitle 2, entitled "Rights of
Objecting Stockholders" of the Corporations and Associations Article, of the
Annotated Code of Maryland for a complete statement of the stockholder's
rights and the steps which must be followed in connection with the exercise of
these rights. See Annex C to this prospectus and proxy statement.
No further notice of the events giving rise to dissenters' rights or any
steps associated with dissenters' rights will be furnished to Fruitland's
stockholders, except as indicated above or otherwise required by law.
Any dissenting stockholder who exercises his or her right to be paid the
value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for his or her shares. The amount
of gain or loss and its character as ordinary income or capital gain will be
determined in accordance with applicable provisions of the Internal Revenue
Code. See "The Merger - Certain federal income tax consequences."
19
<PAGE>
Certain Other Agreements
The support agreement
As a condition to Mercantile entering into the merger agreement, all
directors and the chief executive officer of Fruitland who owned an aggregate
of 169,108 shares as of June 2, 2000 (approximately 38.4%) of the outstanding
Fruitland common stock each entered into a support agreement with Mercantile.
Under the support agreement, each of the individuals who are parties to the
support agreement has agreed:
. Not to pledge, hypothecate, grant a security interest in, sell, transfer
or otherwise dispose of or encumber or enter into any agreement,
arrangement or understanding, other than a proxy for purposes of
approving the merger agreement, which would restrict, establish a right
of first refusal to or otherwise relate to the transfer or voting of the
shares of Fruitland common stock owned or acquired by the director or
officer during the term of the support agreement;
. Subject to the provisions of the merger agreement with respect to the
fiduciary obligations as directors of Fruitland, 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 Mercantile and its
employees and agents) concerning any sale of assets, sale or exchange of
stock, merger, consolidation or similar transactions involving
Fruitland, and to use all commercially reasonable efforts to assure that
Fruitland does not take these steps;
. To promptly advise Mercantile of any inquiry or proposal of which the
director or officer has knowledge;
. To vote his or her shares of Fruitland common stock in favor of the
merger agreement and the transactions contemplated by the merger
agreement, and, in his or her capacity as a stockholder, to use his or
her best efforts to cause the merger to be effected, subject to the
provisions of the merger agreement with respect to the fiduciary
obligations as directors of Fruitland.
The terms of the support agreement expire upon the termination of the merger
agreement.
Affiliate undertakings
In connection with the execution and delivery of the merger agreement, the
directors and the chief executive officer who signed the support agreement
also executed a memorandum, undertaking and agreement under which they have
undertaken to comply with certain provisions of the federal securities laws
which restrict the sale of shares of Mercantile common stock by these
directors and officers. See "The Merger--Resale of Mercantile common stock
after the merger by controlling persons."
Supplemental agreements
The parties have agreed supplementally on certain terms regarding
Fruitland's employees in addition to the employee benefit matters discussed
earlier in this prospectus and proxy statement. Mercantile has consented to
the payment by Fruitland of up to $600,000 in bonuses to Henry E. Tilman, Jr.,
Ronald L. Laws, Ellen P. Vandegrift and Jean H. Sewell. The board of directors
of Fruitland will determine the allocation of this aggregate amount between
the four officers in its discretion. In each case, in order for the officer to
receive his or her share of the aggregate bonus amount, he or she must
continue his or her employment until the integration of the data processing
and financial systems of Peninsula Bank and Fruitland is completed. The
parties have also agreed that two directors of Fruitland will join the board
of directors of Peninsula Bank. These two directors are John B. Long, II, and
Hugh P. McLaughlin, Jr. In addition to other employee matters, the parties
have agreed that Mr. Tilman, now president and chief executive officer of
Fruitland, will become an executive vice president of Peninsula Bank and that
each of Mr. Laws, now executive vice president and chief financial officer of
Fruitland, Ms. Vandegrift, now a senior vice president and chief lending
officer of Fruitland, and Ms. Sewell, now a senior vice president and chief
administrative officer of Fruitland, will become vice presidents of Peninsula
Bank.
20
<PAGE>
Comparison of Stockholder Rights of Holders of Mercantile
Common Stock and Fruitland Common Stock
The rights of Fruitland's stockholders are currently governed by Fruitland's
charter, its bylaws, the Maryland General Corporation Law, and the Financial
Institutions Article of the Maryland Annotated Code. Upon completion of the
merger, Fruitland's stockholders will become stockholders of Mercantile, and
their rights will be governed by the Maryland General Corporation Law and
Mercantile's charter and bylaws. The following is a summary comparison of the
material differences in the rights of holders of Fruitland common stock and
Mercantile common stock under the governing provisions of their respective
charters and bylaws and Maryland law.
Dissenters' rights
For a description of the rights of dissenting stockholders of Fruitland, see
"The Merger--Rights of dissenting stockholders." Under Maryland law, a
stockholder does not have appraisal rights in certain circumstances, including
in a merger or consolidation, if the stockholder's stock is listed on a
national exchange or is designated as a security listed on The Nasdaq National
Market. Since, under the terms of the merger, Fruitland's stockholders will be
receiving Mercantile common stock that is publicly traded and quoted on The
Nasdaq National Market, dissenters' rights with respect to transactions
affecting Mercantile common stock will not be available.
Stockholder power to call a special meeting
Generally under Maryland law, the board of directors, other persons
specified in the corporation's charter or bylaws and the holder or holders of
25% or more of the voting stock of a corporation may call a special
stockholders' meeting. However, a corporation may elect to be subject to Title
3, Subtitle 8 of the Maryland General Corporation Law, which raises the
percentage of stockholders required to request a special stockholders' meeting
from 25% to a majority of those shares entitled to be voted at the meeting.
Fruitland has not made this election; therefore, the power to call a special
meeting of Fruitland Stockholders is governed by the general requirements
under the Maryland General Corporation Law.
Under Mercantile's bylaws the chairman of the board, president and certain
other officials are entitled to call a special meeting of the stockholders.
Under Section 3-805 of the Maryland General Corporation Law, the percentage of
stockholders required to request a special meeting is a majority of those
shares entitled to vote at the meeting. After the merger, no individual or
group of former Fruitland's stockholders who become holders of Mercantile
common stock solely as a result of the merger will own a sufficient number of
Mercantile common stock to call a special meeting of stockholders.
Preferred stock
Fruitland's charter only authorizes the issuance of common stock.
Mercantile's charter authorizes the issuance of up to two million shares of
preferred stock, no par value. Mercantile's board of directors may reclassify
already classified, but unissued, shares of Mercantile preferred stock and may
alter the rights, privileges and restrictions on the unissued Mercantile
preferred stock. Currently, no Mercantile preferred stock is outstanding.
Qualification and removal of directors
Under the Financial Institutions Article of the Maryland Annotated Code, a
director must be a Fruitland stockholder owning shares of unencumbered
Fruitland common stock worth at least $500, and a majority of Fruitland's
directors must reside in Maryland. Fruitland's bylaws provide that the number
of Fruitland directors must be between five and 20, and currently Fruitland
has nine directors. Under Mercantile's charter or bylaws, directors have no
stock ownership or residency requirements. Mercantile currently has 13
directors.
21
<PAGE>
Mercantile's board of directors is divided into three classes, with the
directors serving staggered three-year terms. Under Section 3-804 of the
Maryland General Corporation Law, a Mercantile director may be removed only
for cause and then only by the vote of two-thirds of the eligible stockholder
votes.
Shareholder rights plan
Mercantile has adopted a Shareholder Protection Rights Agreement dated June
8, 1999, which replaces a similar agreement adopted in 1989, that entitles
holders of Mercantile common stock to purchase additional securities, upon the
occurrence of certain events. See "Description of Mercantile Capital Stock--
Purchase rights."
This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, Maryland law and the charter and
bylaws of Fruitland and Mercantile.
22
<PAGE>
Description of Mercantile Capital Stock
General
Mercantile is authorized to issue up to 130,000,000 shares of Mercantile
common stock. On June 30, 2000, 68,645,759 shares of Mercantile common stock
were issued and outstanding. Mercantile is also authorized to issue 2,000,000
shares of preferred stock. The Mercantile preferred stock is subject to
classification and reclassification by Mercantile's board of directors. No
shares of Mercantile preferred stock are issued and outstanding.
Common stock
The holders of Mercantile common stock are entitled to receive dividends
that are declared by Mercantile's board of directors out of funds legally
available for dividends. Each holder of Mercantile common stock is entitled to
one vote per share on all matters requiring a vote of stockholders. In the
event of liquidation, holders of Mercantile 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 Mercantile common stock do not have
preemptive rights except as may be granted by Mercantile's board of directors.
The shares of common stock to be issued in the merger will be fully paid and
non-assessable. There is no provision for cumulative voting with respect to
the Mercantile common stock. Mercantile common stock is publicly traded and
quoted on The Nasdaq National Market under the symbol "MRBK."
Purchase rights
Rights which under certain circumstances may become exercisable for the
purchase of Mercantile preferred stock or Mercantile common stock--or
exchangeable for Mercantile preferred stock or Mercantile common stock--attach
to each share of Mercantile common stock, including shares of Mercantile
common stock issuable in connection with the merger agreement, under the
Shareholders Protection Rights Agreement adopted by Mercantile's board of
directors in June, 1999. In general, these rights become exercisable within 10
business days after a person, together with any affiliate of the person,
acquires or makes a tender offer or an exchange offer for the beneficial
ownership of 10% or more of the outstanding Mercantile common stock or at an
earlier or later time as the Mercantile board of directors may determine.
Until the rights become exercisable, they will not be separable from the
Mercantile common stock and will automatically trade with the Mercantile
common stock. Shares of Mercantile common stock issued to Fruitland's
stockholders in exchange for Fruitland common stock will be accompanied by
these rights. These rights can have a deterrent effect on unsolicited takeover
attempts and, therefore, may delay or make it more difficult to achieve a
change in control of Mercantile.
Stock repurchases
Under authorization by its board of directors, Mercantile repurchased
1,599,077 shares of Mercantile common stock in 1996, 479,175 shares in 1997,
1,911,000 shares in 1998, 2,696,825 shares in 1999 and 1,193,000 shares in
2000. Repurchases have been made under the safe harbor provisions of Rule 10b-
18 under the Securities Exchange Act of 1934, 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
Mercantile dividend reinvestment plans and employee stock purchase and stock
option plans. Mercantile is currently authorized by its board to repurchase
2,490,527 additional shares, which may be purchased from time to time
depending on the price of Mercantile common stock, market conditions,
regulatory considerations and other factors. It is expected that no
repurchases will be made until after the Fruitland special meeting.
23
<PAGE>
Description of The Bank of Fruitland
General
The Bank of Fruitland was organized in 1911 as a Maryland commercial bank.
At June 30, 2000, Fruitland had approximately 91 record holders of its capital
stock.
As of June 30, 2000, Fruitland had total assets of approximately $139.7
million, total deposits of approximately $118.8 million, and total
stockholders' equity of approximately $14.3 million.
Fruitland is a commercial bank offering a wide range of services, including
checking, NOW, money market and savings accounts, certificates of deposit, as
well as installment, mortgage and other consumer and commercial lending
services.
Fruitland's main office is located in Fruitland, Maryland. It also operates
six branches, one in Fruitland, four in Salisbury, Maryland and one in
Princess Anne, Maryland. Fruitland's primary trade area consists of Somerset,
Wicomico and Worcester counties on Maryland's lower Eastern Shore.
Fruitland is subject to state and federal banking laws and regulations which
impose specific requirements on and provide for general regulatory oversight
with respect to virtually all aspects of operations. As a state non-member
bank, Fruitland is regulated and examined by the Maryland Commissioner of
Financial Regulation and the Federal Deposit Insurance Corporation.
Business
Services of The Bank of Fruitland
Fruitland provides service-intensive commercial and retail banking services
to small businesses and to individuals. Fruitland offers the following types
of services:
Retail services
. Checking, NOW, money market and savings accounts
. 24-hour automated teller machines
. Certificates of deposit
. Christmas clubs
. Individual retirement accounts
. Wire transfer services
. Consumer loans, including
. Automobiles, boats, and recreational vehicles
. Home improvement
. Home equity lines of credit
. Personal loans and lines of credit
. Student loans
. Overdraft protection
. Real estate loans, including
. Conventional mortgages
. Construction
. FHA/VA
24
<PAGE>
. Jumbo
. Land purchases
. Low down payment
. Modular homes
. Non-conventional
. Refinancing
. Second mortgages
. Secondary homes
Commercial services
. Loans, including
. Working capital loans
. Lines of credit
. Loans for real estate acquisition, development and construction
. Equipment, inventory and accounts receivable financing
. Loans for agricultural purposes
. Small business administration loans
. Commercial checking, money market, savings accounts and certificates of
deposit
. Letters of credit
Lending activities and loan portfolio composition
At June 30, 2000, Fruitland's loan portfolio, excluding loans held for sale,
totaled approximately $112.0 million, representing approximately 80.2% of its
total assets of $139.7 million. Fruitland's loan portfolio is comprised of
86.6% real estate mortgages. The balance of 13.4% includes various other loans
to consumers, small businesses, municipalities and farmers. A detailed
breakdown of the composition of the loan portfolio of June 30, 2000 follows:
<TABLE>
<CAPTION>
June 30, 2000
----------------
Amount Percent
-------- -------
(in thousands)
<S> <C> <C>
Mortgages on real estate:
Development and construction................................ $ 15,218 13.59%
Secured by farmland......................................... 3,260 2.91
Secured by 1-4 family residential properties:
Home Equity loans......................................... 13,331 11.90
Mortgages secured by first liens.......................... 40,130 35.82
Mortgages secured by junior liens......................... 3,655 3.26
Secured by multifamily (5 or more) residential properties... 778 0.70
Secured by non-farm, non-residential properties............. 20,600 18.39
Demand and time:
Loans to finance agricultural production.................... 69 0.06
Commercial and industrial loans............................. 6,827 6.09
Installment:
Overdraft protection lines of credit........................ 332 0.30
Consumer loans.............................................. 7,469 6.67
Loans to political subdivisions, including volunteer fire
companies.................................................. 351 0.31
-------- ------
$112,020 100.00%
======== ======
</TABLE>
25
<PAGE>
BF Mortgage
BF Mortgage is a division of Fruitland through which Fruitland offers to its
customers a variety of loan programs, many of which are detailed above. The BF
Mortgage division concentrates on the origination and secondary market sale of
residential mortgage loans on properties located throughout the Delmarva
Peninsula.
BF Financial Services, Inc.
Through its wholly-owned subsidiary, BF Financial Services, Inc., Fruitland
engages in investment advisory and related agency financial services through a
third party brokerage arrangement with Primevest Financial Services, Inc., an
unaffiliated registered broker-dealer. BF Financial Services is a Maryland
corporation, which was incorporated on September 26, 1996.
Competition
While promotional activities emphasize the many advantages of dealing with a
locally-run institution closely attuned to the needs of its community,
Fruitland faces strong competition in all areas of its operations. Most of the
competitors have resources substantially greater than those of Fruitland.
Fruitland also encounters competition from thrift institutions, consumer loan
companies, brokerage firms, investment companies, credit unions and other
financial institutions. This competition comes from entities operating in the
Salisbury, Maryland area that include offices of many of the largest banks in
Maryland.
Fruitland's most direct competition for deposits comes from other commercial
banks, savings banks, savings and loan associations and credit unions
operating in Somerset, Wicomico and Worcester counties, as well as from mutual
fund providers.
Fruitland competes with banking entities, mortgage banking companies and
other institutional lenders for loans. The competition for loans varies from
time to time depending on certain factors. These factors include, among
others, the general availability of lendable funds and credit, general and
local economic conditions, current interest rate levels, conditions in the
real estate market and other factors which are not readily predictable.
Employees
At June 30, 2000, Fruitland had 80 employees of whom four were executive
officers, 75 were full-time employees and 5 were part-time employees.
Fruitland believes its employee relations are good.
Properties
Fruitland's main banking office is located at 109 East Main Street,
Fruitland, Maryland 21826. It's branches are located at:
. 101 West Cedar Lane, Fruitland, Maryland 21826
. 543C Riverside Drive, Salisbury, Maryland 21801
. Route 50 & Nanticoke Road, Salisbury, Maryland 21801
. 1301 Mt. Hermon Road, Salisbury, Maryland 21804
. 2623 North Salisbury Boulevard, Salisbury, Maryland 21801
. 30386 Mt. Vernon Road, Princess Anne, Maryland 21853
Fruitland also operates an off-premises ATM located at 800 South Salisbury
Boulevard, Salisbury, Maryland 21801.
26
<PAGE>
Dividends
Fruitland has declared and paid cash dividends on its common stock of $1.48
per share for 1997, $1.53 per share for 1998 and $1.60 per share for 1999. Any
future determination as to payment of cash dividends will, subject to the
merger agreement, be at the discretion of the board of directors of Fruitland
and will depend on Fruitland's results of operations, financial condition,
capital and regulatory requirements and other factors deemed relevant by the
Fruitland board of directors.
Since the execution of the merger agreement, Fruitland has been subject to
certain contractual restrictions on the declaration and payment of dividends.
In accordance with the terms of the merger agreement, Fruitland declared and
paid a cash dividend of $0.73 per share in June 2000. Subject to certain
conditions, the merger agreement permits Fruitland to pay additional dividends
of up to $1.26 per share in December 2000, or, in the alternative, a dividend
of up to $0.63 in each of September and December 2000, and a dividend of up to
$0.50 per share in March 2001 provided, in each instance, that the merger has
not become effective.
As a depository institution whose deposits are insured by the Federal
Deposit Insurance Corporation, Fruitland may not pay dividends or distribute
any of its capital assets while it remains in default on any assessment due to
the FDIC. Fruitland is not currently in default under any of its obligations
to the FDIC. In addition, FDIC regulations also impose certain minimum capital
requirements which affect the amount of cash available for payment of
dividends by a regulated banking institution such as Fruitland.
As a commercial bank under the Maryland Financial Institutions Law,
Fruitland may declare cash dividends from:
. Undivided profits; or
. With the prior approval of the Maryland Bank Commissioner, out of
surplus in excess of 100% of its required capital stock; and
. In either case, after providing for due or accrued expenses, losses,
interest and taxes
Distributions paid by Fruitland to its stockholders will be taxable to its
stockholders as dividends to the extent of Fruitland's accumulated current
earnings and profits.
Price range of common stock
There is no established public trading market for Fruitland 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.
27
<PAGE>
Principal stockholders
The following table lists the number of shares of Fruitland common stock
beneficially owned by directors and executive officers of Fruitland, and each
person known to Fruitland to beneficially own more than five percent of
Fruitland common stock as of June 30, 2000. Unless we indicate otherwise, the
individuals named below have sole voting and investment power over all shares
beneficially owned by them.
<TABLE>
<CAPTION>
Shares of
Fruitland
capital stock
beneficially
owned
---------------
Percent
of
Name and Address(1) Number class
------------------- ------- -------
<S> <C> <C>
Michael G. Abercrombie, Jr., Director...................... 20 *
John W. Causey, Director................................... 3,016 *
R. Dale Dashiell, Director(2).............................. 1,056 *
Thomas B. Houlihan, Director............................... 5,832 1.33
John B. Long, III, Chairman of the board(3)................ 124,628 28.32
Hugh P. McLaughlin, Jr., Director.......................... 3,924 *
A. Kenneth Mills, Director................................. 5,244 1.19
Robert L. Moore, Director.................................. 20 *
Terry R. Sell, Director(4)................................. 21,672 4.93
Henry E. Tilman, Chief executive officer and president..... 3,696 *
Ronald L. Laws, Chief financial officer, chief operating
officer and executive vice president...................... 176 *
Dorothy C. Long(5)......................................... 49,468 11.24
Joann L. Gallagher(6)...................................... 50,688 11.52
Donald C. Davis(7)......................................... 50,688 11.52
All directors, executive officers, and 5% stockholders as a
group (14 persons)(8)..................................... 320,128 72.76%
</TABLE>
--------
* Indicates holdings of less than one percent.
(1) Each stockholder's address is at Fruitland's principal executive office
unless otherwise noted.
(2) Includes 440 shares held jointly by Mr. Dashiell and his wife, Judith F.
Dashiell, with shared voting and investment power.
(3) Includes 86,720 shares held jointly by Mr. Long and his wife, Jean V.
Long, with shared voting and investment power.
(4) Held jointly by Mr. Sell and his wife, Jill D. Sell, with shared voting
and investment power.
(5) Ms. Long's address is 22 Sea Street, Camden, Massachusetts 04843.
(6) Ms. Gallagher's address is 650 Tuxedo Place, N.W., Atlanta, Georgia
30342-3616.
(7) Includes 25,344 shares held by Donald C. Davis and 25,344 shares held by
his wife, Joan W. Davis. Their address is 904 Camden Avenue, Salisbury,
Maryland 21801.
(8) Includes shares owned as described in notes 1 through 7.
28
<PAGE>
Selected Financial Information
The income statement data, per share data and balance sheet data contained
in the following summary are derived from the consolidated audited historical
financial statements of Fruitland for the five years ended December 31, 1999.
The financial data for the six months ended June 30, 2000 and 1999 are derived
from unaudited financial statements. In the opinion of Fruitland's management
this data includes all normal recurring adjustments necessary for fair
presentation of results of these interim periods.
The summary financial data should be read in conjunction with the historical
financial statements and the related notes included in this prospectus and
proxy statement.
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest and dividend
revenue................ $ 5,668 $ 5,373 $ 11,116 $ 10,056 $ 9,176 $ 8,310 $ 7,772
Interest expense........ 2,511 2,317 4,858 4,428 4,028 3,746 3,311
Net Interest Income..... 3,157 3,056 6,258 5,628 5,148 4,564 4,461
Provision for Loan
Losses................. 150 90 490 108 96 91 90
Other Operating
Revenue................ 822 943 1,219 862 532 413 414
Other Operating
Expense................ 2,596 2,383 4,711 3,956 3,338 2,733 2,650
Income Taxes............ 455 587 840 903 827 784 776
Net Income.............. 778 939 1,436 1,523 1,419 1,369 1,359
Balance Sheet Data
Total assets............ $139,685 $138,609 $145,251 $129,859 $117,786 $104,670 $102,320
Total loans, excluding
loans held for sale,
net of unearned income
and allowance for
credit loss............ 110,702 100,805 108,983 94,825 87,291 82,349 74,138
Total deposits.......... 118,801 124,171 118,761 115,896 104,744 92,479 91,085
Total stockholders'
equity................. 14,267 13,768 13,812 13,372 12,519 11,754 10,843
Per Common Share Data(1)
Net Income.............. $ 1.77 $ 2.13 $ 3.26 $ 3.46 $ 3.23 $ 3.11 $ 3.09
Cash Dividends
Declared............... 0.73 0.88 1.60 1.53 1.48 0.91 0.48
Book value.............. 32.43 31.29 31.39 30.39 28.45 26.71 24.64
Ratios
Return on average assets
(annualized)........... 1.10% 1.41% 1.03% 1.24% 1.27% 1.34% 1.42%
Return on average equity
(annualized)........... 11.14% 13.92% 10.18% 11.62% 11.60% 12.52% 13.31%
Average equity to
average assets......... 9.85% 10.11% 10.15% 10.69% 10.97% 10.67% 10.64%
Cash Dividends Declared
to net income.......... 41.29% 40.99% 49.01% 44.33% 45.80% 29.40% 15.46%
Period-end capital to
period-end
risk-weighted assets:
Tier 1................. 14.32% 14.58% 13.50% 14.80% 15.90% 17.00% 17.60%
Total.................. 15.57% 15.67% 14.60% 15.90% 17.10% 18.20% 18.80%
Period-end Tier 1
leverage ratio......... 10.40% 10.02% 9.69% 10.27% 10.61% 11.20% 10.51%
</TABLE>
--------
(1) Per share data for 1995 through 2000 have been adjusted to give
retroactive effect to the 100% stock dividend in 1998, the 10% stock
dividend in 1998, the 100% stock dividend in 1999, and the 100% stock
dividend in 2000.
