Filing Pursuant To Rule 425
of the Securities Act Of 1933, as amended
and deemed Filed Pursuant To Rule 14(a)-12
of the Securities Exchange Act Of 1934, as amended
Filed By: Mercantile Bankshares Corporation
Subject Company: F&M Bancorp
Commission File No. 0-12638
March 13, 2003
This filing relates to a proposed merger between Mercantile Bankshares
Corporation and F&M Bancorp pursuant to the terms of an Agreement dated as of
March 13, 2003.
On March 13, 2003, Mercantile Bankshares Corporation and F&M Bancorp
held a conference call relating to the proposed merger described above, which
was also made available for replay via webcast. Set forth below is certain
disclosure that must be reviewed in order to listen to a replay of the webcast.
Following this disclosure is a transcript of the conference call.
This audio presentation contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to, statements about (i)
the benefits of a merger (the "Merger") between F&M Bancorp ("F&M") and
Mercantile Bankshares Corporation ("Mercantile"), including future financial and
operating results, cost savings enhancements to revenue and accretion to
reported earnings that may be realized from the Merger; (ii) Mercantile's and
F&M's plans, objectives, expectations and intentions and other statements
contained in this filing that are not historical facts; and (iii) other
statements identified by words such as "expects" "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," "targets," "projects," or words of
similar meaning generally intended to identify forward-looking statements. These
forward-looking statements are based upon the current beliefs and expectations
of the respective managements of Mercantile and F&M and are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. Actual results may
differ materially from the anticipated results discussed in these
forward-looking statements because of numerous possible uncertainties.
The following factors, among others, could cause actual results to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements: (1) the businesses of Mercantile and F&M may
not be combined successfully, or such combination may take longer, be more
difficult, time-consuming or costly to accomplish than expected; (2) the
expected growth opportunities or cost savings from the Merger may not be fully
realized or may take longer to realize than expected; (3) deposit attrition,
operating costs, customer losses and business disruption following the Merger,
including adverse effects on relationships with employees, may be greater than
expected; (4) the regulatory approvals required for the Merger
may not be obtained on the proposed terms or on the anticipated schedule; (5)
the stockholders of F&M may fail to approve the Merger; (6) adverse governmental
or regulatory policies may be enacted; (7) the interest rate environment may
further compress margins and adversely affect net interest income; (8) results
may be adversely affected by continued diversification of assets and adverse
changes to credit quality; (9) competition from other financial services
companies in Mercantile's and F&M's markets could adversely affect operations;
(10) an economic slowdown could adversely affect credit quality and loan
originations; and (11) the involvement of the United States and its allies in a
possible war in southwest Asia could have unpredictable negative affects on our
businesses and the economy. Additional factors, that could cause actual results
to differ materially from those expressed in the forward-looking statements are
discussed in Mercantile's and F&M's reports (such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with
the Securities and Exchange Commission and available on the SEC's Internet site
(http://www.sec.gov).
Mercantile and F&M caution that the foregoing list of factors is not
exclusive. All subsequent written and oral forward-looking statements concerning
the proposed transaction or other matters attributable to Mercantile or F&M or
any person acting on their behalf are expressly qualified in their entirety by
the cautionary statements above. Mercantile and F&M do not undertake any
obligation to update any forward-looking statement to reflect circumstances or
events that occur after the date the forward-looking statements are made.
F&M and Faye E. Cannon, F&M's President and Chief Executive Officer,
and certain of F&M's other executive officers and directors may be deemed to be
participants in the solicitation of proxies from the stockholders of F&M in
favor of the Merger. The other executive officers and directors of F&M who may
be participants in the solicitation of proxies in connection with the Merger
have not been determined as of the date of this filing. A description of the
interests of Ms. Cannon and F&M's other executive officers and directors in F&M
is set forth in the proxy statement for F&M's 2002 Annual Meeting of
Stockholders, which was filed with the SEC on March 14, 2002. In addition to
those interests (i) Ms. Cannon and David R. Stauffer will receive, at the
closing time of the Merger, cash payments in respect of foregone option grants
of F&M common stock, (ii) Mercantile will maintain a split-dollar life insurance
policy for James L. Hogan, (iii) certain executive officers, including Ms.
Cannon, may be entitled to receive lump sum payments of amounts due under
certain individual severance agreements or under the FMNB Executive Supplemental
Income Plan, (iv) two members of F&M's current board of directors, who have not
been named as of the date of this filing, will become directors of Mercantile
following the Merger, (v) four members of F&M's current board of directors, who
have not been named as of the date of this filing, will become directors of a
wholly-owned subsidiary bank of Mercantile following the Merger, (vi) a
wholly-owned subsidiary bank of Mercantile will form an advisory board which
will include all members of F&M's current board of directors, each member will
serve for an initial term of four years at a rate of $15,000 per year, (vii)
each executive officer will be entitled to receive reimbursement for tax advice
and financial planning, subject to a limit of $5,000 per executive and (viii)
each of the F&M's directors will receive a lump sum payment of $21,000 under the
Unfunded Deferred Compensation Plan for Non-Employee Directors when such
director ceases to be a member of F&M's board. If and to the extent that Ms.
Cannon and Messrs. Stauffer and Hogan will receive any additional benefits in
connection with the Merger that are unknown as of the date of this filing, the
details of such
benefits will be described in the proxy statement/prospectus. Investors and
security holders may obtain more detailed information regarding the direct and
indirect interests of Ms. Cannon and Messrs. Stauffer and Hogan and F&M's other
executive officers and directors in the Merger by reading the proxy
statement/prospectus when it becomes available.
ADDITIONAL INFORMATION ABOUT THE MERGER AND WHERE TO FIND IT.
F&M and Mercantile intend to file with the SEC a proxy
statement/prospectus and other relevant materials in connection with the Merger.
The proxy statement/prospectus will be mailed to the stockholders of F&M.
Investors and security holders of F&M and Parent are urged to read the proxy
statement/prospectus and the other relevant materials when they become available
because they will contain important information about F&M, Mercantile and the
Merger.
The proxy statement/prospectus and other relevant materials (when they
become available), and any other documents filed by F&M or Mercantile with the
SEC, may be obtained free of charge at the SEC's web site at www.sec.gov. In
addition, investors and security holders may obtain free copies of the documents
filed with the SEC by F&M by contacting Kaye Simmons, F&M Bancorp, 110 Thomas
Johnson Drive, Frederick, MD 21702, telephone 888-694-4170 or from F&M's website
at www.fmbn.com. Investors and security holders may obtain free copies of the
documents filed with the SEC by Mercantile by contacting David Borowy,
Mercantile Bankshares Corporation, Two Hopkins Plaza, Baltimore, MD 21201,
telephone: (410) 237-5900.
Investors and security holders are urged to read the proxy
statement/prospectus and the other relevant materials when they become available
before making any voting or investment decision with respect to the Merger.
TRANSCRIPT OF AUDIO WEBCAST
Mercantile Bankshares Corporation
Moderator: Edward Kelly
March 13, 2003
11:00 a.m. EST
OPERATOR: Good morning everyone. And welcome to the Mercantile Bank Shares
Corporation and F&M Bancorp Investor and Analyst teleconference. We would like
to remind all callers that this call is being recorded. Following introductions,
we will be taking questions