29
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion of the consolidated financial condition and results
of operation of Fruitland and its subsidiary, BF Financial Services, Inc.,
contains selected financial information for Fruitland and its subsidiary. It
should be read in conjunction with the consolidated financial statements and
related notes, as well as the other financial information, included elsewhere
in this prospectus and proxy statement.
The selected financial information for Fruitland for the periods ended June
30, 2000 and 1999 has been derived from Fruitland's unaudited financial
statements. In the opinion of Fruitland's management, this data includes all
normal recurring adjustments necessary for the fair presentation of results of
operations for interim periods. Operating results for the six months ended
June 30, 2000 are not necessarily indicative of the operating performance that
may be reported for the full year ended December 31, 2000.
For purposes of the following discussion, "Fruitland" refers to both The
Bank of Fruitland and its wholly-owned subsidiary, BF Financial Services,
unless the context requires otherwise.
Overview
Fruitland's assets, end of period, increased by $12.1 million (10.3%) in
1998, and by $15.4 million (11.9%) in 1999. For the first six months of 2000,
Fruitland's assets have decreased by $5.6 million, or 3.8%. The increase in
1998 was largely due to increased construction lending and growth in the
portfolio of loans held for sale, both of which originate from the activities
of Fruitland's mortgage banking division, BF Mortgage. In 1999, secondary
market loan originations fell off as interest rates began a steady climb.
During 1999, deposits grew $2.9 million (2.5%), well below the dollar and
percentage growth in loans. In the fourth quarter of 1999, Fruitland borrowed
$12.0 million from the Federal Home Loan Bank to fund loan demand and to
provide liquidity in anticipation of potential cash demands related to the
turn of the century date change. In the first six months of 2000, Fruitland
has repaid $6 million to the Federal Home Loan Bank.
Fruitland's loan portfolio, net of unearned income and exclusive of loans
held for sale, increased $7.6 million (8.6%) from 1997 to 1998, followed by an
additional increase of $14.3 million (14.9%) in 1999. During the first six
months of 2000, the loan portfolio increased $3.1 million (2.8%) to
approximately $113.2 million. Fruitland's loan growth from 1998 through the
first half of 2000 can be attributed to robust overall loan demand, active
pursuit of commercial loans and growth in the construction portfolio.
Construction loan growth was largely attributable to BF Mortgage.
Consolidated net income for Fruitland in 1998 was $1,522,598, which was
$103,395 (7.3%) higher than 1997. Consolidated net income for 1999 was
$1,436,417, $86,181 (5.7%) lower than 1998. On a per share basis, consolidated
net income was $3.26 in 1999, $3.46 in 1998, and $3.23 in 1997, giving
retroactive effect to stock splits effected in the form of 100% dividends in
2000, 1999, and 1998, and a 10% stock dividend in 1998. The decline in
consolidated net income from 1998 to 1999 was due mainly to commercial loan
losses related to three borrowers. These losses totaled $283,746, or
approximately 4.5% of net interest income. Consolidated net income decreased
by 17.2% from $939,000 for the first six months of 1999 to $778,000 during the
same period in 2000. Significant factors contributing to this decrease
included:
. An increase of $101,000 in net interest income was reduced by a $60,000
increase in the provision for credit losses.
. Other expenses, net of other operating revenues increased $334,000
(23.2%), while income taxes declined $132,000 (22.5%).
. Increases in salaries and employee benefits comprised $122,000 (36.5%)
of the increase in other expenses, net of other operating revenues while
net income before income taxes generated by the mortgage banking
division declined $110,900 during the first six months of 2000 compared
to the first six months of 1999.
30
<PAGE>
The following sections provide a detailed analysis of the financial
condition and results of operations of Fruitland.
Interest revenue
Fruitland's loan interest revenue increased by approximately $837,000
(10.4%) from 1997 to 1998. This increase in revenues was substantially due to
increased loan volume, with less than a quarter of the overall increase due to
rate increases. Loan revenues increased another $772,100 (8.7%) in 1999.
During this period, increases due to volume offset a decline in revenues
resulting from lowered rates. Fruitland's loan revenues for the six months
ended June 30, 2000 reflected a $300,157 (6.4%) increase over the six month
period ended June 30, 1999.
Fruitland's investment securities interest revenues decreased $29,400 (4.5%)
from 1997 to 1998 which reflected an 8.6% decrease in average portfolio size.
From 1998 to 1999, investment securities revenues increased nearly $359,000
(57.7%). During 1999, the average investment portfolio increased $6.0 million
(59.9%). The increase in the investment portfolio shifted excess funds from
federal funds to callable U. S. Agency securities, a higher yielding vehicle.
The anticipated calls have not occurred as rates have risen more than
projected during the months following implementation of this investment
strategy.
Approximately 73.6% of the $64,800 increase in revenues from Federal Funds
Sold from 1997 to 1998, occurred due to growth of the invested balance, the
remainder being due to rising rates. During 1999, Federal Funds Sold revenues
decreased by $26,200 (6.1%) on a growing average balance, due to declining
rates. The average investment in Federal Funds Sold during the first six
months of 2000 is down $4.5 million (56.4%) to $3.5 million.
31
<PAGE>
Further details as to the yields earned on loans and other earning assets
are quantified in the financial statements of Fruitland presented elsewhere in
this prospectus and proxy statement.
The Bank of Fruitland and Subsidiary
Supplementary Information
Average Balances, Interest and Yields
Three Years Ended December 31, 1999
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
------------------------------ ------------------------------ -----------------------------
Average Average Average
balance Interest Yield balance Interest Yield balance Interest Yield
------------ ----------- ----- ------------ ----------- ----- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold..... $ 7,997,009 $ 402,454 5.03% $ 7,527,363 $ 428,693 5.70% $ 6,655,827 $ 363,894 5.47%
Interest bearing
deposits.............. 1,539,947 85,452 5.55% 2,085,259 130,854 6.28% 2,027,125 123,660 6.10%
Investment securities:
U. S. Treasury........ 1,809,018 115,231 6.37% 3,778,906 235,554 6.23% 5,515,721 345,218 6.26%
U. S. Agency.......... 13,431,772 818,021 6.09% 4,914,868 310,852 6.32% 3,430,081 217,459 6.34%
State and municipal... 125,346 7,976 6.36% 750,737 50,315 6.70% 1,822,397 124,904 6.85%
Other, Federal Home
Loan Bank Dividend... 624,892 42,746 6.84% 557,186 41,228 7.40% 169,997 2,554 1.50%
------------ ----------- ------------ ----------- ------------ ----------
Total investment
securities........... 15,991,028 983,974 6.15% 10,001,697 637,949 6.38% 10,938,196 690,135 6.31%
------------ ----------- ------------ ----------- ------------ ----------
Loans:
Demand and time....... 6,672,925 635,950 9.53% 5,583,973 541,922 9.70% 4,502,421 430,168 9.55%
Mortgage and home
equity............... 88,639,587 8,311,448 9.38% 80,147,698 7,689,552 9.59% 75,372,434 7,014,978 9.31%
Installment........... 7,636,636 699,062 9.15% 6,762,523 642,877 9.51% 5,760,994 592,180 10.28%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- -----
Total loans........... 102,949,148 9,646,460 9.37% 92,494,194 8,874,351 9.59% 85,635,849 8,037,326 9.39%
---- ---- -----
Allowance for loan
losses................ 980,537 983,181 946,166
------------ ------------ ------------
Total loans, net of
allowance............ 101,968,611 9,646,460 9.46% 91,511,013 8,874,351 9.70% 84,689,683 8,037,326 9.49%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- -----
Total interest-earning
assets............... 127,496,595 11,118,340 8.72% 111,125,332 10,071,847 9.06% 104,310,831 9,215,015 8.83%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- -----
Noninterest-bearing
cash.................. 4,670,725 -- 3,452,971 -- 2,837,009 --
Premises and
equipment............. 2,659,915 -- 2,341,253 -- 2,260,514 --
Other assets........... 4,176,839 -- 5,595,774 -- 2,121,942 --
------------ ----------- ------------ ----------- ------------ ----------
Total assets.......... $139,004,074 $11,118,340 $122,515,330 $10,071,847 $111,530,296 $9,215,015
============ =========== ============ =========== ============ ==========
Liabilities and
Stockholders' Equity
Interest-bearing
Deposits
Savings............... $ 20,233,730 $ 626,538 3.10% $ 18,433,793 $ 568,815 3.09% $ 16,927,206 $ 525,176 3.10%
Money market and NOW.. 16,144,458 463,171 2.87% 14,849,455 439,586 2.96% 13,172,865 389,626 2.96%
Other time deposits... 65,255,261 3,608,354 5.53% 58,316,564 3,420,098 5.86% 53,353,341 3,113,080 5.83%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- -----
Total interest-bearing
deposits............. 101,633,449 4,698,063 4.62% 91,599,812 4,428,499 4.83% 83,453,412 4,027,882 4.83%
Borrowed funds......... 2,871,232 159,901 5.57% 0 -- 0.00% 0 -- 0.00%
------------ ----------- ---- ------------ ----------- ---- ------------ ---------- -----
Total interest-bearing
liabilities.......... 104,504,681 4,857,964 4.65% 91,599,812 4,428,499 4.83% 83,453,412 4,027,882 4.83%
---- ---- -----
Noninterest-bearing
deposits.............. 19,139,226 -- 16,701,148 -- 14,899,554 --
------------ ----------- ------------ ----------- ------------ ----------
123,643,907 4,857,964 3.93% 108,300,960 4,428,499 4.09% 98,352,966 4,027,882 4.10%
----------- ----------
Other liabilities...... 1,246,017 -- 1,111,532 -- 944,183 --
Stockholders' equity... 14,114,150 -- 13,102,838 -- 12,233,147 --
------------ ----------- ------------ ----------- ------------ ----------
Total liabilities and
stockholders'
equity............... $139,004,074 $ 4,857,964 $122,515,330 $ 4,428,499 $111,530,296 $4,027,882
============ =========== ============ =========== ============ ==========
Net interest spread.... 4.07% 4.23% 4.00%
==== ==== =====
Net interest income.... $ 6,260,376 $ 5,643,348 $5,187,133
=========== =========== ==========
Net margin on interest-
earning assets........ 4.91% 5.08% 4.97%
==== ==== =====
Interest on investments is presented on a fully taxable
equivalent basis.
</TABLE>
32
<PAGE>
The Bank of Fruitland and Subsidiary
Supplementary Information
Average Balances, Interest and Yields
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
----------------------------- -----------------------------
Average Average
balance Interest Yield balance Interest Yield
------------ ---------- ----- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold...... $ 3,483,913 $ 116,841 6.70% $ 8,110,338 $ 192,178 4.74%
Interest bearing
deposits............... 1,001,648 29,792 5.90% 1,904,727 44,776 4.70%
Investment securities:
U. S. Treasury......... 756,776 23,683 6.26% 2,261,715 71,181 6.30%
U. S. Agency........... 15,990,141 471,026 5.90% 10,567,512 328,378 6.22%
State and municipal.... 100,322 3,217 6.42% 150,542 3,999 5.32%
Other.................. 600,046 11,600 3.94% 565,550 20,944 7.40%
------------ ---------- ------------ ----------
Total investment
securities............ 17,447,285 509,526 5.84% 13,545,319 424,502 6.26%
------------ ---------- ------------ ----------
Loans:
Demand and time........ 6,876,918 309,267 9.05% 6,908,368 286,215 8.33%
Mortgage and home
equity................ 96,531,997 4,267,759 8.89% 89,237,147 4,096,619 9.23%
Installment............ 9,025,340 435,911 9.71% 6,858,198 329,946 9.67%
------------ ---------- ---- ------------ ---------- ----
Total loans............ 112,434,255 5,012,937 8.97% 103,003,713 4,712,780 9.21%
Allowance for loan
losses................. 1,196,841 992,311
------------ ------------
Total loans, net of
allowance............. 111,237,414 5,012,937 9.07% 102,011,402 4,712,780 9.29%
------------ ---------- ---- ------------ ---------- ----
Total interest-earning
assets................ 133,170,260 5,669,096 8.57% 125,571,786 5,274,236 8.61%
------------ ---------- ---- ------------ ---------- ----
Noninterest-bearing
cash................... 4,150,419 -- 3,970,915 --
Premises and equipment.. 2,732,437 2,448,655
Other assets............ 1,786,443 -- 1,794,425 --
------------ ---------- ------------ ----------
Total assets........... $141,839,559 $5,669,096 $133,785,781 $5,374,236
============ ========== ============ ==========
Liabilities and
Stockholders' Equity
Interest-bearing
Deposits
Savings................ $ 20,196,702 $ 310,295 3.10% $ 19,471,908 $ 300,229 3.10%
Money market and NOW... 14,624,555 212,754 2.92% 15,947,895 230,795 2.92%
Other time deposits.... 63,415,152 1,770,388 5.61% 64,310,978 1,785,705 5.59%
------------ ---------- ---- ------------ ---------- ----
Total interest-bearing
deposits.............. 98,236,409 2,293,437 4.69% 99,730,781 2,316,729 4.67%
Borrowed funds.......... 7,741,758 217,985 5.67% 11,050 269 4.89%
------------ ---------- ---- ------------ ---------- ----
Total interest-bearing
liabilities........... 105,978,167 2,511,422 4.77% 99,741,831 2,316,998 4.67%
----
Noninterest-bearing
deposits............... 20,223,868 -- 18,752,746 --
------------ ---------- ------------ ----------
126,202,035 2,511,422 4.00% 118,494,577 2,316,998 3.94%
---------- ----------
Other liabilities....... 1,087,618 -- 1,037,681 --
Stockholders' equity.... 14,549,906 -- 14,253,523 --
------------ ------------
Total liabilities and
stockholders' equity.. $141,839,559 $2,511,422 $133,785,781 $2,316,998
============ ========== ============ ==========
Net interest spread..... 3.80% 3.94%
==== ====
Net interest income..... $3,157,674 $3,057,238
========== ==========
Net margin on interest-
earning assets......... 4.77% 4.90%
==== ====
</TABLE>
Interest on investments is presented on a fully tax equivalent basis.
Interest expense
Fruitland experienced an increase of approximately $400,600 (9.9%) in
interest expense from 1997 to 1998. During a period of rate stability, this
increase was due primarily to an increase in average interest-bearing deposit
33
<PAGE>
balances of $8.1 million (9.8%). From 1998 to 1999, interest expense increased
$429,500 (9.7%). This includes $159,900 of interest on borrowed funds. In
1998, Fruitland had no borrowed funds or associated expense. The deposit
interest expense increase of $269,600 was caused by deposit balance growth
offset by a decline in the interest expense rate on other time deposits from
5.86% in 1998 to 5.53% in 1999.
Fruitland experienced an increase of $194,000 (8.4%) in interest expense in
the first six months of 2000 as compared to the first six months of 1999. This
increase was comprised of a decrease in deposit interest of $24,000 and an
increase of $218,000 in interest on borrowed funds. The decrease in deposit
interest expense reflected higher rates on a decreased balance. There was no
interest on borrowed funds through June 30, 1999.
Net interest income
The following table provides further analysis of the change in net interest
income during 1998, 1999 and the first six months of 2000.
<TABLE>
<CAPTION>
Six Months ended June 30, Year ended December 31, Year ended December 31,
2000 compared with 1999 1999 compared with 1998 1998 compared with 1997
Increase/(decrease) due to Increase/(decrease) due to Increase/(decrease) due to
------------------------------ --------------------------------- ------------------------------
Total Rate Volume Total Rate Volume Total Rate Volume
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Interest bearing
deposits............. $(14,984) $ 27,461 $ (42,445) $ (45,402) $ (11,156) $ (34,246) $ 7,194 $ 3,648 $ 3,546
Federal funds sold.... (75,337) 143,956 (219,293) (26,239) (53,009) 26,770 64,799 17,126 47,673
Investment securities:
U.S. Treasury........ (47,498) 47,313 (94,811) (120,323) 2,401 (122,724) (109,664) (939) (108,725)
U.S. Government
Agency.............. 142,648 (194,640) 337,288 507,169 (31,099) 538,268 93,393 (742) 94,135
State, county, and
municipals.......... (543) 2,129 (2,672) (29,402) (321) (29,081) (51,798) (787) (51,011)
Other................ (9,344) (11,897) 2,553 1,518 (3,492) 5,010 38,674 967 37,707
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Total investment
securities.......... 85,263 (157,095) 242,358 358,962 (32,511) 391,473 (29,395) (1,501) (27,894)
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Loans:
Demand and time...... 23,052 25,670 (2,618) 94,028 (11,600) 105,628 111,754 8,466 103,288
Mortgage and home
equity.............. 171,140 (502,207) 673,347 621,896 (192,476) 814,372 674,574 229,997 444,577
Installment.......... 105,965 (103,660) 209,625 56,185 (26,943) 83,128 50,697 (52,260) 102,957
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Total loans.......... 300,157 (580,197) 880,354 772,109 (231,019) 1,003,128 837,025 186,203 650,822
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Total interest
revenue............. 295,099 (565,875) 860,974 1,059,430 (327,695) 1,387,125 879,623 205,476 674,147
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Interest-bearing
liabilities
Savings and NOW
deposits............. 10,066 (12,380) 22,446 57,723 2,105 55,618 43,639 (3,065) 46,704
Money market.......... (18,041) 20,547 (38,588) 23,585 (14,747) 38,332 49,960 333 49,627
Other time deposits... (15,317) 34,765 (50,082) 188,256 (218,352) 406,608 307,018 17,662 289,356
Other borrowed funds.. 217,716 (160,061) 377,777 159,901 -- 159,901 -- -- --
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Total interest
expense............. 194,424 (117,129) 311,553 429,465 (230,994) 660,459 400,617 14,930 385,687
-------- --------- --------- ---------- --------- ---------- --------- -------- ---------
Net interest income... $100,675 $(448,746) $ 549,421 $ 629,965 $ (96,701) $ 726,666 $ 479,006 $190,546 $ 288,460
======== ========= ========= ========== ========= ========== ========= ======== =========
</TABLE>
The variance that is both rate/volume is reported with the rate variance.
Income taxes
In 1999, 1998 and 1997, Fruitland's effective income tax rate was 36.9%,
37.2%, and 36.8%, respectively. These effective rates differ from statutory
rates due primarily to tax-exempt income and non-deductibility of some
interest and other expenses.
Liquidity
Liquidity is the ability to meet financial obligations that arise during the
normal course of business. Liquidity is needed primarily to meet the borrowing
and deposit withdrawal requirements of the customers of
34
<PAGE>
Fruitland, as well as for meeting current and planned expenditures. Fruitland
derives liquidity through available lines of credit with other banks, the
maturity distribution and classification status--held to maturity vs.
available for sale--of the investment portfolio, loan repayments and income.
Fruitland maintains a portfolio of readily marketable investments that could
be converted to cash on an immediate basis except for those securities pledged
to secure deposits of public funds and those designated as "held to maturity."
As of June 30, 2000, Fruitland had available lines of credit of $3,750,000
in overnight federal funds and other unsecured lines of credit from
correspondent banks. Secured credit lines from those correspondent banks total
$5,000,000. In addition, Fruitland has a line of credit with the Federal Home
Loan Bank secured by a floating lien on its residential first mortgage loans.
The amount available under this line relates to the size of the residential
first mortgage portfolio.
In anticipation of increased cash demands related to public perception of
the much-publicized "Y2K" computer processing problems, Fruitland increased
its branch cash supply to $7.5 million at December 31, 1999, from $1.8 million
and $1.5 at December 31, 1998 and 1997, respectively. This temporary liquidity
need was funded by short-term borrowing from the Federal Home Loan Bank.
Interest rate sensitivity
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of Fruitland's earning assets and
funding sources. Fruitland's Asset/Liability Management 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 Fruitland's liquidity, growth and capital adequacy
goals. The Asset/Liability Management Committee's objective is to maximize net
interest margins during periods of volatile, as well as stable, interest rates
in order to attain earnings growth and to maintain sufficient liquidity to
satisfy depositors' requirements and meet credit needs of customers.
The following table summarizes the anticipated maturities or repricing of
Fruitland's interest-earning assets and interest-bearing liabilities as of
June 30, 2000 and Fruitland's interest sensitivity gap. An interest
sensitivity gap consists of interest-earning assets less interest-bearing
liabilities. A positive gap for any time period means that more interest-
earning assets will mature or reprice during that time period than interest-
bearing liabilities. During periods of rising interest rates, a short-term
positive interest sensitivity gap position would generally increase net
interest income.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap (in thousands)
-------------------------------------------------------------
1 to 3 3 to 12 1 to 3 3 to 5 Over 5
June 30, 2000 Immediate months months years years years Total
------------- --------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment
securities(1).......... -- 250 2,276 4,148 9,195 -- 15,869
Federal Funds Sold...... -- 1,489 -- -- -- -- 1,489
Interest-bearing
deposits in banks...... -- 780 -- -- -- -- 780
Loans(2)................ 16,500 29,016 19,498 8,918 5,803 33,567 113,302
------ ------- ------- -------- ------- ------- -------
Total interest-earning
assets................ 16,500 31,535 21,774 13,066 14,998 33,567 131,440
====== ======= ======= ======== ======= ======= =======
NOW Accounts............ -- 3,887 -- 3,320 -- -- 7,207
MMDA Accounts........... -- 4,094 -- 4,093 -- -- 8,187
Savings Accounts........ -- 9,684 -- 9,683 -- -- 19,367
Certificates of deposit
less than $100,000..... -- 7,403 22,702 14,179 10,843 -- 55,127
Certificates of deposit
equal to or over
$100,000............... -- 1,292 3,411 2,314 1,547 -- 8,564
------ ------- ------- -------- ------- ------- -------
Total interest-bearing
deposits............... -- 26,360 26,113 33,589 12,390 -- 98,452
Other borrowings........ -- -- -- -- 6,000 -- 6,000
------ ------- ------- -------- ------- ------- -------
Total interest-bearing
liabilities........... -- 26,360 26,113 33,589 18,390 -- 104,452
====== ======= ======= ======== ======= ======= =======
Interest Rate
Sensitivity Gap........ 16,500 $ 5,175 $(4,339) $(20,523) $(3,392) $33,567
Cumulative Interest Rate
Sensitivity Gap........ 16,500 $21,675 $17,336
Cumulative Interest Rate
Sensitivity............ 1.82 1.33
</TABLE>
--------
(1) Securities are stated at book value for held-to-maturity and fair market
value for available for sale.
(2) Loans are stated net of unearned income and net of allowance for credit
losses.
35
<PAGE>
The analysis provided in the table above includes the following assumptions:
(1) fixed-rate loans other than residential first mortgages are scheduled by
contractual maturity, and variable-rate loans are scheduled by repricing date;
(2) residential first mortgages, which are written on demand, are scheduled by
amortization period; (3) loan prepayments are incorporated at percentages
which vary at different rate shock levels; and (4) investment securities are
scheduled by maturity date.
Due to their nature as both liquid funds and investment savings, the
balances of money market and savings deposits are assumed to be 50% sensitive
within three months and 50% sensitive in the 1-3 year horizon.
Analysis of investment securities
The composition of Fruitland's investment portfolio valued at amortized cost
as of June 30, 2000, and December 31, 1999, 1998, and 1997, is as follows:
<TABLE>
<CAPTION>
6/30/00 12/31/99 12/31/98 12/31/97
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities....... $ 449,455 $ 1,148,987 $ 2,750,277 $4,662,291
Federal Agency Securities...... 15,745,892 15,995,312 6,800,000 3,649,799
State and Municipal
Securities.................... 100,181 100,438 300,944 901,603
Equity Securities.............. 600,100 600,000 559,000 559,000
----------- ----------- ----------- ----------
$16,895,628 $17,844,737 $10,410,221 $9,772,693
=========== =========== =========== ==========
</TABLE>
In 1999, the Asset/Liability Management Committee, comprised of
representatives of management and the board of directors, adopted a strategy
of shifting excess funds from federal funds to higher yielding callable
federal agency securities. The result was a $9.2 million increase in federal
agency securities during 1999. The anticipated calls have not occurred as
rates have risen more than projected during the months following
implementation of this investment strategy. Of the $15.7 million invested in
federal agencies at June 30, 2000, $2 million mature within one year, while
the balance of $13.7 million mature in one to five years.
The amortized cost and estimated fair values of debt securities at June 30,
2000, by contractual maturities, are shown below:
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
------------------------------------------- ----------------------------------------------
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities
Due in one year or
less.................. $ -- $-- $ -- $ -- $ 449,455 $-- $ (517) $ 448,938
Federal Agency
Securities
Due in one year or
less.................. -- -- -- -- 2,000,000 -- (22,968) 1,977,032
Due after one year
through five years.... 1,495,892 -- (26,126) 1,469,766 12,250,000 -- (402,735) 11,847,265
State and Municipal
Securities(1)
Due in one year or
less.................. 100,181 49 -- 100,230 -- -- -- --
---------- ---- -------- ---------- ----------- ---- --------- -----------
Total.................. $1,596,073 $ 49 $(26,126) $1,569,996 $14,699,455 $-- $(426,220) $14,273,235
========== ==== ======== ========== =========== ==== ========= ===========
</TABLE>
--------
(1) All of the obligations of states and political subdivisions are rated "A"
or higher by either Moody's Investors Services or Standard & Poor's
Corporation.
36
<PAGE>
Analysis of loans
The table below represents a breakdown of loan balances, exclusive of loans
held for sale, of Fruitland as of June 30, 2000, and December 31, 1999, 1998,
and 1997. Fruitland had no foreign loans in any period presented.
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------
2000 1999 1998 1997
-------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Demand and time............................... $ 6,896 $ 6,460 $ 5,694 $ 5,631
Installment................................... 8,152 8,995 7,015 6,009
Mortgage and home equity...................... 96,972 94,632 83,082 76,585
-------- -------- ------- -------
Total loans, net of unearned income......... $112,020 $110,087 $95,791 $88,225
======== ======== ======= =======
</TABLE>
Fruitland concentrates its lending to customers primarily in the Delmarva
region. Although the loan portfolio is diversified, its performance will be
influenced by the economy of the region.
The following table shows the contractual final maturities and interest rate
sensitivities of loans of Fruitland at June 30, 2000. Balances presented are
net of unearned income and exclude loans held for sale. Some loans may include
contractual installment payments which are not reflected in the tables until
final maturity. In addition, Fruitland's experience indicates that a
significant number of loans will be extended or repaid prior to contractual
final maturity. Consequently, the table cannot necessarily be viewed as an
accurate forecast of future cash payments.
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------------
On one year or
less After 1 through 5 years After 5 years
---------------- ------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
------- -------- ------------ -------------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand and time......... $ 1,398 $ 4,704 $ 547 $ 132 $ 114 $--
Mortgage and home
equity................. 28,218 8,708 6,468 1,787 51,018 774
Installment............. 331 -- 6,171 -- 1,650 --
------- ------- ------------ ----------- ------- ----
Total loans, net of
unearned income...... $29,947 $13,412 $ 13,186 $ 1,919 $52,782 $774
======= ======= ============ =========== ======= ====
</TABLE>
The following table provides information concerning non-performing loans,
past due loans and non-performing assets (including other real estate owned
and property in liquidation).
<TABLE>
<CAPTION>
December 31,
June 30, ----------------
2000 1999 1998 1997
-------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Non-performing Loan:
Nonaccrual Loans(1).............................. $277 $ 77 $ 93 $136
Restructured Loans(2)............................ -- -- -- --
---- ---- ---- ----
Total Non-Performing Loans..................... 277 77 93 136
Other Real Estate Owned & Property in
Liquidation(3).................................... -- -- -- --
---- ---- ---- ----
Total Non-Performing Assets.................... 277 77 93 136
Loans Past Due 90 days or More(4).................. 446 722 705 119
---- ---- ---- ----
Total Non-Performing Assets and Past Due
Loans......................................... $723 $799 $798 $255
==== ==== ==== ====
Non-Performing Assets to Total Loans............... 0.25% 0.07% 0.10% 0.15%
Non-Performing Assets and Past Due
Loans to Total Loans, Net of Unearned Income..... 0.65% 0.73% 0.83% 0.29%
</TABLE>
--------
(1) When scheduled principal or interest payments are past due 90 days or more
on any loan not fully secured by collateral or not in the process of
collection, the accrual of interest income is discontinued and recognized
only as collected. The loan is restored to accrual status when all amounts
past due have been paid and the borrower has demonstrated the ability to
service the debt on a current basis.
37
<PAGE>
(2) Restructured loans are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15. Nonaccrual loans are
not included in these totals.
(3) Other real estate and property in liquidation were collateral on loans to
which Fruitland had taken title. This property, which is held for resale,
is carried at the lower of fair value or principal balance of the related
loan.
(4) Past due loans are loans that were contractually past due 90 days or more
as to principal or interest payments at the dates indicated. Nonaccrual
and restructured loans are not included in these totals.
As of June 30, 2000, there were no interest-bearing assets, other than
loans, classifiable as nonaccrual, 90 days past due, restructured or problem
assets.
Fruitland provides for loan losses based on a review of its loan portfolio
through the establishment of an allowance for credit losses which is increased
by provisions charged against earnings. Net charge-offs are applied against
the allowance, and Fruitland's management and board of directors evaluate the
allowance balance quarterly to determine its adequacy to absorb losses in the
existing portfolio. Management and the board consider the following factors in
determining the adequacy of the allowance:
. Historical relationships among loans outstanding;
. Credit loss experience and the current level of the allowance;
. Continuing evaluation of non-performing loans and loans classified by
management as having potential for future deterioration taking into
consideration collateral value and the financial strength of the
borrower and guarantors;
. Continuing evaluation of the present and future economic environment.
Fruitland's loan officers and internal auditor conduct regular reviews of
the loan portfolio's quality. In addition, bank regulatory agencies and
independent accountants periodically review the loan portfolio.
At June 30, 2000, the allowance of $1,317,452 represented 1.18% of gross
loans, which Fruitland's management and board of directors consider to be
sufficient to address the risks in the current loan portfolio. At December 31,
1999, the allowance was 1.00% of gross loans. The provision made for credit
losses in the first six months of 2000 was $150,000. This, in addition to a
$75,668 recovery related to a charged-off loan, is primarily responsible for
the increase in the percentage of the allowance relative to gross loans during
the six months ended June 30, 2000. As of June 30, 2000, there were
approximately $446,000 in loans past due 90 days or more, not including those
loans on which the accrual of interest had been discontinued. Nonaccruing
loans totaled $277,000 at June 30, 2000.
38
<PAGE>
The following table presents certain information regarding loan loss
experience and the allowance for credit losses:
<TABLE>
<CAPTION>
Year Ended December 31,
June 30, -----------------------
2000 1999 1998 1997
-------- ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Allowance at Beginning of Period............ $1,104 $ 966 $ 934 $ 915
------ ------ ------ ------
Less Losses Charged Off:
Installment............................. 11 45 6 7
Credit card and related plans........... 1 5 1 6
Mortgage and home equity................ -- 122 71 40
Demand and time......................... 5 185 5 26
------ ------ ------ ------
Total Losses Charged Off.............. 17 357 83 79
------ ------ ------ ------
Recoveries of Losses Previously Charged
Off:
Installment............................. 3 1 -- --
Credit card and related plans........... 1 2 -- --
Mortgage and home equity................ 76 -- 5 --
Demand and time......................... 1 2 2 2
------ ------ ------ ------
Total Recoveries...................... 81 5 7 2
------ ------ ------ ------
Net Losses Charged Off (Recoveries)......... (64) 352 76 77
Provisions to Allowance Charged to Operating
Expenses................................... 150 490 108 96
------ ------ ------ ------
Allowance at End of Period(1)............... $1,318 $1,104 $ 966 $ 934
====== ====== ====== ======
Ratios of Net Charge-Offs (Recoveries) to
Average Total Loans(1)..................... (0.06)% 0.34% 0.08% 0.09%
Ratios of Allowance to Non-Performing and
Past Due Loan(1)........................... 182.30% 138.17% 121.05% 366.27%
Ratios of Allowance to Loans, Net of
Unearned Income............................ 1.18% 1.00% 1.01% 1.06%
</TABLE>
--------
(1) There is no direct relationship between the size of the allowance or the
related provision for credit losses, and the non-performing and past due
loans. Accordingly, the ratio of the allowance to non-performing and past
due loans may tend to fluctuate widely.
The following is a breakdown of the allowance. It is based primarily on
those factors discussed previously in evaluating the adequacy of the allowance
as a whole. Since any 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>
Years Ended December 31,
June 30, ---------------------------------------------------
2000 1999 1998 1997
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and time......... $ 246,737 18.73% $ 247,107 22.38% $210,020 21.74% $235,165 25.18%
Installment............. 334,693 25.40 252,393 22.86 208,018 21.53 215,359 23.06
Mortgage and home
equity................. 736,022 55.87 604,405 54.76 548,126 56.73 483,246 51.76
---------- ------ ---------- ------ -------- ------ -------- ------
Total.................. $1,317,452 100.00% $1,103,815 100.00% $966,156 100.00% $933,770 100.00%
========== ====== ========== ====== ======== ====== ======== ======
</TABLE>
39
<PAGE>
Deposit analysis
The following table sets forth the average deposit balances and average
rates paid on deposits during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
Six Months Ended -------------------------------------------------------------
June 30, 2000 1999 1998 1997
-------------------- -------------------- -------------------- -------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------------ ------- ------------ ------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total-Noninterest-
Bearing Demand
Deposits............... $ 20,223,868 $ 19,139,226 $ 16,701,148 $14,899,554
------------ ------------ ------------ -----------
Interest-Bearing
Deposits
Checking Accounts
(NOW)................. 6,260,550 2.84% 6,383,134 2.84% 5,790,750 2.84% 5,505,333 2.84%
Savings Accounts....... 20,196,702 3.10% 20,233,730 3.10% 18,433,793 3.09% 16,927,206 3.10%
Money Market Accounts.. 8,364,005 2.99% 9,761,323 2.87% 9,058,705 2.96% 7,667,532 2.96%
Certificates of Depos-
it, $100,000 or More.. 8,964,956 5.36% 9,621,417 5.84% 7,742,250 6.06% 6,530,750 5.74%
Other time Deposits.... 54,450,196 5.65% 55,633,844 5.47% 50,574,314 5.83% 46,822,591 5.85%
------------ ------------ ------------ -----------
Total Interest-Bearing
Deposits.............. 98,236,409 101,633,448 91,599,812 83,453,412
------------ ------------ ------------ -----------
Total Deposits......... $118,460,277 $120,772,674 $108,300,960 $98,352,966
============ ============ ============ ===========
</TABLE>
The following table provides the maturities of certificates of deposit of
Fruitland in amounts of $100,000 or more. Fruitland had no brokered deposits
as of June 30, 2000.
<TABLE>
<CAPTION>
Years Ended December 31,
June 30, ------------------------
2000 1999 1998 1997
-------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Maturing or Repricing in:
3 Months or Less............................ $1,292 $2,544 $1,741 $1,350
Over 3 Months Through 12 Months............. 3,411 3,579 2,862 2,415
Over 12 Months.............................. 3,861 3,005 3,656 3,891
------ ------ ------ ------
Total..................................... $8,564 $9,128 $8,259 $7,656
====== ====== ====== ======
</TABLE>
Other borrowed funds
Fruitland has borrowed from the Federal Home Loan Bank under a line of
credit secured by a floating lien on its residential first mortgage loans. As
a condition of obtaining this line of credit, Fruitland was required to
purchase shares of capital stock in the Federal Home Loan Bank.
As of December 31, 1999, Fruitland had a note payable to the Federal Home
Loan Bank in the amount of $8 million. The balance remaining on the note at
June 30, 2000 was $6 million. The Federal Home Loan Bank advanced this loan
September 30, 1999, with a final maturity of September 30, 2009. Interest is
payable quarterly. The interest rate was fixed at 5.07% until March 30, 2000
at which time the Federal Home Loan Bank exercised the option to convert the
loan to a floating rate, repricing quarterly. The rate at June 30, 2000 was
6.78%. As of December 31, 1999, The Bank of Fruitland had also been advanced
$4 million under a short-term, fixed rate credit extension from the Federal
Home Loan Bank. The 5.98% loan was advanced on October 29, 1999, with interest
due at maturity on January 31, 2000. Except as described above, Fruitland had
no other borrowed funds in the years ended December 31, 1999, 1998 and 1997,
or in the six months ended June 30, 2000.
40
<PAGE>
Capital adequacy
The Federal Deposit Insurance Corporation has historically determined the
adequacy of a bank's capital resources by comparison of its capital to its
assets. Specifically, capital adequacy is based on the ratios of Tier 1
capital to risk-weighted assets and qualifying total capital to risk-weighted
assets. The FDIC's capital adequacy guidelines require Fruitland 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 Fruitland is then compared to the aggregate value of
such risk-weighted assets or commitments to determine if additional capital is
required. At June 30, 2000, Fruitland's ratio of qualifying total capital to
risk-weighted assets was 15.58% 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 Fruitland's capital position to its various
minimum statutory and regulatory capital requirements for the quarter ended
June 30, 2000.
Leverage Capital Ratio
June 30, 2000
<TABLE>
<CAPTION>
Percent of Average
Amount Total Assets
-------- ---------------------
(in thousands)
<S> <C> <C>
Tier 1 Capital(1)......... $ 14,530 10.33%
Leverage Capital Ratio
Requirement.............. 4,219 3.00%
-------- -----
Excess.................. $ 10,311 7.33%
======== =====
Average Total Assets...... $140,642
========
Risk-based Capital Ratio
June 30, 2000
<CAPTION>
Percent of Risk-Based
Amount Capital
-------- ---------------------
(in thousands)
<S> <C> <C>
Tier 1 Capital(1)......... $ 14,530 14.32%
Risk-Based Tier 1 Capital
Ratio Requirement........ 4,057 4.00%
-------- -----
Excess.................. $ 10,473 10.32%
======== =====
Tier 1 Capital(1)......... $ 14,530 14.32%
Tier 2 Capital(2)......... 1,269 1.25%
-------- -----
Total Risk-Based
Capital(3)............. $ 15,799 15.57%
Fully Phased-In Risk-Based
Capital Requirement...... 8,115 8.00%
-------- -----
Excess.................. $ 7,684 7.57%
======== =====
Risk-Weighted Assets...... $101,432
========
</TABLE>
--------
(1) Tier 1 Capital consists of capital stock, surplus, and undivided profits.
(2) Tier 2 Capital consists of the allowable portion of the Allowance for
Credit Losses.
(3) Total Risk-Based Capital represents the sum of Tier 1 and 2 Capital.
41
<PAGE>
Legal Matters
Certain legal matters in connection with the validity of the securities
offered by this prospectus and proxy statement and the merger will be passed
upon for Mercantile 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 Mercantile.
Experts
The consolidated financial statements of Mercantile Bankshares Corporation
and Affiliates as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, incorporated in this prospectus
and proxy statement by reference to the Annual Report of Mercantile Bankshares
Corporation for the year ended December 31, 1999, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given upon the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of The Bank of Fruitland and
Subsidiary as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999, included in this prospectus and proxy
statement have been audited by Rowles & Company, LLP, independent certified
public accountants, whose report thereon is included herein in reliance on the
report of said firm, which report is given upon the authority of said firm as
experts in auditing and accounting.
Forward Looking Statements
Portions of this prospectus and proxy statement may be deemed to contain
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward looking statements include estimates,
predictions, opinions or statements of belief and the underlying assumptions.
For example, the information contained under the captions "Background of the
merger" and "Opinion of Fruitland's financial adviser," while meant to be a
factual account of matters considered in the analysis of the merger, could be
read as incorporating forward-looking statements. We believe that any such
statements are appropriately qualified in the portions of the prospectus and
proxy statement in which they appear. Nonetheless, we remind and caution you
that these statements were based on numerous variables and assumptions which
are inherently uncertain. Actual results can be affected by many unpredictable
factors, including interest rates, effects of monetary policy and other
economic conditions, and may vary materially from the statements made.
Where You Can Find More Information
Mercantile has filed with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act of 1933 covering
1,100,000 shares of Mercantile common stock. Statements contained in this
prospectus and proxy statement concerning any document filed as an exhibit to
the registration statement are not necessarily complete, and in each instance
reference is made to the copy of the applicable document filed with the
Securities and Exchange Commission or attached as an annex or exhibit to the
registration statement.
Mercantile is subject to the informational requirements of the Securities
Exchange Act of 1934, and files reports, proxy statements and other
information with the Securities and Exchange Commission. These reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained
42
<PAGE>
by the Securities and Exchange Commission at the following locations of the
Securities and Exchange Commission:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center CitiCorp Center
Room 1024 Suite 1300 500 West Madison Street,
Washington, D.C. 20549- New York, New York 10048 Suite 1400
1004 Chicago, Illinois 60621-
2511
You may also obtain copies of this information from the Public Reference
Section of the Securities and Exchange Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549-1004, at prescribed rates.
The Securities and Exchange Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information concerning Mercantile which has been filed electronically
with the Securities and Exchange Commission.
The Securities and Exchange Commission allows Mercantile to "incorporate by
reference" information into this prospectus and proxy statement. This means
that Mercantile can disclose important information to you by referring you to
another document filed separately with the Securities and Exchange Commission.
The information incorporated by reference is considered to be a part of this
prospectus and proxy statement, except for any information that is superseded
by information that is included directly in this document.
The following documents, previously filed with the Securities and Exchange
Commission, are incorporated by reference into this prospectus and proxy
statement:
1. Mercantile's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999;
2. Mercantile's Report on Form 8-K dated June 2, 2000;
3. Mercantile's Quarterly Reports on Form 10-Q for the periods ended March
31, 2000 and June 30, 2000; and
4. The descriptions of Mercantile common stock and preferred stock purchase
rights set forth in Mercantile's registration statement filed under Section
12 of the Securities Exchange Act of 1934, and any amendment or report
filed for the purpose of updating any such description;
In addition, Mercantile incorporates by reference additional documents that
they may file with the Securities and Exchange Commission under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of
this prospectus and proxy statement and the date of the Fruitland special
meeting. These documents include periodic reports, including annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as
well as proxy statements.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus and proxy statement 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 the statement. Any
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.
You can obtain any of the documents incorporated by reference in this
document through Mercantile or from the Securities and Exchange Commission
through its web site at the address described above. This information is
available to you without charge upon your oral or written request to
Mercantile Bankshares Corporation, Two Hopkins Plaza, P.O. Box 1477,
Baltimore, Maryland 21203, Attention: Secretary (telephone (410) 237-5900). To
ensure timely delivery of the documents, any request should be made by
November 2, 2000.
43
<PAGE>
We have not authorized anyone 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, any information or
representation not contained in this prospectus and proxy statement 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 an offer or solicitation of an
offer, or proxy solicitation in that jurisdiction. Neither the delivery of
this prospectus and proxy statement nor the issuance or sale of any securities
under this prospectus and proxy statement shall under any circumstances create
any implication that there has been no change in the information set forth in
this prospectus and proxy statement since the date of this prospectus and
proxy statement or incorporated by reference in this prospectus and proxy
statement since the date of this prospectus and proxy statement.
44
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
Report of Independent Auditors............................................ F-2
Financial Statements
Consolidated balance sheets as of December 31, 1999 and 1998............ F-4
Consolidated statements of income for the three years ended December 31,
1999................................................................... F-5
Consolidated statements of changes in stockholders' equity for the three
years ended December 31, 1999.......................................... F-6
Consolidated statements of cash flows for the three years ended December
31, 1999............................................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
Unaudited Interim Financial Statements:
Consolidated balance sheets as of June 30, 2000 and 1999................ F-23
Consolidated statements of income for the six months ended June 30, 2000
and 1999............................................................... F-24
Consolidated statements of changes in stockholders' equity for the six
months ended June 30, 2000 and 1999.................................... F-25
Consolidated statements of cash flows for the six months ended June 30,
2000 and 1999.......................................................... F-26
Note to Unaudited Consolidated Financial Statements..................... F-28
</TABLE>
F-1
<PAGE>
[Rowles & Company Letterhead]
Report of Independent Auditors
The Board of Directors and Stockholders
The Bank of Fruitland and Subsidiary
Fruitland, Maryland
We have audited the accompanying consolidated balance sheets of The Bank of
Fruitland and Subsidiary as of December 31, 1999 and 1998, and the related
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Bank
of Fruitland and Subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Rowles & Company, LLP
Salisbury Maryland
January 12, 2000
F-2
<PAGE>
The Bank of Fruitland and Subsidiary
Financial Statements
December 31, 1999
F-3
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks............................ $ 9,639,529 $ 3,594,758
Federal funds sold................................. 238,327 8,651,254
Interest-bearing cash accounts..................... 2,980,809 2,064,831
Securities available for sale...................... 14,574,156 6,000,953
Securities held to maturity (approximate Market
values of $2,226,631 and $3,928,815).............. 2,245,522 3,900,430
Federal Home Loan Bank stock....................... 600,000 559,000
Loans held for sale................................ 1,479,344 6,767,127
Loans, less allowance for credit losses of
$1,103,815 and $966,156........................... 108,982,774 94,824,883
Premises and equipment............................. 2,703,692 2,424,971
Accrued interest income............................ 911,006 718,163
Other assets....................................... 421,875 121,050
Deferred income taxes.............................. 474,427 231,662
------------- ------------
$ 145,251,461 $129,859,082
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Demand............................................ $ 19,635,599 $ 19,733,234
Money market...................................... 9,989,281 10,419,861
Savings and now................................... 25,651,018 24,175,990
Other time........................................ 63,485,101 61,567,045
------------- ------------
118,760,999 115,896,130
Accrued interest payable........................... 462,925 436,843
Borrowed funds..................................... 12,000,000 --
Other liabilities.................................. 215,986 154,320
------------- ------------
131,439,910 116,487,293
------------- ------------
Stockholders' equity
Common stock, par value $10 per share; authorized
1,000,000 shares; issued and outstanding 220,000
shares in 1999 and 100,000 shares in 1998........ 2,200,000 1,000,000
Stock dividend distributable...................... -- 100,000
Surplus........................................... 5,050,000 6,150,000
Undivided profits................................. 6,823,416 6,090,999
------------- ------------
14,073,416 13,340,999
Accumulated other comprehensive income............. (261,865) 30,790
------------- ------------
13,811,551 13,371,789
------------- ------------
$ 145,251,461 $129,859,082
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest revenue
Loans, including fees....................... $9,646,460 $8,874,351 $8,037,326
U.S. Treasury securities.................... 115,231 235,554 345,218
U.S. Government agency securities........... 818,021 310,852 217,459
State and municipal securities.............. 5,539 34,941 86,739
Other investments........................... 85,452 130,854 123,660
Federal funds sold.......................... 402,454 428,693 363,894
Federal Home Loan Bank dividend............. 42,746 41,228 2,554
---------- ---------- ----------
Total interest revenue................... 11,115,903 10,056,473 9,176,850
---------- ---------- ----------
Interest expense
Deposits.................................... 4,698,063 4,428,499 4,027,882
Other....................................... 159,901 -- 198
---------- ---------- ----------
Total interest expense................... 4,857,964 4,428,499 4,028,080
---------- ---------- ----------
Net interest income...................... 6,257,939 5,627,974 5,148,770
Provision for credit losses.................. 490,000 108,000 95,500
---------- ---------- ----------
Net interest income after provision for
credit losses........................... 5,767,939 5,519,974 5,053,270
---------- ---------- ----------
Other operating revenue
Service charges on deposit accounts......... 490,481 429,595 428,225
Mortgage banking fees....................... 419,834 193,620 (25,298)
Other fees.................................. 308,509 238,884 128,581
---------- ---------- ----------
Total other operating revenue............ 1,218,824 862,099 531,508
---------- ---------- ----------
Other expenses
Salaries.................................... 2,145,546 1,787,740 1,535,327
Employee benefits........................... 418,184 332,633 236,436
Occupancy................................... 356,082 303,299 279,353
Furniture and equipment..................... 398,306 296,944 260,513
Other operating............................. 1,392,621 1,235,911 1,026,593
---------- ---------- ----------
Total other expenses..................... 4,710,739 3,956,527 3,338,222
---------- ---------- ----------
Income before income taxes................... 2,276,024 2,425,546 2,246,556
Income taxes................................. 839,607 902,948 827,353
---------- ---------- ----------
Net income................................... $1,436,417 $1,522,598 $1,419,203
========== ========== ==========
Earnings per common share.................... $ 3.26 $ 3.46 $ 3.23
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------ Undivided Comprehensive Comprehensive
Shares Par Value Surplus Profits Income Income
------- ---------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 50,000 $ 500,000 $ 5,000,000 $6,224,198 $ 30,111
Net income.............. -- -- -- 1,419,203 -- $1,419,203
Unrealized loss on
investment securities
available for sale net
of income taxes........ -- -- -- -- (4,828) (4,828)
----------
Comprehensive income.... $1,414,375
==========
Cash dividend $1.48 per
share.................. -- -- -- (650,000) --
------- ---------- ----------- ---------- ---------
Balance, December 31,
1997................... 50,000 500,000 5,000,000 6,993,401 25,283
Net income.............. -- -- -- 1,522,598 -- $1,522,598
Unrealized gain on
investment securities
available for sale net
of income taxes........ -- -- -- -- 5,507 5,507
----------
Comprehensive income.... $1,528,105
==========
Cash dividend $1.53 per
share.................. -- -- -- (675,000) --
Stock split effected in
the form of a 100%
stock dividend......... 50,000 500,000 (500,000) -- --
10% stock dividend...... 10,000 100,000 1,650,000 (1,750,000) --
------- ---------- ----------- ---------- ---------
Balance, December 31,
1998................... 110,000 1,100,000 6,150,000 6,090,999 30,790
Net income.............. -- -- -- 1,436,417 -- $1,436,417
Unrealized loss on
investment securities
available for sale net
of income taxes........ -- -- -- -- (292,655) (292,655)
----------
Comprehensive income.... $1,143,762
==========
Cash dividend $1.60 per
share.................. -- -- -- (704,000) --
Stock split effected in
the form of a 100%
stock dividend......... 110,000 1,100,000 (1,100,000) -- --
------- ---------- ----------- ---------- ---------
Balance, December 31,
1999................... 220,000 $2,200,000 $ 5,050,000 $6,823,416 $(261,865)
======= ========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received..................... $ 10,897,822 $ 9,908,619 $ 9,170,884
Fees and commissions received......... 1,181,824 1,440,918 729,660
Net proceeds of loans originated for
sale................................. 5,183,033 (5,517,150) (1,145,227)
Interest paid......................... (4,831,882) (4,391,469) (3,971,202)
Cash paid to suppliers and employees.. (4,251,689) (4,253,481) (3,217,818)
Income taxes paid..................... (1,045,003) (873,197) (760,020)
------------ ----------- -----------
7,134,105 (3,685,760) 806,277
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment
securities and certificates of
deposit
Held to maturity..................... 2,900,188 3,528,205 3,069,839
Available for sale................... 2,880,000 1,125,000 1,800,000
Purchase of investment securities and
certificates of deposit
Held to maturity..................... (1,494,687) (1,406,216) (2,838,298)
Available for sale................... (12,628,818) (3,794,992) (447,312)
Loans made, net of principal
collected............................ (14,629,829) (7,573,748) (5,017,349)
Proceeds from sale of assets.......... 12,748 -- --
Purchases of premises, equipment and
computer software.................... (702,732) (431,176) (436,222)
------------ ----------- -----------
(23,663,130) (8,552,927) (3,869,342)
------------ ----------- -----------
Cash flows from financing activities
Net increase (decrease) in
Time deposits........................ 1,918,056 5,514,520 6,452,417
Other deposits....................... 946,813 5,637,880 5,812,452
Borrowed funds....................... 12,000,000 -- --
Dividends paid........................ (704,000) (675,000) (650,000)
------------ ----------- -----------
14,160,869 10,477,400 11,614,869
------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents...................... (2,368,156) (1,761,287) 8,551,804
Cash and cash equivalents at beginning
of year............................... 12,246,012 14,007,299 5,455,495
------------ ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 9,877,856 $12,246,012 $14,007,299
============ =========== ===========
NONCASH ACTIVITIES
Foreclosure of real estate............ $ -- $ (51,127) $ --
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
The Bank of Fruitland and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of net income to net
cash provided by operating
activities
Net income.......................... $ 1,436,417 $ 1,522,598 $ 1,419,203
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization...... 383,740 313,036 277,049
Provision for credit losses........ 490,000 108,000 95,500
Proceeds from sale of loans held
for sale.......................... 35,576,581 44,410,709 14,127,065
Originations of loans held for
sale.............................. (30,393,548) (49,927,859) (15,272,292)
Loss on sale of assets............. 18,643 11,908 --
Amortization of premiums and
accretion of discounts............ (6,988) (12,527) (13,169)
Decrease (increase) in
Accrued interest receivable....... (192,843) (55,041) 27,230
Other assets...................... (61,547) (67,843) 67,013
Deferred income taxes............. (60,198) (51,702) 12,033
Increase (decrease) in
Deferred fees on loans............ (18,062) (80,286) (20,027)
Accrued interest payable.......... 26,082 37,030 56,878
Accrued income taxes, net of
refunds.......................... (145,198) 81,453 13,724
Other liabilities................. 81,026 24,764 16,070
------------ ------------ ------------
$ 7,134,105 $ (3,685,760) $ 806,277
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies in the accompanying financial
statements conform to generally accepted accounting principles and to general
practices within the banking industry. Management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions may affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Business
The Bank of Fruitland is a financial institution operating primarily in
Wicomico and Somerset counties on Maryland's Eastern Shore. The Bank offers
deposit and credit services to individuals, businesses, associations and
government entities.
In 1997, the bank formed a division to perform mortgage banking activities.
Mortgages originated by this division are usually sold to third parties within
days of settlement. The Bank does not retain servicing of the loans sold. The
mortgage division operates primarily in Delaware and in the counties on the
Eastern Shore of Maryland.
BF Financial Services, Inc., a subsidiary of The Bank of Fruitland, was
organized in 1996 and offers a full array of investment products and services
to individuals located primarily in Wicomico and Somerset counties.
Principles of Consolidation
The consolidated financial statements of The Bank of Fruitland include the
accounts of its wholly owned subsidiary, BF Financial Services, Inc.
Intercompany accounts and transactions have been eliminated.
Earnings per Common Share
Earnings per common share are determined by dividing net income by the
440,000 shares outstanding giving retroactive effect to stock dividends
declared, including the stock dividend declared in 2000.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold.
Investment Securities
As securities are purchased, management determines if the securities should
be classified as held to maturity or available for sale. Securities which
management has the intent and ability to hold to maturity are recorded at
amortized cost, which is cost adjusted for amortization of premiums and
accretion of discounts to maturity. Securities which may be sold before
maturity are classified as available for sale and carried at fair value with
unrealized gains and losses included in stockholders' equity on an after tax
basis. Gains and losses on disposal are determined using the specific-
identification method.
Loans held for Sale
The mortgage banking division originates loans to be sold to investors.
Because of the short holding period, these loans are carried at cost which
approximates market value.
F-9
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Loans and Allowance for Credit Losses
Loans are stated at face value less deferred origination fees and the
allowance for credit losses.
Interest on loans is accrued based on the principal amounts outstanding. The
accrual of interest is discontinued when any portion of the principal or
interest is ninety days past due and collateral is insufficient to discharge
the debt in full. The Bank recognizes loan origination fees as revenue over
the expected life of the loan.
The allowance for credit losses is established through a provision for
credit losses charged to expenses. If the current economy or real estate
market were to suffer a severe downturn, the estimate for uncollectible
accounts would need to be increased. In management's judgment, the allowance
is adequate to provide for credit losses based on management's review and
analysis of the loan portfolio as well as prevailing and anticipated economic
conditions.
Loans are considered impaired when, based on current information, management
considers it unlikely that the collection of principal and interest payments
will be made according to contractual terms. Generally, loans are not reviewed
for impairment until the accrual of interest has been discontinued.
Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method for all classes of
assets.
Income Taxes
The provision for income taxes includes taxes payable for the current year
and deferred income taxes. Deferred income taxes are provided to account for
temporary differences between income reported in the financial statements and
taxable income. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
2. Cash and Equivalents
The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the limit,
including unsecured federal funds sold to the same banks, were approximately
$8,006,380 and $9,156,687 for 1999 and 1998, respectively.
Banks are required to carry noninterest-bearing cash reserves at specified
percentages of deposit balances. The Bank's normal amount of cash on hand and
on deposit with other banks is sufficient to satisfy the reserve requirements.
3. Stockholders' Equity
At December 31, 1999, the surplus account of the bank includes earned
surplus of $3,400,000 which is available for recording of future stock
dividends at fair market value.
F-10
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
4. Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999
-----------------
Available for sale
U.S. Treasury................... $ 749,215 $ 1,317 $ 360 $ 750,172
U.S. Government agency.......... 14,250,000 -- 426,016 13,823,984
------------ ------- -------- -----------
$ 14,999,215 $ 1,317 $426,376 $14,574,156
============ ======= ======== ===========
Held to maturity
U.S. Treasury................... $ 399,772 $ 728 $ -- $ 400,500
U.S. Government agency.......... 1,745,312 -- 20,077 1,725,235
State and municipal............. 100,438 458 -- 100,896
------------ ------- -------- -----------
$ 2,245,522 $ 1,186 $ 20,077 $ 2,226,631
============ ======= ======== ===========
December 31, 1998
-----------------
Available for sale
U.S. Treasury................... $ 1,450,791 $25,006 $ -- $ 1,475,797
U.S. Government agency.......... 4,500,000 29,766 4,610 4,525,156
------------ ------- -------- -----------
$ 5,950,791 $54,772 $ 4,610 $ 6,000,953
============ ======= ======== ===========
Held to maturity
U.S. Treasury................... $ 1,299,486 $12,123 $ -- $ 1,311,609
U.S. Government agency.......... 2,300,000 15,234 1,406 2,313,828
State and municipal............. 300,944 2,434 -- 303,378
------------ ------- -------- -----------
$ 3,900,430 $29,791 $ 1,406 $ 3,928,815
============ ======= ======== ===========
</TABLE>
Contractual maturities and the amount of pledged securities follow. Actual
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------------ ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999
-----------------
Maturing
Within one year................. $ 550,042 $ 551,359 $ 750,210 $ 751,162
Over one to five years.......... 14,449,173 14,022,797 1,495,312 1,475,469
------------ ----------- ---------- ----------
$ 14,999,215 $14,574,156 $2,245,522 $2,226,631
============ =========== ========== ==========
Pledged securities............... $ 649,164 $ 649,797 $ 100,000 $ 100,062
============ =========== ========== ==========
December 31, 1998
-----------------
Maturing
Within one year................. $ 1,202,064 $ 1,217,875 $1,100,271 $1,105,053
Over one to five years.......... 4,748,727 4,783,078 2,550,159 2,575,169
Over five years................. -- -- 250,000 248,593
------------ ----------- ---------- ----------
$ 5,950,791 $ 6,000,953 $3,900,430 $3,928,815
============ =========== ========== ==========
Pledged securities............... $ 398,795 $ 409,500 $ 300,520 $ 303,156
============ =========== ========== ==========
</TABLE>
F-11
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Investments are pledged to secure the deposits of local governments.
5. Loans and Allowance for Credit Losses
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Demand and time................................. $ 6,459,806 $ 5,694,003
Mortgage........................................ 94,631,612 83,082,292
Installment..................................... 8,995,171 7,014,744
------------ -----------
110,086,589 95,791,039
Allowance for credit losses..................... 1,103,815 966,156
------------ -----------
Loans, net...................................... $108,982,774 $94,824,883
============ ===========
</TABLE>
Maturities in the loan portfolio at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Within one year................................. $ 43,535,771 $50,607,435
One to five years............................... 15,327,163 18,187,105
After five years................................ 51,623,225 27,414,131
------------ -----------
110,486,159 96,208,671
Deferred origination fees....................... 399,570 417,632
------------ -----------
$110,086,589 $95,791,039
============ ===========
</TABLE>
The Bank writes most loans with fixed rates. Most mortgage loans are written
on a demand basis to provide flexibility to adjust to a changing market.
The Bank lends to customers primarily in the Delmarva region. Although the
loan portfolio is diversified, its performance will be influenced by the
economy of the region.
The Bank has commitments outstanding at December 31, as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Home equity lines of credit...................... $ 1,574,549 $ 1,653,639
Construction funds............................... 6,585,397 5,189,254
Overdraft protection............................. 674,654 588,314
Other commitments................................ 6,865,271 2,802,856
----------- -----------
Total loan commitments........................... $15,699,871 $10,234,063
=========== ===========
Irrevocable letters of credit.................... $ 1,077,080 $ 1,003,642
=========== ===========
</TABLE>
Loan commitments and lines of credit are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan
commitments generally have interest rates fixed at current market amounts,
fixed expiration dates, and may require payment of a fee. Lines of credit
generally have variable interest rates. Such lines do not represent future
cash requirements because it is unlikely that all customers will draw upon
their lines in full at any time.
F-12
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Letters of credit are commitments issued to guarantee the performance of a
customer to a third party. Loan commitments, lines of credit, and letters of
credit are made on the same terms, including collateral, as outstanding loans.
The Bank's exposure to credit loss in the event of nonperformance by the
borrower is represented by the contract amount of the commitment. Management
is not aware of any accounting loss the Bank will incur by the funding of
these commitments.
Nonaccrual loans and interest that would have been accrued on these loans at
December 31, follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Nonaccrual loans.......................................... $76,964 $93,204
======= =======
Interest.................................................. $ 6,764 $27,404
======= =======
</TABLE>
Management has identified no impaired loans.
Amounts 90 days or more past due at December 31, including nonaccruing
loans, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Mortgage................................................ $721,821 $789,755
Installment............................................. 72,035 8,050
Demand and time......................................... 4,929 --
-------- --------
$798,785 $797,805
======== ========
</TABLE>
Transactions in the allowance for credit losses for the years ended December
31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance............................. $ 966,156 $ 933,770 $ 915,290
Provision charged to operations............... 490,000 108,000 95,500
Recoveries.................................... 16,172 6,923 2,322
---------- ---------- ----------
1,472,328 1,048,693 1,013,112
Loans charged off............................. 368,513 82,537 79,342
---------- ---------- ----------
Ending balance................................ $1,103,815 $ 966,156 $ 933,770
========== ========== ==========
</TABLE>
6. Related Party Transactions
The executive officers and directors of the Bank enter into loan
transactions with the Bank in the ordinary course of business. The terms of
these transactions are similar to the terms provided to other borrowers
entering into similar loan transactions. At December 31, 1999 and 1998, the
total amount of such loans outstanding was $8,505,241 and $6,807,614.
F-13
<PAGE>
The Bank of Fruitland and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
7. Premises and Equipment
A summary of premises and equipment, and the related depreciation, is as
follows:
<TABLE>
<CAPTION>
Estimated
Useful life 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Land and improvements........................ 9-15 years $ 943,757 $ 936,765
Premises..................................... 7-33 years 1,826,317 1,566,976
Furniture and equipment...................... 5-10 years 1,781,973 1,701,965
Leasehold improvements....................... 10-15 years 211,070 210,050
---------- ----------
4,763,117 4,415,756
Accumulated amortization and depreciation.... 2,059,425 1,990,785
---------- ----------
Net premises and equipment................... $2,703,692 $2,424,971
========== ==========
Depreciation expense......................... $ 322,912 $ 259,730
========== ==========
</TABLE>
Included in other assets and other operating expense is computer software
and the related amortization as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Software cost.......................................... $434,550 $393,363
Accumulated amortization............................... 348,274 315,778
-------- --------
$ 86,276 $ 77,585
======== ========
Amortization expense................................... $ 60,828 $ 53,306
======== ========
</TABLE>
8. Deposits
Included in other time deposits are certificates of deposit in amounts of
$100,000 or more. These certificates and their remaining maturities at
December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Three months or less.............................. $ 2,544,004 $1,740,908
Over three through twelve months.................. 3,579,420 2,861,961
Over twelve months................................ 3,004,761 3,656,136
----------- ----------
$ 9,128,185 $8,259,005
=========== ==========
Interest expense.................................. $ 562,319 $ 469,071
=========== ==========
</TABLE>
9. Long-term Debt and Lines of Credit
The Bank may borrow up to $21,348,000 from the Federal Home Loan Bank (FHLB)
through any combination of notes or line of credit advances. The line of
credit interest rate is a variable rate set daily by the lender. Both the
notes payable and the line of credit are secured by a floating lien on all of
the Bank's residential first mortgage loans. The Bank was required to purchase
shares of capital stock in the FHLB as a condition to obtaining the line of
credit.
F-14
<PAGE>
The Bank of Fruitland and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The Bank has a note payable to the Federal Home Loan Bank in the amount of
$8,000,000. The loan was advanced September 30, 1999, with interest fixed at
5.07% and a final maturity of September 30, 2009. Interest is payable near the
end of each calendar quarter. The FHLB has the option to convert the loan to a
floating rate note on March 30, 2000.
The Bank has also been advanced $4,000,000 under a short-term, fixed rate
credit extension from the FHLB. The 5.98% loan was advanced on October 29,
1999, with interest and principal due at maturity of January 31, 2000.
In addition to the line of credit available from the FHLB, the Bank has
available lines of credit of $3,750,000 in overnight federal funds and other
unsecured lines of credit from other correspondent banks. Secured credit lines
from these correspondent banks total $5,000,000.
10. Other Operating Expenses
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Advertising.................................. $ 104,719 $ 87,143 $ 84,810
ATM service charges.......................... 80,349 70,418 54,246
Books and periodicals........................ 16,760 47,426 32,889
Correspondent bank charges................... 57,394 44,224 39,945
Data processing.............................. 68,066 74,265 61,579
Delivery service............................. 67,105 64,110 52,553
Director and committee fees.................. 202,940 158,950 158,680
FDIC assessment.............................. 13,420 12,419 11,196
Printing and stationery...................... 207,405 176,306 126,596
Professional fees............................ 87,199 78,556 58,581
Postage...................................... 89,923 75,239 74,967
Software amortization........................ 60,828 53,306 51,024
Telephone.................................... 72,108 79,716 63,157
Other........................................ 264,405 213,833 156,370
----------- ---------- ----------
$ 1,392,621 $1,235,911 $1,026,593
=========== ========== ==========
</TABLE>
11. Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal........................................... $796,661 $814,088 $684,276
State............................................. 103,146 140,562 131,044
-------- -------- --------
899,807 954,650 815,320
Deferred........................................... (60,200) (51,702) 12,033
-------- -------- --------
$839,607 $902,948 $827,353
======== ======== ========
</TABLE>
F-15
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
The components of the deferred income tax expenses (benefits) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Provision for credit losses....................... $(53,164) $(12,507) $(7,137)
Depreciation...................................... (14,693) (10,753) 8,085
Discount accretion................................ (4,423) (17,960) 5,172
Nonaccrual interest............................... 7,972 (4,321) 5,913
Organization costs................................ 4,108 (6,161) --
-------- -------- -------
$(60,200) $(51,702) $12,033
======== ======== =======
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets
Allowance for credit losses........................ $355,353 $302,189 $289,682
Nonaccrual interest................................ 2,612 10,584 6,263
Organization costs................................. 2,053 6,161 --
Unrealized loss on investment securities available
for sale.......................................... 163,193 -- --
-------- -------- --------
523,211 318,934 295,945
-------- -------- --------
Deferred tax liabilities
Depreciation....................................... 47,098 61,791 72,544
Discount accretion................................. 1,686 6,109 24,069
Unrealized gain on investment securities available
for sale.......................................... -- 19,372 15,908
-------- -------- --------
48,784 87,272 112,521
-------- -------- --------
$474,427 $231,662 $183,424
======== ======== ========
</TABLE>
A reconciliation of the provision for taxes on income from the statutory
federal income tax rate to the effective income tax rates follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory federal income tax rate...................... 34.0% 34.0% 34.0%
Tax effect of tax-exempt income............................... (0.2) (0.8) (1.4)
State income tax, net of federal benefit...................... 2.7 3.8 3.9
Nondeductible items........................................... 0.4 0.2 0.3
---- ---- ----
36.9% 37.2% 36.8%
==== ==== ====
</TABLE>
12. Lease Commitments
The Bank leased a branch office effective January 15, 1997. The lease dated
November 13, 1996 is for an original term of ten years and includes an option
to renew for an additional ten years. The Bank is liable for all expenses
related to the building in addition to the rent. Parking lot spaces are rented
under an annually renewable lease agreement.
F-16
<PAGE>
The Bank of Fruitland and Subsidiary
Notes to Consolidated Financial Statements--(Continued)
Lease obligations will require payments as follows:
<TABLE>
<CAPTION>
Minimum
Year Rental
---- ---------
<S> <C>
2000............................................................ $ 22,300
2001............................................................ 22,400
2002............................................................ 22,400
2003............................................................ 22,400
2004............................................................ 25,835
Remaining....................................................... 53,051
---------
$ 168,386
=========
</TABLE>
Total rent expense was $41,230 for 1999, $30,326 for 1998, and $22,344 for
1997.
13. Fair Value of Financial Instruments
The estimated fair values of the Bank's financial instruments are summarized
in the following table. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques
prescribed by the FASB and may not be indicative of the net realizable or
liquidation values. Also, the calculation of estimated fair values is based on
market conditions at a specific point in time and may not reflect current or
future fair values.
The fair values of securities are estimated using a matrix that considers
yield to maturity, credit quality, and marketability.
The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect. The
fair value of variable-rate loans, including loans with a demand feature, is
estimated to equal the carrying amount. The valuation of loans is adjusted for
possible credit losses.
Loans held for sale are held for such short periods that cost approximates
fair value.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of fixed-
maturity time deposits is estimated based on interest rates currently offered
for deposits of similar remaining maturities.
F-17
<PAGE>
The Bank Of Fruitland And Subsidiary
Notes To Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
------------ ------------
<S> <C> <C>
December 31, 1999
Financial assets
Cash and due from banks............................. $ 9,639,529 $ 9,639,529
Federal funds sold.................................. 238,327 238,327
Interest-bearing deposits........................... 2,980,809 2,986,242
Investment securities............................... 17,419,678 17,400,787
Loans, net.......................................... 108,982,774 108,822,999
Loans held for sale................................. 1,479,344 1,479,344
Accrued interest receivable......................... 911,006 911,006
Financial liabilities
Noninterest-bearing deposits........................ 19,635,599 19,635,599
Interest-bearing deposits...........................
Without fixed maturities............................ 35,640,299 35,640,299
Time deposits with fixed maturities................. 63,485,101 63,899,850
Borrowed funds...................................... 12,000,000 11,980,534
Accrued interest payable............................ 462,925 462,925
December 31, 1998
Financial assets
Cash and due from banks............................. $ 3,594,758 $ 3,594,758
Federal funds sold.................................. 8,651,254 8,651,254
Interest-bearing deposits........................... 2,064,831 2,057,798
Investment securities............................... 10,460,383 10,488,768
Loans, net.......................................... 94,824,883 94,874,456
Loans held for sale................................. 6,767,127 6,767,127
Accrued interest receivable......................... 718,163 718,163
Financial liabilities
Noninterest-bearing deposits........................ 19,733,234 19,733,234
Interest-bearing deposits...........................
Without fixed maturities............................ 34,595,851 34,595,851
Time deposits with fixed maturities................. 61,567,045 62,377,640
Accrued interest payable............................ 436,843 436,843
</TABLE>
14. Pension Plan
The Bank has adopted a defined contribution profit sharing plan qualifying
under section 401(k) of the Internal Revenue Code. The Plan covers all
employees with one year of service who have reached 18 years of age. The Plan
requires the Bank to match employee contributions at a rate of 50% up to a
maximum of 4% of employee eligible compensation. Pension expense was $57,726
for 1999, $44,525 for 1998, and $31,663 for 1997.
F-18
<PAGE>
The Bank Of Fruitland And Subsidiary
Notes To Consolidated Financial Statements--(Continued)
15. Capital Standards
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
adopted risk-based capital standards for banking organizations. These
standards require ratios of capital to assets for minimum capital adequacy and
to be classified as well capitalized under prompt corrective action
provisions. As of December 31, the capital ratios and minimum capital
requirements of the Bank are as follows:
<TABLE>
<CAPTION>
Minimum To be well
Actual Capital Adequacy Capitalized
------------- ---------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ---------------- ------- -----
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total capital(1)................. $15,177 14.6% $ 8,314 8.0% $10,392 10.0%
Tier 1 capital(1)................ $14,073 13.5% $ 4,157 4.0% $ 6,235 6.0%
Tier 1 capital(2)................ $14,073 9.4% $ 5,970 4.0% $ 7,462
December 31, 1998 5.0%
Total capital(1)................. $14,307 15.9% $ 7,215 8.0% $ 9,019 10.0%
Tier 1 capital(1)................ $13,341 14.8% $ 3,607 4.0% $ 5,411 6.0%
Tier 1 capital(2)................ $13,341 10.5% $ 5,095 4.0% $ 6,369 5.0%
December 31, 1997
Total capital(1)................. $13,427 17.1% $ 6,281 8.0% $ 7,851 10.0%
Tier 1 capital(1)................ $12,493 15.9% $ 3,140 4.0% $ 4,710 6.0%
Tier 1 capital(2)................ $12,493 10.6% $ 4,713 4.0% $ 5,892 5.0%
</TABLE>
--------
(1) (To risk-weighted assets)
(2) (To average fourth quarter assets)
16. Commitments And Contingencies
The mortgage banking division sells loans in the normal course of business
with a ninety day recourse period. At December 31, 1999, 1998, and 1997, loans
sold during the last quarter total $5,639,230, $13,154,944, and $6,521,075,
respectively. At December 31, 1999 and 1998, the division had outstanding
commitments totaling $1,929,853 and $4,948,390.
17. Segments
The Bank of Fruitland's reportable segments are strategic business units
that offer complementary products and services to the core business of
banking. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Bank provides
the accounting for all segments and charges a management fee for this service
to the other segments. The Bank has also lent money to the segments with terms
similar to those offered third parties.
F-19
<PAGE>
The Bank Of Fruitland And Subsidiary
Notes To Consolidated Financial Statements--(Continued)
Segment information for the three reportable segments follows:
<TABLE>
<CAPTION>
Year Ended December 31, Mortgage Brokerage Segment Consolidated
1999 Core Bank Division Subsidiary Totals Eliminations Totals
----------------------- ------------ -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue........ $ 11,158,966 $ -- $ -- $ 11,158,966 $(43,063) $ 11,115,903
Interest expense........ 4,857,964 32,234 10,829 4,901,027 (43,063) 4,857,964
Net interest income..... 6,301,002 (32,234) (10,829) 6,257,939 -- 6,257,939
Provision for credit
losses................. 490,000 -- -- 490,000 -- 490,000
Net interest income
after provision for
credit losses.......... 5,811,002 (32,234) (10,829) 5,767,939 -- 5,767,939
Other operating revenues
from external
customers.............. 637,502 420,702 160,620 1,218,824 -- 1,218,824
Intersegment operating
revenues............... 30,000 -- -- 30,000 (30,000) --
Depreciation and
amortization expense... 358,673 21,075 3,993 383,741 -- 383,741
Other operating
expenses............... 3,818,398 346,100 192,500 4,356,998 (30,000) 4,326,998
Income before income
taxes.................. 2,301,433 21,293 (46,702) 2,276,024 -- 2,276,024
Income tax expense
(benefit).............. 844,614 9,535 (14,542) 839,607 -- 839,607
Net income (loss)....... 1,456,819 11,758 (32,160) 1,436,417 -- 1,436,417
Segment assets.......... 145,680,837 122,958 60,952 145,864,747 (613,286) 145,251,461
Expenditures for segment
purchases of premises,
equipment and
software............... 683,869 16,240 2,623 702,732 -- 702,732
</TABLE>
A reconciliation of total segment assets to consolidated total assets
follows:
<TABLE>
<S> <C>
Total segment assets........................................ $145,864,747
Elimination of Intersegment loans........................... (565,000)
Elimination of Intersegment deposit Accounts................ (48,286)
------------
$145,251,461
============
</TABLE>
F-20
<PAGE>
The Bank Of Fruitland And Subsidiary
Notes To Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, Mortgage Brokerage Segment Consolidated
1998 Core Bank Division Subsidiary Totals Eliminations Totals
----------------------- ------------ --------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue........ $ 10,104,677 $ -- $ -- $ 10,104,677 $ (48,204) $ 10,056,473
Interest expense........ 4,428,499 35,892 12,312 4,476,703 (48,204) 4,428,499
Net interest income..... 5,676,178 (35,892) (12,312) 5,627,974 -- 5,627,974
Provision for credit
losses................. 108,000 -- -- 108,000 -- 108,000
Net interest income
after provision for
credit losses.......... 5,568,178 (35,892) (12,312) 5,519,974 -- 5,519,974
Other operating revenues
from external
customers.............. 554,622 211,621 95,856 862,099 -- 862,099
Intersegment operating
revenues............... 30,000 -- -- 30,000 (30,000) --
Depreciation and
amortization expense... 294,546 15,141 3,349 313,036 -- 313,036
Other operating
expenses............... 3,193,395 330,606 149,490 3,673,491 (30,000) 3,643,491
Income before income
taxes.................. 2,664,859 (170,018) (69,295) 2,425,546 -- 2,425,546
Income tax expense
(benefit).............. 992,538 (67,742) (21,848) 902,948 -- 902,948
Net income (loss)....... 1,672,321 (102,276) (47,447) 1,522,598 -- 1,522,598
Segment assets.......... 130,326,064 139,708 50,484 130,516,256 (657,174) 129,859,082
Expenditures for segment
purchases of premises,
equipment and
software............... 377,422 48,409 5,345 431,176 -- 431,176
</TABLE>
A reconciliation of total segment assets to consolidated total assets
follows:
<TABLE>
<S> <C>
Total segment assets........................................ $130,516,256
Elimination of Intersegment loans........................... (575,000)
Elimination of Intersegment deposit Accounts................ (82,174)
------------
$129,859,082
============
</TABLE>
18. Subsequent Events
Per share data has been adjusted to give retroactive effect to the stock
split effected in the form of a 100% stock dividend in 2000.
F-21
<PAGE>
The Bank of Fruitland and Subsidiary
Unaudited Financial Statements
June 30, 2000
F-22
<PAGE>
The Bank of Fruitland and Subsidiary
Consolidated Balance Sheets (unaudited)
<TABLE>
<CAPTION>
June 30,
---------------------------
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks........................... $ 4,542,831 $ 3,499,105
Federal funds sold................................ 1,489,472 9,401,864
Interest-bearing cash accounts.................... 779,636 1,373,434
Securities available for sale..................... 14,273,234 13,944,785
Securities held to maturity (approximate market
values of $1,569,995 and $2,450,176)............. 1,596,073 2,444,979
Federal Home Loan Bank stock...................... 600,100 580,000
Loans held for sale............................... 1,187,465 2,427,972
Loans, less allowance for credit losses of
$1,317,452 and $1,034,441........................ 110,701,790 100,805,034
Premises and equipment............................ 2,779,159 2,673,586
Accrued interest income........................... 918,518 900,585
Other assets...................................... 342,145 217,899
Deferred income taxes............................. 474,876 339,661
------------- ------------
$ 139,685,299 $138,608,904
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Demand........................................... $ 20,349,171 $ 18,808,910
Money market..................................... 8,186,822 10,212,000
Savings and now.................................. 26,573,999 27,465,578
Other time....................................... 63,690,908 67,684,681
------------- ------------
118,800,900 124,171,169
Accrued interest payable.......................... 459,820 459,990
Borrowed funds.................................... 6,000,000 --
Other liabilities................................. 157,083 209,517
------------- ------------
125,417,803 124,840,676
============= ============
Stockholders' equity
Common stock, par value $10 per share; authorized
1,000,000 shares; issued and outstanding 440,000
shares in 2000, and 110,000 shares in 1999...... 4,400,000 1,100,000
Surplus.......................................... 4,400,000 6,150,000
Undivided profits................................ 5,730,075 6,645,272
------------- ------------
14,530,075 13,895,272
Accumulated other comprehensive income............ (262,579) (127,044)
------------- ------------
14,267,496 13,768,228
------------- ------------
$ 139,685,299 $138,608,904
============= ============
</TABLE>
See Note to Unaudited Financial Statements
F-23
<PAGE>
The Bank of Fruitland and Subsidiary
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest revenue
Loans, including fees................................. $5,012,938 $4,712,781
U.S. Treasury securities.............................. 23,683 71,181
U.S. Government agency securities..................... 471,026 328,378
State and municipal securities........................ 2,234 2,777
Other investments..................................... 29,792 44,776
Federal funds sold.................................... 116,841 192,178
Federal Home Loan Bank dividend....................... 11,600 20,944
---------- ----------
Total interest revenue............................. 5,668,114 5,373,015
---------- ----------
Interest expense
Deposits.............................................. 2,293,437 2,316,729
Other................................................. 217,985 269
---------- ----------
Total interest expense............................. 2,511,422 2,316,998
---------- ----------
Net interest income................................ 3,156,692 3,056,017
Provision for credit losses............................ 150,000 90,000
---------- ----------
Net interest income after provision for credit
losses............................................ 3,006,692 2,966,017
---------- ----------
Other operating revenue
Service charges on deposit accounts................... 222,514 207,985
Other fees............................................ 599,634 735,218
---------- ----------
Total other operating revenue...................... 822,148 943,203
========== ==========
Other expenses
salaries.............................................. 1,242,856 1,148,362
Employee benefits..................................... 243,597 216,516
Occupancy............................................. 188,263 155,057
Furniture and equipment............................... 180,057 182,436
Other operating....................................... 741,089 680,576
---------- ----------
Total other expenses............................... 2,595,862 2,382,947
---------- ----------
Income before income taxes............................. 1,232,978 1,526,273
Income taxes........................................... 455,119 587,000
---------- ----------
Net income............................................. $ 777,859 $ 939,273
========== ==========
Earnings per common share.............................. $ 1.77 $ 2.13
========== ==========
</TABLE>
See Note to Unaudited Financial Statements
F-24
<PAGE>
The Bank of Fruitland and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common stock Other
------------------ Undivided Comprehensive Comprehensive
Shares Par Value Surplus Profits Income Income
------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 110,000 $1,100,000 $ 6,150,000 $ 6,090,999 $ 30,790
Net income.............. -- -- -- 939,273 -- $ 939,273
Unrealized loss on
investment securities
available for sale net
of income taxes........ -- -- -- -- (157,834) (157,834)
---------
Comprehensive income.... $ 781,439
=========
Cash dividend $.88 per
share.................. -- -- -- (385,000) --
------- ---------- ----------- ----------- ---------
Balance, June 30, 1999.. 110,000 1,100,000 6,150,000 6,645,272 (127,044)
Net income.............. -- -- -- 497,144 -- $ 497,144
Unrealized gain on
investment securities
available for sale net
of income taxes........ -- -- -- -- (134,821) (134,821)
---------
Comprehensive income.... $ 362,323
=========
Cash dividend $.73 per
share.................. -- -- -- (319,000) --
Stock split effected in
the form of a 100%
stock dividend......... 110,000 1,100,000 (1,100,000) -- --
------- ---------- ----------- ----------- ---------
Balance, December 31,
1999................... 220,000 2,200,000 5,050,000 6,823,416 (261,865)
Transfer to surplus..... -- -- 1,550,000 (1,550,000) --
Net income.............. -- -- -- 777,859 -- $ 777,859
Unrealized loss on
investment securities
available for sale net
of income taxes........ -- -- -- -- (714) (714)
---------
Comprehensive income.... $ 777,145
=========
Cash dividend $.73 per
share.................. -- -- -- (321,200) --
Stock split effected in
the form of a 100%
stock dividend......... 220,000 2,200,000 (2,200,000) -- --
------- ---------- ----------- ----------- ---------
Balance, June 30, 2000.. 440,000 $4,400,000 $ 4,400,000 $ 5,730,075 $(262,579)
======= ========== =========== =========== =========
</TABLE>
See Note to Unaudited Financial Statements
F-25
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received................................. $ 5,631,138 $ 5,179,057
Fees and commissions received..................... 819,538 951,705
Net proceeds of loans originated for sale......... 291,879 4,234,405
Interest paid..................................... (2,514,527) (2,293,851)
Cash paid to suppliers and employees.............. (2,548,390) (2,276,968)
Income taxes paid................................. (336,587) (481,614)
------------ ------------
1,343,051 5,312,734
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
and certificates of deposit
Held to maturity................................. 1,050,000 1,800,000
Available for sale............................... 300,000 1,782,000
Purchase of investment securities and certificates
of deposit
Held to maturity................................. (100,000) (495,000)
Available for sale............................... -- (9,158,000)
Investment at federal home loan bank, net of
liquidations..................................... 1,901,173 --
Loans made, net of principal collected............ (1,840,446) (6,061,008)
Proceeds from sale of assets, including
repossessions.................................... 18,112 --
Purchases of premises, equipment and computer
software......................................... (236,145) (415,272)
------------ ------------
1,092,694 (12,547,280)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits.................................... 205,808 6,117,100
Other deposits................................... (165,906) 2,157,403
Borrowed funds................................... (6,000,000) --
Dividends paid.................................... (321,200) (385,000)
------------ ------------
(6,281,298) 7,889,503
------------ ------------
Net (decrease) increase in cash and cash
equivalents....................................... (3,845,553) 654,957
Cash and cash equivalents at beginning of year..... 9,877,856 12,246,012
------------ ------------
Cash and cash equivalents at end of year........... $ 6,032,303 $ 12,900,969
------------ ------------
Noncash activities
Foreclosure of real estate........................ $ -- $ --
============ ============
</TABLE>
See Note to Unaudited Financial Statements
F-26
<PAGE>
The Bank of Fruitland & Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities
Net income........................................ $ 777,859 $ 939,273
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.................... 162,048 159,039
Provision for credit losses...................... 150,000 90,000
Proceeds from sale of loans held for sale........ 13,994,251 22,799,856
Originations of loans held for sale.............. (13,702,595) (18,566,139)
Loss on sale of assets........................... -- --
Amortization of premiums and accretion of
discounts....................................... (893) (2,393)
Decrease (increase) in
Accrued interest receivable..................... (7,512) (182,422)
Other assets.................................... (58,061) (22,428)
Deferred income taxes........................... -- (9,627)
Increase (decrease) in
Deferred fees on loans.......................... (28,570) (9,143)
Accrued interest payable........................ (3,105) 23,147
Accrued income taxes, net of refunds............ 118,532 115,013
Other liabilities............................... (58,903) (21,442)
------------ ------------
$ 1,343,051 $ 5,312,734
============ ============
</TABLE>
See Note to Unaudited Financial Statements
F-27
<PAGE>
The Bank of Fruitland and Subsidiary
Note to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2000 and 1999
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of The Bank of Fruitland's
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been made. Operating results
for the six month period ended June 30, 2000, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000 or
for future periods.
F-28
<PAGE>
Annex A
Agreement and Plan of Affiliation and Merger
Among Mercantile Bankshares Corporation,
Peninsula Bank and The Bank of Fruitland
Table of Contents
<TABLE>
<CAPTION>
Section Subject Page
------- ------- ----
<C> <S> <C>
1.1 The Affiliation and Merger....................................... A-4
1.2 Conversion Rate.................................................. A-4
1.3 Commercially Reasonable Efforts Requirement...................... A-4
1.4 Stockholder List................................................. A-4
1.5 Representations of the Corporation; Antidilution................. A-4
(a) Representations
(1) Bank Holding Company Status................................. A-4
(2) FDIC Application............................................ A-4
(3) Good Standing............................................... A-4
(4) Capitalization.............................................. A-5
(5) SEC Registration of Common Stock............................ A-5
(6) Financial Statements........................................ A-5
(7) Material Adverse Changes.................................... A-5
(8) No Conflicting Agreements................................... A-5
(9) Validly Issued Stock........................................ A-5
(10) Due Authorization........................................... A-6
(b) Antidilution................................................. A-6
1.6 Representations of the Bank...................................... A-6
(a) Corporate Status............................................. A-6
(b) Capitalization............................................... A-6
(c) Number of Stockholders....................................... A-6
(d) Unpaid Dividends............................................. A-6
(e) Compliance with Laws and Regulations......................... A-6
(f) Corporate Documents, Employment Agreements, Leases, Material
Contracts, List of Securities, Community Reinvestment Act
Statement, Financial Reports, Material Adverse Changes,
Losses and Liabilities....................................... A-7
(g) Accuracy of Financial Statements............................. A-7
(h) Stock Issuance, Distributions since March 31, 2000........... A-7
(i) Litigation................................................... A-7
(j) Tax Returns and Liability.................................... A-7
(k) Brokers...................................................... A-8
(l) Employee Benefit Plans....................................... A-8
(m) Title to Assets.............................................. A-9
(n) No Conflicting Agreements; Business Combination Matters...... A-9
(o) Personal Property............................................ A-9
(p) Zoning Laws, Etc............................................. A-9
(q) Title to Offices............................................. A-9
(r) Conditions of Buildings...................................... A-9
(s) Environmental Matters........................................ A-10
1.7 Access to Records and Information; Operation of Business......... A-10
(a) Access....................................................... A-10
(b) Operations................................................... A-10
1.8 Financial Statements............................................. A-11
1.9 Regulatory Approvals............................................. A-11
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Section Subject Page
------- ------- ----
<C> <S> <C>
1.10 Exclusive Dealing.............................................. A-11
1.11 Conditions to Corporation's Obligation......................... A-12
(a) FDIC Approval.............................................. A-12
(b) Other Regulatory Approvals................................. A-12
(c) SEC Registration Statement................................. A-12
(d) Agreements With Respect to SEC Rule 145.................... A-12
(e) Consents................................................... A-12
(f) Legal Proceedings and Impediments.......................... A-12
(g) Dividends.................................................. A-12
(h) Stock Issuance, Evidences of Indebtedness, Distributions... A-12
(i) Compensation; Employee Benefits Plans...................... A-12
(j) Investment Practices....................................... A-13
(k) Other Approvals............................................ A-13
(l) Limit on Dissenters........................................ A-13
(m) Office Openings and Closings............................... A-13
(n) Tax Opinion................................................ A-13
(o) Stockholders Equity........................................ A-13
(p) Material Adverse Changes................................... A-13
(q) Loan Portfolio............................................. A-13
(r) Loan Quality............................................... A-13
(s) Deposits................................................... A-13
(t) Nature of Expenses......................................... A-13
(u) Securities................................................. A-13
(v) Representation Update and Certificate re Representations
and Conditions............................................. A-14
1.12 Conditions to the Bank's Obligations........................... A-14
(a) FDIC Approval.............................................. A-14
(b) Other Regulatory Approvals................................. A-14
(c) SEC Registration Statement................................. A-14
(d) Tax Opinion................................................ A-14
(e) Fairness Opinion........................................... A-14
(f) Representation Update and Certificate re Representation and
Conditions................................................. A-15
1.13 Confidentiality................................................ A-15
1.14 Employee Benefit Matters....................................... A-15
(a) 401(k) Plan................................................ A-15
(b) Corporation's Cash Balance Plan............................ A-15
(c) Other Benefits............................................. A-15
2.1 Effective Date................................................. A-16
2.2 Corporation's Obligation in Accomplishing Merger............... A-16
2.3 Bank's Obligations in Accomplishing Merger..................... A-16
2.4 Stockholder Approval........................................... A-16
2.5 Effect of Merger............................................... A-16
2.6 Terms of Merger; Objecting Stockholders........................ A-17
2.7 Confirmatory Deeds............................................. A-18
2.8 Procedural Matters............................................. A-18
3.1 Termination for Regulatory Reasons............................. A-18
3.2 Termination by Consent or Due to Passage of Time............... A-18
3.3 Termination with Respect to Acquisition Proposal............... A-18
3.4 Termination If Support Agreement Not Delivered................. A-18
3.5 Amendment...................................................... A-19
3.6 Expenses; Limited Liability.................................... A-19
3.7 Notices........................................................ A-19
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section Subject Page
------- ------- ----
<C> <S> <C>
3.8 Counterparts................................................... A-20
3.9 Binding Effect; No Third Party Rights.......................... A-20
3.10 Governing Law.................................................. A-20
Exhibit A Agreement of Merger............................................ A-21
</TABLE>
A-3
<PAGE>
Agreement and Plan of
Affiliation and Merger
THIS AGREEMENT AND PLAN OF AFFILIATION AND MERGER (the "Agreement"), made
this 1st day of June, 2000, by and among Mercantile Bankshares Corporation, a
body corporate of the State of Maryland (the "Corporation"), Peninsula Bank, a
Maryland commercial bank ("Peninsula"), and The Bank of Fruitland, a Maryland
commercial bank (the "Bank").
WITNESSETH, that for and in consideration of the mutual promises of the
parties hereto hereinafter contained and other good and valuable
consideration, and in the expectation of the delivery of a Support Agreement,
to be dated and delivered as of the first business day after the date hereof,
between the Corporation and certain stockholders of the Bank, the parties
hereto agree as follows:
Article I
General Provisions
1.1. The Affiliation and Merger. Subject to the terms, provisions, and
conditions of this Agreement, the Bank shall become affiliated with the
Corporation by merger into Peninsula, pursuant to the procedures described in
Article II of this Agreement (the "Merger" or the "Affiliation") and the form
of Agreement of Merger attached as Exhibit A hereto (the "Agreement of
Merger").
1.2. Conversion Rate.
The Merger shall be accomplished on the basis of two and five tenths (2.5)
shares of the Corporation's Common Stock, $2.00 par value per share (the
"Common Stock"), for each share of common stock of the Bank that is
outstanding on the Effective Date, hereinafter defined, immediately prior to
the Merger becoming effective (the "Conversion Rate"). Fractional shares shall
be treated as provided elsewhere herein. The Conversion Rate may be adjusted
pursuant to Section 1.5(b);
1.3. Commercially Reasonable Efforts Requirement. The Corporation, Peninsula
and the Bank shall each use all commercially reasonable efforts, with
diligence and good faith, to consummate the transactions contemplated in this
Agreement.
1.4. Stockholder List. Within five days after the date of this Agreement,
the Bank shall furnish to the Corporation a list containing the names and
addresses of the current holders of its common stock as the same appear in the
stock registration books of the Bank and the number of shares held by each.
1.5. Representations of the Corporation; Antidilution.
(a) The obligations of the Bank under this Agreement are based upon and
subject to the correctness and accuracy of the following representations of
the Corporation:
(1) The Corporation is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended. Peninsula is a Maryland commercial
bank, the deposits of which are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and which is not a member of the Federal Reserve
System.
(2) The Corporation will cause the filing of applications with the FDIC
and the Maryland Commissioner of Financial Regulation (the "Maryland
Commission") for approval of the Merger and prosecute such applications in
good faith and with diligence.
(3) The Corporation and Peninsula are each corporations duly organized,
validly existing, and in good standing under the laws of the State of
Maryland and have the corporate power and authority to carry on their
respective businesses as they are now conducted.
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<PAGE>
(4) At the date of this Agreement, the authorized capital stock of the
Corporation consist of 2,000,000 shares of preferred stock, no par value
("Mercantile Preferred"), and 130,000,000 shares of Common Stock. At April
28, 2000, no shares of Mercantile Preferred were outstanding, 68,044,904
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 Stockholder Protection Rights Agreement adopted June 8,
1999, each share of issued and outstanding Common Stock, including the
Common Stock to be issued hereunder, carries a right to purchase additional
securities of the Corporation under certain circumstances.
(5) The Corporation with the assistance and cooperation of the Bank and
its representatives will prepare and file with the Securities and Exchange
Commission ("SEC"), a Registration Statement ("Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Common Stock issuable upon consummation of the
Merger and shall use all commercially reasonable efforts to have the
Registration Statement declared effective by the SEC. The Corporation and
the Bank may each rely upon all information provided to it by the other
party in this connection and shall not be liable for any untrue statement
of a material fact or any omission to state a material fact in the
Registration Statement, or in the Proxy Statement of the Bank (the "Proxy
Statement") which is prepared as a part thereof, if such statement is made
in reliance upon any information provided to it by the other party or by
any of its officers or authorized representatives. The Corporation, relying
on the information provided by the Bank pursuant to Section 1.4, shall
promptly take all such actions, with the assistance and cooperation of the
Bank and its authorized representatives, as may be necessary or appropriate
in order to comply with all applicable securities laws of any state or
other jurisdiction applicable to the transactions contemplated by this
Agreement.
(6) The Corporation has delivered to the Bank (i) copies of its
consolidated financial statements for the year ended December 31, 1999
containing the following consolidated financial statements of the
Corporation (collectively, the "Corporation's Audited Financial
Statements"): consolidated balance sheets as of December 31, 1999 and 1998
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, 1999, together with the notes thereto,
certified by Pricewaterhouse Coopers, LLP, independent certified public
accountants, and (ii) copies of its unaudited consolidated financial
statements for the three months ended March 31, 2000 containing a
consolidated balance sheet as of March 31, 2000 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, 2000 Financial Statements"). All of the Corporation's Audited
Financial Statements and the Corporation's March 31, 2000 Financial
Statements have been prepared in accordance with generally accepted
accounting principles (to the extent required) and applicable SEC
requirements and present fairly the information presented therein.
(7) Since March 31, 2000, 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, 2000 Financial Statements and
that is not disclosed therein, other than liabilities arising since the
respective dates thereof in the ordinary course of business, which are not
materially adverse.
(8) Neither the execution and delivery of this Agreement nor the carrying
out of the transactions contemplated hereunder will result in any material
violation, termination, modification of, or be in conflict with, any terms
of the Corporation's or Peninsula's Charter or Bylaws, or any contract or
other instrument to which the Corporation or Peninsula is a party, or of
any judgment, decree, or order applicable to the Corporation or Peninsula,
or result in the creation of any material lien, charge, or encumbrance upon
any of the properties or assets of the Corporation or Peninsula.
(9) The Common Stock deliverable pursuant to this Agreement will be,
prior to its issuance, duly authorized for issuance and will, when issued
and delivered in accordance with this Agreement, be duly and validly
issued, fully paid and nonassessable.
A-5
<PAGE>
(10) The execution, delivery, and performance of this Agreement by the
Corporation and Peninsula have been duly authorized by their respective
Boards of Directors and require no action on the part of the stockholders
of the Corporation. This Agreement constitutes a valid and binding
obligation of the Corporation and Peninsula, enforceable against the
Corporation and Peninsula in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally or by general equitable
principles.
(b) Nothing in this Agreement shall limit the right of the Corporation to
issue or repurchase any of its stock or other securities in any manner and for
any consideration permitted by law either in connection with acquisitions of
new affiliates or otherwise, prior to or after the Effective Date, as
hereinafter defined; provided, however, that if the Corporation takes any
action which establishes, prior to the Effective Date, as hereinafter defined,
a record date or effective date for a stock dividend on the Common Stock, a
split or reverse split of the Common Stock, or any distribution on all shares
of the Common Stock other than cash dividends, the Corporation will take such
action as shall be necessary in order that each share of common stock of the
Bank will be converted in the Merger into the same number of shares of Common
Stock (whether such number is greater or less than the number otherwise
provided for herein) that the owner of such shares would have owned
immediately after the record date or effective date of such event had the
Effective Date occurred immediately before such record date or effective date,
and the Conversion Rate shall be adjusted accordingly. The Bank hereby agrees
to any revision in the Conversion Rate and payment arrangements pursuant to
the foregoing provisions of Section 1.5(b).
1.6. Representations of the Bank. The obligations of the Corporation and
Peninsula under this Agreement are based upon and subject to the correctness
and accuracy of the following representations of the Bank:
(a) The Bank is a Maryland commercial bank, legally formed, validly existing
and in good standing under the laws of Maryland, the deposits of which are
insured by the FDIC, and is not a member of the Federal Reserve System. The
Bank has the corporate power and authority to carry on its business as it is
now conducted. The Bank owns seven banking offices and leases one banking
office, with its main office in Fruitland, Maryland, and branch offices
located in Fruitland, Maryland, Salisbury, Maryland and Princess Anne,
Maryland. The Bank owns an operations center located in Fruitland, Maryland.
The Bank has no subsidiaries or affiliated companies other than the Bank's
wholly owned subsidiary, BF Financial Services, Inc. (the "Bank Subsidiary"),
and is not a general partner or coventurer in any joint venture or other
business enterprise.
(b) The authorized capital stock of the Bank consists of 1,000,000 shares of
a single class of common stock, par value of $10.00 per share, of which
440,000 shares are issued and outstanding as of the date of this Agreement.
All of such issued and outstanding shares are validly issued, fully paid and
nonassessable. All of the issued and outstanding shares of the Bank Subsidiary
were validly issued, are fully paid and nonassessable and are owned of record
and beneficially by the Bank, free and clear of any liens and encumbrances of
any kind or nature. Neither the Bank nor the Bank Subsidiary has any options,
calls, warrants, commitments or agreements of any character to which it is a
party or by which it is bound calling for the issuance of shares of the Bank's
or the Bank Subsidiary's capital stock or any security representing the right
to purchase or receive or convert into any capital stock of the Bank or the
Bank Subsidiary.
(c) The Bank does not have more than 500 stockholders of record and its
securities are not subject to registration under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(d) At the date of this Agreement, there are no declared and unpaid
dividends or distributions on, or with respect to, the shares of common stock
of the Bank.
(e) The Bank and the Bank Subsidiary have complied in all material respects
with all laws and regulations applicable to the Bank and the Bank Subsidiary,
their properties and operations and all valid orders of regulatory authorities
having jurisdiction over the Bank or the Bank Subsidiary and have received no
notice of any asserted violations of the same.
A-6
<PAGE>
(f) The Bank has previously furnished to the Corporation (i) copies of the
Charter and Bylaws of the Bank and the Bank Subsidiary, including all
amendments thereto, (ii) copies of all written agreements or understandings,
and written memoranda of all oral agreements or understandings, if any,
between the Bank or the Bank Subsidiary and each present or former director,
officer and employee of the Bank or the Bank Subsidiary relating to his
compensation, employment or severance, (iii) copies of all leases, mortgages,
and agreements, deeds, titles, policies, title opinions and title reports with
respect to its and the Bank Subsidiary's banking and other offices, (iv)
copies or descriptions of all other material contracts and leases to which it
or the Bank Subsidiary is a party, (v) a list of all securities held by the
Bank or the Bank Subsidiary on April 28, 2000, (vi) a copy of the Bank's
Community Reinvestment Act Statement, (together with all related documents
required to be made available for public inspection), (vii) copies of the
Bank's year-end Consolidated Reports of Condition and Income ("Call Reports")
filed with the FDIC for all years subsequent to 1994, (viii) copies of all
interim Call Reports filed with the FDIC in 1999 and 2000 (the Bank's March
31, 2000 Call Reports being hereinafter referred to as the "Bank's March 31,
2000 Call Reports"), (ix) copies of the Bank's audited consolidated financial
statements for the years ended December 31, 1995, 1996, 1997, 1998 and 1999,
together with the notes thereto, certified by Rowles & Company, LLP,
independent certified public accountants (the said financial statements for
the year ended December 31, 1999 being hereinafter referred to as the "Bank's
December 31, 1999 Financial Statements"), (x) a copy of the most recent
management letter rendered by the Bank's independent certified public
accountants, and (xi) copies of the Bank's Federal and Maryland income and
franchise tax returns for the years 1995, 1996, 1997, 1998 and 1999. Since
March 31, 2000, there has been no material adverse change in the consolidated
balance sheet, income statement, financial position, results of operation, or
business of the Bank. No material loss is presently realizable or anticipated
with respect to the assets included in the Bank's December 31, 1999 Financial
Statements or the Bank's March 31, 2000 Call Reports (except to the extent
provided for therein), and there is no material liability, actual or
contingent, known or anticipated, of a character that should be disclosed in
the Bank's December 31, 1999 Financial Statements or the Bank's March 31, 2000
Call Reports and that is not disclosed therein, other than liabilities arising
since the respective dates thereof in the ordinary course of business, which
are not materially adverse.
(g) All of the financial statements previously provided to the Corporation
pursuant to subparagraph (f) of this Section 1.6 are accurate and complete in
all material respects, have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
covered by such financial statements except as stated therein, and present
fairly the financial position, cash flows (with respect to those financial
statements containing statements of cash flows), results of operations, and
changes in stockholders' equity (with respect to those financial statements
containing statements of changes in stockholders' equity) of the Bank at the
close of business at the dates thereof and for the periods covered thereby.
(h) Since March 31, 2000, the Bank has not authorized or issued any
additional shares of capital stock or securities convertible thereto, or
options, warrants or rights to subscribe thereto or any notes, debentures or
other evidences of indebtedness (other than certificates of deposit issued in
the normal course of business) or authorized or made payment or distribution
of any of its assets to its stockholders by way of dividends or otherwise or,
except for this Agreement, entered into any agreement or commitment of any
character with respect to any of the foregoing.
(i) There is no material litigation or regulatory or other proceeding
pending against or to the best of the Bank's knowledge threatened against the
Bank or the Bank Subsidiary and neither the Bank nor the Bank Subsidiary is
subject to any order or decree of any court or regulatory agency or any formal
or informal agreement or memorandum of understanding with any regulatory
agency.
(j) The Bank and the Bank Subsidiary have each 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 the Bank nor the
Bank Subsidiary has any material liability for taxes except as set forth and
provided for in the Bank's December 31, 1999 Financial Statements and March
31, 2000 Call Reports, and there is no reason for the Bank to believe that any
such liability will be asserted in connection with such returns except as
noted in the Bank's December 31, 1999 Financial Statements and March 31, 2000
Call Reports. The Bank is not aware of any
A-7
<PAGE>
currently pending or threatened investigations or proceedings concerning its
or the Bank Subsidiary's tax returns by any governmental agency. The Bank's
and the Bank Subsidiary's federal and Maryland tax returns for the years 1995
through 1999 have been timely filed.
(k) There is no finder or broker acting, or who acted, for the Bank, or, to
the knowledge of the directors of the Bank, for any stockholder of the Bank,
in connection with the transactions contemplated by this Agreement, except
that the Bank has retained Feldman Financial Advisors, Inc. as its financial
advisor pursuant to a retainer agreement, a copy of which has been provided to
the Corporation.
(l) Except as set forth in a schedule previously provided by the Bank (the
"Benefit Plan Schedule"), the Bank, the Bank Subsidiary and any entity
included in the group of entities treated as a single employer with the Bank
and the Bank Subsidiary under Section 414(b), (c), (m) or (o) of the Internal
Revenue Code of 1986, as amended (the "Code") (an "ERISA Affiliate") 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 all of the current or former
employees, officers or directors of the Bank, Bank Subsidiary or ERISA
Affiliate or the beneficiaries of such persons (such plans, programs and
arrangements set forth in such Benefit Plan Schedule, collectively, the
"Employee Plans").
(1) (a) Each Employee Plan and any related funding arrangement is in
compliance in all material respects with all applicable requirements of
ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and
other applicable law, and each Employee Plan has been administered in all
material respects in accordance with its written terms to the extent
consistent with such requirements of law; (b) all benefits due and payable
under any Employee Plan have been paid in accordance with the terms of such
Employee Plan; the Bank, the Bank Subsidiary and each ERISA Affiliate have
timely made (and at the Effective Date will have timely made) all
contributions required to be made to any Employee Plan; (c) 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 might reasonably be expected to give rise to such proceedings or
litigation; (d) 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; (e) 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, any parties in interest or any fiduciaries
subject to such rules; (f) no material excise taxes are payable or will
become payable prior to the Effective Date with respect to any Employee
Plan; and (g) the Bank, the Bank Subsidiary and any ERISA Affiliate are not
subject to any legal obligation to continue any Employee Plan either before
or after the Effective Date and any such Employee Plan, in any manner and
without the consent of any employee or beneficiary, may be amended or
terminated.
(2) The Bank has previously delivered to the Corporation complete copies
of: each Employee Plan; all related summary plan descriptions; all related
trust agreements or other funding arrangements, including, but not limited
to, insurance policies; for the five (5) most recent plan years, all annual
reports (5500 series) for each Employee Plan that have been filed with any
governmental agency; and all other material documents relating to any
Employee Plan as may reasonably be requested by the Corporation.
(3) The only Employee Plan currently maintained or contributed to by the
Bank, the Bank Subsidiary and any ERISA Affiliate which is intended to be
qualified under Section 401(a) of the Code is the The Bank of Fruitland
401(k) Profit Sharing Plan, a 401(k) plan (the "Qualified Plan"); the
Qualified Plan has been amended to comply with all current applicable
legislation (including any regulations issued thereunder), has
A-8
<PAGE>
received a favorable determination letter from the Internal Revenue Service
with respect to its tax-qualified status which considers all such current
legislation, or is still within a remedial amendment period as announced by
the Internal Revenue Service and the Bank has delivered to the Corporation
complete copies of all determination letters previously received and all
material correspondence relating to the applications therefor; nothing has
occurred since the date of the most recent applicable determination letter
nor will occur prior to the Effective Date that would adversely affect the
tax-qualified status of the Qualified Plan.
(4) The Bank, the Bank Subsidiary and any ERISA Affiliate do not have any
obligation, and have not made any representation, in connection with any
medical, death or other welfare benefits for its employees after they
retire, except to the extent required under the group health plan
continuation requirements of Sections 601 through 609 of ERISA or under
applicable state law.
(m) The Bank and the Bank Subsidiary have good and marketable title to all
of their respective material properties and assets, including those reflected
on the Bank's March 31, 2000 Call Reports, except as sold or otherwise
disposed of only in the ordinary course of business, free and clear of all
material liens and encumbrances (except as permitted in Section 1.6(q) below
with respect to certain real estate and except for securities pledged to
secure government deposits or that are the subject of repurchase transactions
in the ordinary course of business).
(n) The execution, delivery and performance of this Agreement have been duly
authorized by the Bank's Board of Directors and, except for stockholder
approval, require no further corporate action. The Board of Directors of the
Bank has taken all action necessary or advisable to render the provisions of
Sections 3-601 through 3-604 of the Maryland General Corporation Law ("MGCL")
and Sections 3-701 through 3-709 of the MGCL, being the Maryland Business
Combination statute and the Maryland Control Shares statute, respectively,
inapplicable to transactions with the Corporation and its affiliates and
associates, including Peninsula. Neither the execution and delivery of this
Agreement nor the carrying out of the transactions contemplated hereunder will
result in any violation, termination, modification of, or be in conflict with
the Charter or Bylaws of the Bank or the Bank Subsidiary, or the terms of any
material contract or other instrument to which the Bank or the Bank Subsidiary
is a party, or of any judgment, decree, order or regulatory agreement
applicable to the Bank or the Bank Subsidiary, or result in the creation of
any material lien, charge, or encumbrance upon any of the properties or assets
of the Bank or the Bank Subsidiary. Except as previously disclosed by the Bank
in writing to the Corporation, no consent to this Agreement by any private
party is required under any contract, lease, mortgage or other instrument to
which the Bank or the Bank Subsidiary is a party. This Agreement constitutes a
valid and binding obligation of the Bank, enforceable against the Bank in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally or by general equitable principles.
(o) The tangible personal property of the Bank and the Bank Subsidiary is in
all material respects in good operating condition and repair, subject to
ordinary wear and tear.
(p) There is no material violation of any zoning, building, fire or other
regulatory laws, statutes, ordinances or regulations relating to the Bank's or
the Bank Subsidiary's offices or other real property; no condemnation
proceeding exists or, to the knowledge of the Bank is threatened that would
preclude or impair the use of the Bank's or the Bank Subsidiary's offices as
presently being used in the conduct of its business.
(q) The Bank has good and merchantable fee simple title to the real estate
for the offices and other real estate owned by the Bank, free and clear of
liens and encumbrances of every kind and nature except use, occupancy and
similar restrictions of public record that are generally applicable to
properties in the immediate neighborhood or subdivision in which the real
property is located, easements and encumbrances that are of record or that may
be observed by an inspection of the property, and such utility and other
easements and encumbrances as do not materially adversely affect the fair
market value of the real property.
(r) In all material respects, all electrical, plumbing, heating, air
conditioning and other mechanical systems and related equipment in the Bank's
and Banking Subsidiary's banking and other offices are in good working
A-9
<PAGE>
order, subject to ordinary wear and tear and the roofs of the office buildings
are waterproof and their basements, if any, are not subject to water seepage.
(s)(1) (i) all real estate (including, without limitation, offices and
foreclosed properties) owned by the Bank (the "Real Estate") is in material
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
material 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, the Bank will afford the Corporation, its officers and other
authorized representatives, such access to all books, accounts, records, bank
examination reports (subject to any permission from regulatory agencies as may
be required), tax returns, leases, contracts and documents of the Bank and the
Bank Subsidiary and furnish to the Corporation such information with respect
to the Bank's and the Bank Subsidiary's assets, liabilities and businesses as
the Corporation may from time to time request, and further will fully
cooperate with the Corporation in satisfying the conditions set forth in this
Agreement.
(b) Unless the Corporation shall otherwise consent in writing from the date
of this Agreement until the Effective Date, the Bank will do and will cause
the Bank Subsidiary 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
the Bank and the Bank Subsidiary;
(2) operate their businesses only in the usual, regular and ordinary
manner and consistently with past operations and practices, including,
without limitation, following the Bank's 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;
(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 substantially 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 its business;
(6) not make or commit to make any capital expenditures aggregating in
excess of $75,000;
(7) not pledge, sell, lease, transfer, dispose or otherwise encumber any
of 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 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 the Bank or the Bank Subsidiary or a share
exchange or any other reorganization involving Bank or the Bank
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Subsidiary capital stock with or into another corporation or the
liquidation or dissolution of the Bank or the Bank Subsidiary;
(11) not create any subsidiary, affiliate or other related business
entity; and
(12) not take any other action or enter into any agreement which would
have the effect of defeating the purposes of this Agreement or the Merger
except as provided in Section 1.10.
1.8. Audits, Income and Capital Account Requirements, Etc. If independent
public accountants acceptable to the Corporation are unable to certify
financial statements of the Bank or the Bank Subsidiary for any period (or
must qualify such a certification) that would materially interfere with or
prevent the Corporation, before or after the Effective Date, from complying
with requirements of the SEC (or other requirements) for the preparation and
publication of certified or other required financial statements, whether for
the Bank or for the Corporation and its consolidated subsidiaries, then the
Corporation and Peninsula shall have the right by written notice to the Bank
at any time prior to the Effective Date to terminate this Agreement, in which
event no party shall have any obligations under, or liabilities arising out
of, this Agreement, except as set forth in Section 3.6 with respect to
expenses.
1.9 Regulatory Approvals. When requested by the Corporation, and through
counsel for the Corporation, the Bank will cooperate with the Corporation and
use all commercially reasonable efforts to obtain the approval of the Merger
by all appropriate State and Federal regulatory agencies.
1.10 Exclusive Dealing. The Board of Directors of the Bank has carefully
considered and deliberated upon the terms and conditions of the Merger and has
concluded that the Merger is fair to, and in the best interests of the
stockholders of the Bank, with the intent that this Agreement be conclusive
and binding, subject to the terms and conditions hereof. In the process of so
concluding, the Board of Directors of the Bank has, at the Bank's expense,
received the written opinion of Feldman Financial Advisors, Inc., its
financial advisor, that the Conversion Rate to be received in the Merger is
fair to the stockholders of the Bank from a financial viewpoint. Accordingly,
in view of the commitments of the parties and the time and expense required to
consummate the Agreement and while this Agreement is in effect, neither the
Bank nor any of its officers, directors, employees, agents or representatives
(including, without limitation, investment bankers) shall, directly or
indirectly: (i) encourage, solicit or initiate the submission of any
Acquisition Proposal, as hereinafter defined, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to any Acquisition Proposal; or (ii) recommend
any Acquisition Proposal to the Bank's stockholders or enter into any
agreement with respect to any Acquisition Proposal or participate in
discussions or negotiations with, or furnish any information to, any person
other than the Corporation, Peninsula, or their affiliates and agents, in
connection with any potential Acquisition Proposal, unless an unsolicited
Acquisition Proposal is made and the Board of Directors of the Bank shall
conclude, based on a written opinion of counsel, which opinion may be based
with respect to financial matters on the written opinion of a duly qualified
and independent financial advisor of the Bank, that their fiduciary
obligations require consideration of such Acquisition Proposal because such
Acquisition Proposal may be in the best interest of the Bank's stockholders
and is more favorable to the Bank's stockholders from a financial point of
view than the Affiliation provided for herein. "Acquisition Proposal" shall
mean any proposed (A) merger, consolidation, share exchange or similar
transaction involving the Bank, (B) sale, lease or other disposition directly
or indirectly by merger, consolidation, share exchange or otherwise of assets
of the Bank representing 10% or more of the consolidated assets of the Bank,
(C) issue, sale or other disposition (including by way of merger,
consolidation, share exchange or any similar transactions) of securities (or
options, rights or warrants to purchase, or securities convertible into, such
securities) representing 10% or more of the voting power of the Bank, (D)
transaction in which any person shall acquire beneficial ownership (as such
term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership, or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns or has the right
to acquire beneficial ownership, of 20% or more of the Bank's outstanding
common stock. The Bank shall promptly advise the Corporation of, and
communicate to the Corporation the terms of, any such inquiry or proposal
addressed to the Bank or of which the Bank, or its officers, directors,
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employees, agents, or representatives (including, without limitation, any
investment banker) has knowledge. The Bank's Board of Directors shall use all
commercially reasonable efforts to cause its officers, directors, employees,
agents and representatives to comply with the requirements of this Section
1.10.
1.11 Conditions to the Corporation's Obligations. The obligations of the
Corporation and Peninsula under this Agreement are subject to the satisfaction
prior to, and at, the Effective Date, of the conditions set forth in Article
II of this Agreement or elsewhere in this Agreement and of the following
conditions:
(a) That pursuant to applicable statutes, the FDIC shall have given all
required approvals to permit the Merger and such approvals shall have become
effective and all required waiting times with respect thereto shall have
expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Maryland Commissioner, the Virginia State Corporation
Commission, (if required by law), and the Delaware Bank Commissioner (if
required by law), and any appropriate Federal regulatory agencies in addition
to the FDIC) shall have approved the Merger to the extent required by
applicable State or Federal laws and all required waiting periods with respect
thereto shall have expired.
(c) That the Registration Statement shall have been declared effective by
the SEC and there shall not be in effect a stop order with respect thereto.
(d) That stockholders who are affiliates of the Bank for the purposes of SEC
Rule 145 shall have entered into agreements with the Corporation, in form and
substance satisfactory to the Corporation, necessary or desirable to conform
with SEC Rule 145.
(e) That all other consents or approvals, governmental or otherwise, that in
the opinion of counsel for the Corporation are necessary to permit, enable or
facilitate the Merger, shall have been granted or issued and shall have become
effective.
(f) That there shall be no actual or threatened legal proceeding preventing
the consummation of the Merger.
(g) That since March 31, 2000, the Bank shall not have authorized or
distributed any of its assets to its stockholders by way of dividends or
otherwise, except cash dividends declared in June, 2000 at not more than $0.73
per share and in December, 2000 at not more than $1.26 per share (or
alternatively, in June, 2000 at not more than $0.73 per share, in September,
2000 at not more than $0.63 per share, and in December, 2000 at not more than
$0.63 per share), and in March 2001 at not more than $0.50 per share;
provided, however, that the aggregate cash dividends declared by the Bank in
the year 2000 shall not exceed 50% of the Bank's net income (excluding
comprehensive net income or loss and merger costs) for the year 2000 and that
the Bank shall not pay any dividend with respect to any period for which the
stockholders of the Bank are or become eligible to receive a dividend declared
by the Corporation.
(h) That since the date of this Agreement, the Bank and the Bank Subsidiary
shall not have issued or authorized the issuance of additional shares of
capital stock of any class or options to buy shares of said stock or warrants
or rights to subscribe thereto or any notes, or securities convertible into
such capital stock or debentures or other evidences of indebtedness (other
than certificates of deposit issued by the Bank 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 their
capital stock, or repurchased or redeemed any of their capital stock or
changed their respective capitalization or made any distribution of the Bank's
earnings or assets other than as provided in Section 1.11(g) above and other
than by the Bank Subsidiary to the Bank, or as otherwise agreed in writing by
the Corporation, and the Bank shall not have sold, transferred, pledged or
granted any options or other rights with respect to the capital stock of the
Bank Subsidiary held by the Bank.
(i) That, except with the prior written approval of the Corporation, there
shall have been no material increase in the compensation, or rate of
compensation, payable or to become payable by the Bank or the Bank
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Subsidiary to any director, officer or employee thereof, other than in
accordance with past practices, or the establishment of, or an agreement to
establish by the Bank or the Bank Subsidiary, any early retirement program or
arrangement for certain employees, or any payment (other than payments
consistent with past practices) of any bonus, profit sharing, severance or
other extraordinary compensation, or any change (other than changes required
by law or described in writing by the Bank to the Corporation prior to the
date of this Agreement) in any presently existing stock option, employee stock
ownership, profit sharing, pension, retirement, bonus, severance, group life
or health insurance or other plan, agreement or arrangement, and that the Bank
and the Bank Subsidiary 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 March 31, 2000, and the Effective Date, no change shall
have been made in the Bank's or the Bank Subsidiary's existing investment
practices and policies.
(k) That there are granted or issued any such consents or approvals,
governmental or otherwise (including, without limitation, lessor consents),
which are necessary to permit or enable Peninsula, as successor in the Merger,
to conduct after the Effective Date all and every part of the business and
activities conducted by the Bank prior to the Effective Date in the manner in
which such activities and business were then conducted by the Bank and at the
offices at which they were then conducted.
(l) That the holders of no more than 20% of the Bank's common stock shall
have voted against the Merger, pursuant to Title 3 Subtitle 7, Part II of the
Financial Institutions Articles of the Annotated Code of Maryland.
(m) That the Bank shall not have applied for or opened any new, or closed
any existing, branch offices without the written consent of the Corporation.
(n) That the Corporation and Peninsula shall have received from Venable,
Baetjer and Howard, LLP (or such other qualified law firm as the Corporation
shall select) an opinion with respect to the federal income tax consequences
of the Merger substantially to the effect that the Merger will qualify as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code, that the Corporation, Peninsula and the Bank will each be a
party thereto, and that no gain or loss will be recognized by the Corporation,
Peninsula or the Bank as a result of the Merger.
(o) That the consolidated stockholders' equity of the Bank determined in
accordance with generally accepted accounting principles, exclusive of
accumulated other comprehensive income or expense, consistently applied, shall
not be less than $14,073,416.
(p) That since March 31, 2000 there shall not have been a material adverse
change in the consolidated balance sheet, income statement, financial
position, results of operation, or business of the Bank.
(q) That the nature or composition of the Bank's loan portfolio shall not be
materially different from the nature or composition of the Bank's loan
portfolio as reflected in the Bank's March 31, 2000 Call Reports.
(r) That any material item or material group of items in the Bank's loan
portfolio shall not be materially defective, including, without limitation,
matters relating to credit, collateral or documentation.
(s) That the nature or composition of the Bank's deposit liabilities shall
not be materially different from the nature or composition of the Bank's
deposit liabilities as reflected in the Bank's March 31, 2000 Call Reports.
(t) That the Bank's accrued expenses or other liabilities shall not be
materially different in nature from those reflected in the Bank's March 31,
2000 Call Reports, except those expenses and liabilities related to this
Agreement and the transactions contemplated hereby.
(u) That the list of the Bank's securities supplied by the Bank to the
Corporation pursuant to Section 1.6(f) shall be accurate, as of its date, in
all material respects.
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(v) That the representations of the Bank contained in Section 1.6 of this
Agreement shall be true in all material respects on and as of the Effective
Date as if made again as of such date, and that, on request of the
Corporation, and as of the Effective Date, the President of the Bank shall
deliver a written certificate to the Corporation that to his knowledge,
information and belief, the representations set forth in this Agreement are
true and correct in all material respects as if made on and as of the date of
such certificate and that the conditions set forth herein which are required
to have been met by such date have, without exception, been met.
Conditions (d) through (v) may be waived by the Corporation and Peninsula.
1.12 Conditions to the Bank's Obligations.
The obligation of the Bank to consummate the Merger under this Agreement is
subject to the following conditions:
(a) That pursuant to applicable statutes, the FDIC shall have given all
required approvals to permit the Merger and such approvals shall have become
effective and all required waiting times with respect thereto shall have
expired.
(b) That all appropriate State regulatory agencies (including, without
limitation, the Maryland Commissioner, the Virginia State Corporation
Commission (if required by law), and the Delaware Bank Commissioner (if
required by law), and any appropriate Federal regulatory agencies in addition
to the FDIC) shall have approved the Merger to the extent required by
applicable State or Federal laws and all required waiting periods with respect
thereto shall have expired.
(c) That the Registration Statement shall have been declared effective by
the SEC and there shall not be in effect a stop order with respect thereto.
(d) That the Bank shall have received an opinion of Venable, Baetjer and
Howard, LLP (or such other qualified law firm as the Bank shall select) with
respect to the federal income tax consequences of the Merger, substantially to
the effect that, upon completion of the Merger (except as to the disposition
of fractional shares):
(1) the Merger will qualify as a reorganization within the meaning of
Section 368(a)(2)(D) of the Internal Revenue Code;
(2) the Corporation, Peninsula and the Bank will each be a party thereto;
(3) no gain or loss will be recognized by the Corporation, Peninsula or
the Bank as a result of the Merger;
(4) no gain or loss will be recognized by the stockholders of the Bank
upon receipt by them of Common Stock in exchange for common stock of the
Bank;
(5) provided that the Bank's common stock is held as a capital asset, the
basis of the Common Stock received by such stockholders of the Bank will be
the same as the basis of the common stock of the Bank surrendered by such
stockholders in exchange for the Common Stock;
(6) provided that the Bank's common stock is held as a capital asset,
such stockholders' holding period of the Common Stock received by them will
include the stockholders' holding period of the common stock of the Bank
which is surrendered in exchange for such Common Stock.
(e) That the Bank's Proxy Statement shall contain the written opinion of
Feldman Financial Advisors, Inc. (or such other recognized investment firm as
the Bank may select) dated contemporaneously with the date of the Proxy
Statement, to the effect that the consideration to be received in the Merger
is fair to the stockholders of the Bank from a financial point of view.
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(f) That the representations of the Corporation contained in Section 1.5(a)
of this Agreement (other than Section 1.5(a)(4)) shall be true in all material
respects on and as of the Effective Date as if made again as of such date, and
that, on request of the Bank, and as of the Effective Date, the President of
the Corporation shall deliver a written certificate to the Bank that, to his
knowledge, information and belief, the representations of the Corporation set
forth in this Agreement (other than in Section 1.5(a)(4)) are true and correct
in all material respects as if made on and as of the date of such certificate
and that the conditions set forth herein required to have been met by the
Corporation by such date have, without exception, been met.
Conditions (e) and (f) may be waived by the Bank.
1.13 Confidentiality.
Between the date of this Agreement and the Effective Date, the Corporation,
Peninsula and the Bank each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and will not use for any purpose other than those contemplated in this
Agreement, any written, oral or other information obtained in confidence from
the other party or a third party in connection with this Agreement or the
transactions contemplated hereby unless such information is already known to
such party or to others not bound by a duty of confidentiality or unless such
information becomes publicly available through no fault of such party, unless
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
transactions contemplated hereby or unless the furnishing or use of such
information is required by or necessary or appropriate in connection with
legal proceedings. If the Merger is not consummated, each party will return or
destroy as much of such written information as may reasonably be requested
except to the extent that it is necessary or appropriate for the party to
retain the information in connection with any legal proceedings relating to
the Agreement.
1.14 Employee Benefit Matters.
(a) 401(k) Plan. It is the current intention of the Corporation and
expectation of the parties that effective as of the Effective Date (or as soon
thereafter as is practicable in the judgment of the Corporation), the Bank's
Qualified Plan will be merged with and into the Corporation's 401(k) plan. If
the plans are merged, the terms of the merger will comply with applicable
requirements of the Internal Revenue Code, including Sections 401(a), 414(1)
and 411(d)(6), and will provide that employees of the Bank and the Bank
Subsidiary will be given credit under the Corporation's 401(k) plan for
service with the Bank and the Bank Subsidiary for purposes of eligibility to
participate and vesting. In the event that, in the judgment of the
Corporation, it is not technically feasible or desirable to merge the plans,
the Bank's 401(k) plan will be terminated or frozen.
(b) Corporation's Cash Balance Plan. Effective as of the first January 1st
following the Effective Date, employees of the Bank and the Bank Subsidiary
will become eligible to participate in the Corporation's cash balance plan
according to its applicable provisions. Employees of the Bank and the Bank
Subsidiary will be given credit under the Corporation's cash balance plan for
service with the Bank and the Bank Subsidiary for purposes of eligibility to
participate and vesting.
(c) Other Benefits. Except with respect to (i) the Bank's 401(k) plan
described in Section 1.14(a) above (the disposition of which shall be governed
by Section 1.14(a) above), (ii) the Corporation's cash balance plan described
in Section 1.14(b) above (eligibility for participation in and vesting under
which shall be governed by Section 1.14(b) above), and (iii) executive plans,
programs and arrangements, eligibility for participation in which is
determined in the discretion of Peninsula and/or the Corporation, after the
Effective Date, employees of the Bank and the Bank Subsidiary shall be
entitled to participate in Peninsula's employee benefit plans and programs on
substantially the same basis as similarly situated employees of Peninsula
(taking into account all applicable factors, including but not limited to,
position, employment classification, age, length of service, pay, part-time or
full time status, and the like.) Peninsula agrees to treat service with the
Bank and the Bank Subsidiary before the Effective Date as service with
Peninsula for purposes of all such employee benefit and seniority based plans
and programs.
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Article II
Merger
The following terms, provisions and conditions are in addition to those
contained in Articles I and III of this Agreement:
2.1. Effective Date. he effective date of the Merger (the "Effective Date")
shall be the effective date set forth in the Certificate of Merger issued by
the Maryland Commissioner pursuant to applicable provisions of Maryland law.
The Merger shall be made effective on the earliest practical date, as
determined by the Corporation after consultation with the Bank, that is the
last business day of a month, or such other date determined by the Corporation
after such consultation, after all of the conditions set forth in this
Agreement have been satisfied (except such as may have been waived by the
Corporation, Peninsula or the Bank, as the case may be).
2.2. Corporation's Obligations in Accomplishing Merger. In order to effect
the Merger, the Corporation and Peninsula will (i) approve through all
necessary corporate action, execute and deliver an Agreement of Merger
substantially in the form attached as Exhibit A hereto; (ii) prepare and file
with the FDIC an application for approval of the Merger of the Bank and
Peninsula described herein and in the Agreement of Merger pursuant to the
provisions of Section 18(c) of the Federal Deposit Insurance Act ((S)1828(c)
of Title 12 of the United States Code); (iii) submit the Agreement of Merger
to the Maryland Commissioner for approval pursuant to the applicable bank
merger provisions of the Financial Institutions Article of the Annotated Code
of Maryland; (iv) publish any newspaper notices required by law with respect
to the Merger; (v) if required by law, as determined by the Corporation, cause
the Corporation's existing bank affiliates to file an application with the
Maryland Commissioner under Title 5 Subtitle 4 of the Financial Institutions
Article of the Annotated Code of Maryland for approval of their affiliation
with the Bank and the Bank Subsidiary contemplated herein; (vi) prepare and
file, if necessary, any application required by Virginia corporation and bank
regulatory officials; (vii) prepare and file any other required regulatory
applications; and (viii) use their best efforts to secure favorable action on
all such applications.
2.3. Bank's Obligations in Accomplishing Merger. At such times as shall be
requested by the Corporation, the Board of Directors of the Bank, (i) shall
approve an Agreement of Merger substantially in the form of Exhibit A hereto,
(ii) shall cause the execution and delivery of the Agreement of Merger by the
Bank, (iii) through counsel for the Corporation, shall submit the Agreement of
Merger to the Maryland Commissioner for approval pursuant to the applicable
bank merger provisions of the Financial Institutions Article of Annotated Code
of Maryland and to the FDIC for its approval pursuant to the provisions of
Section 18(c) of the Federal Deposit Insurance Act ((S)1828(c) of Title 12 of
the United States Code), (iv) shall cause the publication of any newspaper
notices required by law with respect to the Merger, and (v) shall duly call
and convene a meeting of the Bank's stockholders to act upon the Agreement of
Merger and the Merger provided for therein and in connection therewith shall
recommend approval of the Agreement of Merger and the Merger provided for
therein to the Bank's stockholders and use all of their commercially
reasonable efforts to obtain a favorable vote thereon, subject to the
provisions of Section 1.10 hereof.
2.4. Stockholder Approval. The Merger is subject to the additional
nonwaivable condition that the Agreement of Merger and the Merger provided for
therein shall have been approved by the holders of two-thirds of the votes
entitled to be cast with respect to each of Peninsula and the Bank at
stockholder meetings duly called for that purpose (or with respect to
Peninsula, if permitted by law, by stockholder consent action), subject,
however, to the rights of the Corporation under Section 1.11(l) hereof.
Subject to the terms and conditions of this Agreement, the Corporation will
vote all of the outstanding common stock shares of Peninsula in favor of the
Agreement of Merger and the Merger provided for therein.
2.5. Effect of Merger. Upon the Effective Date, the Bank shall be merged
with and into Peninsula in accordance with the Agreement of Merger and
pursuant to the applicable provisions of the Annotated Code of Maryland and
with the effect provided in said provisions. As a result of the Merger and as
of the Effective Date:
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(a) Peninsula shall be the Successor.
(b) The charter and bylaws of Peninsula in effect immediately prior to the
Effective Date shall be the charter and bylaws of the Successor.
(c) The offices of the Bank and the offices of Peninsula as of the date of
this Agreement and any additional offices opened prior to the Effective Date
by Peninsula, or, in accordance with this Agreement, by the Bank shall be and
become the offices of the Successor.
2.6. Terms of Merger; Objecting Stockholders. On the Effective Date and
immediately upon the Merger provided for in the Agreement of Merger becoming
effective with the effects set forth in Section 2.5 above and in Section 3-712
of the Financial Institutions Article of the Annotated Code of Maryland, or
any successor statute thereto, and in consideration thereof, the terms of the
Merger shall be as follows:
(a) Each share of capital stock of Peninsula shall remain issued and
outstanding as one share of capital stock of the Successor, without any action
on the part of the holder thereof.
(b) Each share of issued and outstanding common stock of the Bank (other
than the shares held by any objecting stockholder of the Bank pursuant to
paragraph (d) of this Section 2.6) shall for all corporate purposes, and
without any action on the part of the holder thereof, automatically become and
be converted into two and five-tenths (2.5) shares (subject to adjustment
pursuant to Section 1.5(b)) of Common Stock of the Corporation and the right
to receive cash in lieu of fractional shares of Common Stock, as provided in
paragraph (c) of this Section 2.6. Each certificate representing shares of the
common stock of the Bank (other than certificates for shares held by any
objecting stockholders) will thereafter represent a number of whole shares of
Common Stock (and the right to receive cash in lieu of fractional shares of
Common Stock) determined in accordance with the Conversion Rate set forth
above. Such certificates may at any time thereafter be surrendered to The Bank
of New York, acting as exchange agent, or such other or additional exchange
agent as the Corporation may select (the "Exchange Agent") (together with the
transmittal materials delivered by the Exchange Agent hereunder) for new
certificates for the appropriate number of whole shares of Common Stock (and
cash in lieu of fractional shares). After the Effective Date, no dividends or
other distributions shall be paid on shares of Common Stock with respect to
which certificates formerly representing shares of common stock of the Bank
have not been surrendered; but whenever a dividend is declared by the
Corporation on the Common Stock after the Effective Date, the declaration
shall include dividends on all shares of Common Stock issuable hereunder and
upon such surrender, all dividends not paid because of this provision shall be
paid, without interest. The Corporation shall be entitled, however, after the
Effective Date, to treat the certificates of theretofore outstanding common
stock of the Bank as evidencing the ownership of the number of whole shares of
Common Stock into which the common stock of the Bank, previously represented
by such certificates, shall have been converted, notwithstanding the failure
to surrender such certificates. All certificates for common stock of the Bank
surrendered to the Exchange Agent for new certificates representing shares of
Common Stock pursuant to this Section 2.6(b) will be cancelled.
(c) In order to save the expense and inconvenience of issuing and
transferring fractional shares, no fractional shares of Common Stock or
certificates therefor will be issued, but, in lieu thereof, and solely as a
mechanism for rounding shares to whole shares, the Corporation will pay cash
for such fractional shares on the basis of the closing price for Common Stock
(as reported by The Nasdaq National Market) (or any successor Market or Stock
Exchange) on the Effective Date (or if no closing price is reported on that
date, then the closing price on the next preceding day on which there is a
closing price), without interest, upon surrender of certificates of common
stock of the Bank representing the right to receive such cash in lieu of
fractional shares of Common Stock. No such holder shall be entitled to
dividends, voting rights or any other rights of stockholders in respect of any
fractional share.
(d) Any holder of shares of the common stock of the Bank whose shares are
voted against the approval of the Merger at the meeting of stockholders at
which the Merger is approved, and who, within thirty (30) days after the
Effective Date (which shall be set forth in a notice provided to any such
stockholder by the Corporation
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and Peninsula by certified mail, return receipt requested pursuant to Section
3-207(b) of the MGCL), makes a written demand upon Peninsula for payment for
such shares, accompanied by a surrender of the certificates for such shares,
all pursuant to the provisions of Title 3, Subtitle 7, Part II of the
Financial Institutions Articles of the Annotated Code of Maryland, or any
successor statute thereto and any applicable provisions of Title 3, Subtitle 2
of the MGCL, shall be entitled to receive from Peninsula in cash the fair
value of such shares of the common stock of the Bank determined in accordance
with the aforesaid provisions of the Annotated Code of Maryland, or any
successor statute thereto. The amount paid to any such objecting stockholder
shall be debited against the capital accounts of Peninsula. If the holders of
any of the shares of the Bank object to the Merger and demand payment in cash
for their shares as aforesaid, the Corporation shall pay to Peninsula, as a
contribution to its capital, cash at a price per share equal to the price per
share paid by Peninsula to the objecting shareholder.
2.7. Confirmatory Deeds. When and as requested by the Corporation or
Peninsula, the Bank shall execute and deliver or cause to be executed and
delivered, all such deeds and other instruments, and take or cause to be taken
all such further or other actions, as the Corporation or Peninsula may deem
necessary or desirable in order to vest or perfect in or confirm of record or
otherwise to Peninsula as Successor in the Merger, title to and possession of
all real estate and other property of the Bank, and otherwise to carry out the
intent and purposes of this Agreement and the Agreement of Merger.
2.8 Procedural Matters. The Corporation, at its option, may revise the
sequence of events or other matters relating to the accomplishment of the
Merger in such manner as it may reasonably determine will best facilitate
accomplishment of the Affiliation.
Article III
Miscellaneous
3.1. Termination For Regulatory Reasons. If, at any time, the Corporation
receives information from any regulatory authority, which by law is required
to approve the Merger or any other aspect of the transactions provided for
herein or which has authority to challenge the validity of the Merger or such
transactions in judicial proceedings or otherwise, that provides a substantial
basis for concluding that the required regulatory approval will not be granted
or that the Merger or such transactions will be so challenged, the Corporation
and Peninsula may, after consultation with the Bank, and subject to the
provisions of Section 3.6 with respect to expenses, terminate all obligations
under this Agreement by giving fourteen (14) days written notice of such
termination to the Bank. Upon such termination, except as set forth in Section
3.6, this Agreement shall become null and void and none of the parties hereto
shall have any obligation or liability to the others with respect to this
Agreement.
3.2. Termination By Consent or Due to Passage of Time. At any time prior to
the Effective Date, notwithstanding the approval of the Merger by the
stockholders of the Bank, this Agreement may be terminated by mutual consent
of the Bank and the Corporation. Moreover, the Corporation and Peninsula on
the one hand, and the Bank on the other, shall be entitled to terminate this
Agreement after April 30, 2001, by written notice to the other party unless
the Effective Date shall have occurred on or before such date or the parties
hereto shall have extended the Effective Date of this Agreement in writing.
3.3 Termination With Respect to Acquisition Proposal. This Agreement may be
terminated by the Corporation and Peninsula if the Directors of the Bank
recommend to its stockholders or the Bank accepts an Acquisition Proposal and
may be terminated by the Bank if, in compliance with Section 1.10 hereof, its
Directors recommend to its stockholders or it accepts an Acquisition Proposal.
In any such case, the Bank shall pay the Corporation a termination fee in the
amount of $400,000 and shall also pay its own expenses as provided in Section
3.6 below.
3.4 Termination If Support Agreement Not Delivered. This Agreement may be
terminated by the Corporation and Peninsula unless stockholders owning
beneficially at least 38% of the Bank's outstanding capital
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<PAGE>
stock have executed and delivered to the Corporation by the end of the first
business day following the date of this Agreement, a "Support Agreement," in a
form satisfactory to the Corporation, agreeing to vote in favor of the
Agreement of Merger and the Merger and to certain other related matters with
respect to the transactions contemplated in this Agreement.
3.5. Amendment. This Agreement may be amended, but only in writing approved
by the Bank, the Corporation and Peninsula, at any time prior to the Effective
Date and with respect to any of the terms and provisions hereof; provided,
however, that after the stockholders of the Bank have approved the Merger, no
amendment shall be made that alters the Conversion Rate set forth in Section
1.2 (except pursuant to Section 1.5(b)) or otherwise materially adversely
affects the rights of the Bank's stockholders.
3.6. Expenses; Limited Liability. Each party to this Agreement shall pay its
own expenses relating hereto, including fees and disbursements of its
respective counsel and of any investment or financial advisor retained by it;
provided, however, that, subject to the provisions of the next sentence of
this Section 3.6, in the event the transactions hereunder are not consummated,
other than pursuant to Section 3.3, the Corporation will pay for the
preparation of the regulatory filings referred to herein and for the filing
fees relating thereto, the printing and mailing of the Proxy Statement, and
all fees and disbursements of accountants (not including routine auditing
fees) for either of the parties hereto. The termination of this Agreement in
accordance with the terms of Sections 3.1, 3.2 or 3.3 shall create no
liability on the part of any party, except as set forth in Section 3.3, or on
the part of any party's directors, officers, stockholders, agents or
representatives; provided, however, that if this Agreement is terminated under
any of such provisions or otherwise by the Corporation and Peninsula by reason
of a material breach by the Bank, or by the Bank by reason of a material
breach by the Corporation or Peninsula, and such breach involves an
intentional, willful or grossly negligent misrepresentation or breach of
covenant, the breaching party shall be liable to the nonbreaching party for
all costs and expenses reasonably incurred by the nonbreaching party in
connection with the preparation, execution and attempted consummation of this
Agreement, including the fees of its counsel, accountants, consultants and
other advisors and representatives.
3.7. Notices. All notices or other communications required or permitted
under the terms of this Agreement shall be sufficient if hand delivered or if
sent by registered or certified mail, postage prepaid, or with respect to any
notice of termination under Section 3.4, if hand delivered or sent by
telecopy, addressed as follows:
If to the Corporation or Peninsula:
Mercantile Bankshares Corporation
Attention: Alan D. Yarbro, Esq.
General Counsel and Secretary
Two Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-237-5347
Copy to:
Venable, Baetjer and Howard, LLP
Attention: Lee M. Miller, Esq.
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Fax No. 410-244-7742
If to the Bank:
The Bank of Fruitland
Attention: Henry E. Tilman, Jr.
President
109 East Main Street--P.O. Box 100
Fruitland, Maryland 21826
Fax No. 410-749-5264
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<PAGE>
Copy to:
Long, Badger, Sullivan & Robertson, P.A.
Attention: John B. Long, II., Esq.
124 E. Main Street
Salisbury, Maryland 21803
Fax No. 410-749-8731
or to such other address as shall hereafter be provided in writing by the
Corporation or the Bank, respectively. Any notice or communication given
pursuant to this Agreement shall be deemed to have been given on the day it is
mailed or telecopied, as the case may be.
3.8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
shall together be deemed one and the same Agreement.
3.9. Binding Effect; No Third Party Rights. This Agreement shall bind the
Corporation, Peninsula 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.
3.10. Governing Law. This Agreement shall be governed by the laws of the
State of Maryland, without regard to conflict of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
Mercantile Bankshares Corporation
/s/ H. Furlong Baldwin
By_____________________________(SEAL)
H. Furlong Baldwin
Chairman of the Board, President
and Chief Executive Officer
The Bank of Fruitland
/s/ John B. Long, II
By_____________________________(SEAL)
John B. Long, II
Chairman of the Board
Peninsula Bank
/s/ Jeffrey F. Turner
By_____________________________(SEAL)
Jeffrey F. Turner
President and Chief Executive
Officer
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<PAGE>
Exhibit A
Agreement of Merger
THIS AGREEMENT OF MERGER made between The Bank of Fruitland, a Maryland
commercial bank (hereinafter called "Fruitland"), and Peninsula Bank, a
Maryland commercial bank (hereinafter called "Peninsula"), and joined in by
Mercantile Bankshares Corporation, a Maryland corporation (hereinafter called
"Mercshares").
In consideration of the mutual covenants and agreements herein contained and
the mutual benefits to be derived therefrom, the parties do hereby agree as
follows:
Section 1. As of the effective date and time provided for in Section 9
hereof (the "Effective Date"), Fruitland shall be merged into Peninsula under
the charter of Peninsula and Peninsula shall be the Successor (hereinafter
called the "Successor") under the name "Peninsula Bank". The bylaws of
Peninsula shall be the bylaws of the Successor.
Section 2. The business, objects and purposes of the Successor shall be to
carry on in all of its aspects the business of a commercial bank, and to that
end the Successor shall have and may exercise all rights and powers conferred
upon commercial banks under the laws of the State of Maryland, as now in force
or as the same may hereafter be amended, and shall have and may exercise all
rights, powers and duties of Fruitland and of Peninsula under their respective
charters.
Section 3. The address of the principal banking office of Fruitland is 109
East Main Street, Fruitland, Maryland 21826. The address of the principal
banking office of Peninsula is 11738 Somerset Avenue, Princess Anne, Maryland
21853.
Section 4. The address of the principal banking office of the Successor will
be 11738 Somerset Avenue, Princess Anne, Maryland 21853.
Section 5. The authorized capital stock of Fruitland is ten million dollars
($10,000,000), consisting of one million (1,000,000) shares of common stock
with a par value of ten dollars ($10.00) per share. The authorized capital
stock of Peninsula is nine hundred thirty thousand dollars ($930,000),
consisting of thirty-one thousand (31,000) shares of capital stock with a par
value of thirty dollars ($30.00) per share. The authorized capital stock of
Peninsula as Successor is nine hundred thirty thousand dollars ($930,000),
consisting of thirty-one thousand (31,000) shares of capital stock with a par
value of thirty dollars ($30) per share. Each share of capital stock shall be
entitled to one vote. No preferred stock will be issued in the Merger.
Section 6. All assets and all rights, franchises and interests of Peninsula
and Fruitland in and to every species of property, real, personal and mixed,
and choses in action thereto belonging, shall be transferred to and vest in
the Successor without any deed, conveyance or other transfer. The Successor by
virtue of this Merger and without any order or other action on the part of any
court or otherwise shall hold and enjoy the same, and all rights of property,
franchises and interests in the same manner and to the same extent as such
rights, franchises and interests were held or enjoyed by either Peninsula or
Fruitland immediately prior to the Effective Date.
Section 7. On the Effective Date and immediately upon the Merger provided
for in this Agreement of Merger becoming effective and in consideration
thereof, the terms of the Merger shall be as follows:
(a) Each share of capital stock of Peninsula shall remain issued and
outstanding as one share of capital stock of the Successor, without any action
on the part of the holder thereof.
(b) Each share of issued and outstanding capital stock of Fruitland (other
than the shares held by any objecting stockholder of Fruitland as provided in
paragraph (d) of this Section 7) shall for all corporate purposes,
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<PAGE>
and without any action on the part of the holder thereof, automatically become
and be converted into two and five-tenths (2.5) shares of Common Stock,
subject to adjustment pursuant to Section 1.5(b) of the Plan, as hereinafter
defined, $2.00 par value per share, of Mercshares (the "Common Stock") and the
right to receive cash in lieu of fractional shares of Common Stock, as
provided in paragraph (c) of this Section 7. Each certificate representing
shares of the common stock of Fruitland (other than certificates representing
shares held by any objecting stockholders) will thereafter represent a number
of whole shares of Common Stock (and the right to receive cash in lieu of
fractional shares of Common Stock) determined in accordance with the
conversion ratio set forth above. Such certificates (together with any
required transmittal materials or endorsements) may at any time thereafter be
surrendered to The Bank of New York, acting as exchange agent, or such other
or additional exchange agent as Mercshares may select (the "Exchange Agent")
for new certificates for the appropriate number of whole shares of Common
Stock (and cash in lieu of fractional shares). After the Effective Date, no
dividends or other distributions shall be paid on shares of Common Stock with
respect to which certificates formerly representing shares of common stock of
Fruitland have not been surrendered; but whenever a dividend is declared by
Mercshares on the Common Stock after the Effective Date, the declaration shall
include dividends on all shares of Common Stock issuable hereunder and upon
such surrender, all dividends not paid because of this provision shall be
paid, without interest. Mercshares shall be entitled, however, after the
Effective Date, to treat the certificates theretofore representing outstanding
common stock of Fruitland as evidencing the ownership of the number of whole
shares of Common Stock into which the common stock of Fruitland, previously
represented by such certificates, shall have been converted, notwithstanding
the failure to surrender such certificates. All certificates for common stock
of Fruitland surrendered to the Exchange Agent for new certificates
representing shares of Common Stock pursuant to this Section 7 will be
canceled.
(c) In order to save the expense and inconvenience of issuing and
transferring fractional shares, no fractional shares of Common Stock or
certificates therefor will be issued, but, in lieu thereof, and solely as a
mechanism for rounding shares to whole shares, Mercshares will pay cash for
such fractional shares on the basis of the closing price for Common Stock (as
reported by The Nasdaq National Market or any successor Market or Stock
Exchange) 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 Fruitland representing the right to receive such cash in lieu of
fractional shares of Common Stock. No such holder shall be entitled to
dividends, voting rights or any other rights of stockholders in respect of any
fractional share.
(d) Any holder of shares of the common stock of Fruitland whose shares are
voted against the approval of the Merger at the meeting of stockholders at
which the Merger is approved, and who, within thirty (30) days after the
Effective Date (which shall be set forth in a notice provided to any such
stockholder by the Corporation and Peninsula by certified mail, return receipt
requested pursuant to Section 3-207(b) of the Maryland General Corporation
Law) makes a written demand upon Peninsula for payment for such shares,
accompanied by a surrender of the certificates for such shares, all pursuant
to the provisions of Title 3, Subtitle 7, Part II of the Financial
Institutions Articles of the Annotated Code of Maryland, or any successor
statute thereto and any applicable provisions of Title 3, Subtitle 2 of the
Maryland General Corporation Law, shall be entitled to receive from Peninsula
in cash the fair value of such shares of the common stock of Fruitland
determined in accordance with the aforesaid provisions of the Financial
Institutions Article of the Annotated Code of Maryland and of Maryland General
Corporation Law, or any successor statute thereto. The amount paid to any such
objecting stockholder shall be debited against the capital accounts of
Peninsula. If the holders of any of the shares of Fruitland object to the
Merger and demand payment in cash for their shares as aforesaid, Mercshares
shall pay to Peninsula, as a contribution to its capital, cash at a price per
share equal to the price per share paid by Peninsula to the objecting
shareholder.
(e) There will be no objecting shareholders of Peninsula, which is a wholly
owned affiliate of Mercshares.
Section 8. This Agreement of Merger is subject to the approval of the
Commissioner of Financial Regulation of Maryland and of the holders of at
least two-thirds (2/3rds) of the issued and outstanding common stock of each
of Fruitland and of Peninsula, respectively, and is subject also to compliance
with all of the
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<PAGE>
conditions set forth in the Agreement and Plan of Affiliation and Merger dated
June 1, 2000, by and among Fruitland, Peninsula, and Mercshares (the "Plan"),
pursuant to which this Agreement of Merger is executed, except such as shall
have been waived as provided in the said Plan. At any time prior to the
Effective Date, notwithstanding its approval by the stockholders of Fruitland
and/or Peninsula, the parties hereto, without further action or approval of
the stockholders of Fruitland or Peninsula, may amend or abandon the Merger in
accordance with Article III of the Plan.
Section 9. The Merger provided for herein shall be effective on the date and
time set forth in the Certificate of Merger issued by the Commissioner of
Financial Regulation of Maryland.
Section 10. 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.
IN WITNESS WHEREOF, Fruitland and Peninsula have caused this Agreement of
Merger to be executed on their respective behalves and their corporate seals
to be hereunto affixed on this 27th day of July, 2000.
Attest: The Bank of Fruitland
/s/ Ronald L. Laws /s/ Henry E. Tilman, Jr.
_____________________________________ By: _________________________________
Ronald L. Laws, Cashier Henry E. Tilman, Jr.,
President and Chief Executive
Officer
Attest:
Peninsula Bank
/s/ Michael R. Walsh
_____________________________________
Michael R. Walsh, Secretary /s/ Jeffrey F. Turner
By: _________________________________
Jeffrey F. Turner,
President and Chief Executive
Officer
Mercantile Bankshares Corporation hereby joins in the foregoing Agreement of
Merger, undertakes that it will be bound thereby and that it will issue the
shares of its common stock and make the payments required by the provisions of
Section 7.
IN WITNESS WHEREOF, Mercantile Bankshares Corporation has caused this
undertaking to be executed on its behalf by its proper officers and its
corporate seal to be hereunto affixed on this 27th day of July, 2000.
Attest: Mercantile Bankshares Corporation
/s/ Alan D. Yarbro /s/ H. Furlong Baldwin
_____________________________________ By: _________________________________
Alan D. Yarbro, Secretary H. Furlong Baldwin,
Chairman of the Board,
President and Chief Executive
Officer
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<PAGE>
Annex B
[Feldman Financial Advisors, Inc. Letterhead]
October 6, 2000
Board of Directors
The Bank of Fruitland
109 East Main Street
Fruitland, Maryland 21826
Members of the Board:
The Bank of Fruitland ("BOF") and Mercantile Bankshares Corporation
("Mercantile") have entered into an Agreement and Plan of Affiliation and
Merger ("Agreement") dated June 1, 2000, pursuant to which BOF will become
affiliated with Mercantile by merger into Peninsula Bank ("Peninsula"), a
wholly owned subsidiary of Mercantile (the "Merger"). As set forth in the
Agreement, on the Effective Date of the Merger each of the outstanding shares
of BOF common stock ("BOF Common Stock") will be converted into 2.5 shares
(the "Exchange Ratio") of Mercantile common stock ("Mercantile Common Stock"),
subject to adjustment. In connection therewith, you have requested our opinion
as to the fairness, from a financial point of view, of the Exchange Ratio to
the shareholders of BOF.
Feldman Financial Advisors, Inc. ("Feldman Financial") specializes in
providing financial advisory and consulting services, to commercial banks and
thrift institutions. As part of our business, we are regularly engaged in the
independent valuation of businesses and securities in connection with merger
and acquisition transactions, initial public offerings, private placements,
and recapitalizations. Feldman Financial is familiar with BOF, having acted as
financial advisor to BOF in connection with the negotiations leading to the
Agreement and will receive a fee from BOF for our services.
During the course of our engagement, we reviewed and analyzed publicly
available and confidential materials bearing upon the financial and operating
conditions of BOF and material prepared in connection with the proposed
transaction, including, but not limited to, the following: the Agreement;
certain historical financial information concerning BOF; the terms of recent
merger and acquisition transactions involving banks that we considered
relevant; historical trading prices and activity for BOF Common Stock and
Mercantile Common Stock and financial and other information provided to us by
the management of BOF. With respect to Mercantile, we reviewed and relied upon
publicly available information regarding the financial condition and
operations of Mercantile.
In the course of our review, we have relied upon and assumed the accuracy
and completeness of all the financial and other information that was provided
by BOF or their representatives to us or was available to us from public
sources. We did not independently verify and have relied on and assumed that
the aggregate allowance for loan losses set forth in the balance sheet of BOF
at June 30, 2000 was adequate to cover such losses and complied fully with
applicable law, regulatory policy, and sound banking practices as of the date
of such financial statements. We were not retained and did not conduct a
physical inspection of any of the properties or facilities of BOF, nor did we
make any independent evaluation or appraisal of the assets, liabilities, or
prospects of BOF, nor were we furnished with any such evaluation or appraisal,
and we were not retained to and did not review any individual credit files.
B-1
<PAGE>
[Feldman Financial Advisors, Inc. Letterhead]
Board of Directors
Bank of Fruitland
October 6, 2000
Page 2
In addition, we have discussed financial projections with BOF senior
management for the purpose of reviewing the future prospects of BOF. We
assumed that, as of the date such projections were prepared, they were
reasonably prepared reflecting the best estimates and judgements of the
management of BOF as to the future operating and financial performance of BOF.
Further, there will usually be differences between prospective and actual
results because events and circumstances frequently do not occur as expected
and those differences may be material. Additionally, we performed such other
studies, analyses, and examinations as we deemed appropriate. We also took
into account our assessment of general market and financial conditions and our
experience in other transactions, as well as our knowledge of the banking
industry and our general experience in securities valuations.
We have also assumed that there has been no material adverse change in BOF's
or Mercantile's assets, financial condition, results of operations, business,
or prospects since the date of the last financial statements made available to
us by BOF or obtained from public sources. We have undertaken no
responsibility for legal matters. Our opinion is necessarily based upon
economic, market, monetary, and other conditions as they exist and can be
evaluated as of the date hereof and the information made available to us
through the date hereof. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion unless specifically requested by BOF.
We are not expressing any opinion herein as to the price at which shares of
Mercantile Common Stock issued in the Merger may trade if and when they are
issued or at any future time, nor does our opinion address the relative merits
of the Merger, or constitute a recommendation to any holder of BOF Common
Stock as to how such holder should vote with respect to the Merger at any
meeting of holders of BOF Common Stock.
This letter is solely for the information of the Board of Directors of BOF
and is not to be used, circulated, quoted, or otherwise referred to for any
other purpose without our prior written consent, except as set forth in our
engagement letter with BOF. We hereby consent to the inclusion and reference
to this letter in any proxy statement to be delivered to holders of BOF Common
Stock in connection with the Merger if and only if this letter is quoted in
full or attached as an exhibit to such document and this letter has not been
withdrawn prior to the date of such document.
Based upon and subject to the foregoing, and based upon such other matters
as we considered relevant we are of the opinion that, as of the date hereof,
the Exchange Ratio to be exchanged by Mercantile pursuant to the terms of the
Agreement is fair, from a financial point of view, to the shareholders of BOF.
Sincerely,
/s/ Felman Financial Advisors, Inc.
-----------------------------------
Feldman Financial Advisors, Inc.
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<PAGE>
Annex C
Appraisal Rights Provisions
of the Financial Institutions Article
of the Maryland Annotated Code
(S) 3-718. Successor may offer fair value.
(a) In general.--The successor in a consolidation, merger, or transfer of
assets may offer to pay in cash to the objecting stockholders of a constituent
bank not more than what it considers to be the fair value of their shares of
stock as of the time of the stockholders' meeting approving the transaction.
(b) Effect of acceptance.--An objecting stockholder who accepts the offer is
barred from receiving the appraised fair value of the shares of stock under
(S) 3-719 of this subtitle.
(S) 3-719. Right to fair value.
(a) General rule.--The owner of shares of stock that were voted against a
consolidation, merger, or transfer of assets is entitled to receive the fair
value of those shares, in cash, if the transaction becomes effective.
(b) Procedure by stockholder.--A stockholder who desires to receive payment
of the fair value for shares under this section, within 30 days after the
transaction becomes effective, shall:
(1) Make a written demand on the successor for payment; and
(2) Surrender the stock certificates.
(S) 3-720. Appraisal of fair value.
(a) Basis of fair value.--The fair value of the shares of stock shall be
determined as of the date of the stockholders' meeting approving the
consolidation, merger, or transfer of assets.
(b) Appraisers.--(1) The determination of fair value shall be made by three
appraisers as follows:
(i) One chosen by the owners of two thirds of the shares involved;
(ii) One chosen by the board of directors of the successor; and
(iii) The third chosen by the other two appraisers.
(2) The fair value to which any two appraisers agree shall govern.
(3) The appraisers shall give notice of the fair value determination to
the successor and to each stockholder who has made demand for the
determination under (S) 3-719 of this subtitle.
(c) Reappraisal.--(1) Within 5 days after the appraisers give the notice of
the fair value determination, a stockholder who is dissatisfied with that
value may notify the Commissioner.
(2) The Commissioner shall have the shares reappraised.
(3) This reappraisal is final and binding as to the value of the shares
of stock of that stockholder.
(d) Appraisal by Commissioner.--(1) If the appraisal to be made under
subsection (b) of this section is not completed within 90 days after the
consolidation, merger, or transfer of assets becomes effective, the
Commissioner shall have an appraisal made.
(2) This appraisal is final and binding as to the value of the shares of
stock of all objecting stockholders.
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(e) Expenses of appraisals.--The successor shall pay the expenses of each
appraisal made under this section.
(S) 3-721. Amount due is debt of successor.
Any amount due to an objecting stockholder under this Part II is a debt of
the successor.
Relevant Appraisal Rights Provisions
of The Maryland General Corporation Law
(S) 3-207. Notice and offer to stockholders.
(a) Duty of successor:--(1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the
corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice:--The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by
certified mail, return receipt requested, bearing a postmark from the United
States Postal Service, at the address he gives the successor in writing, or,
if none, at his address as it appears on the records of the corporation which
issued the stock.
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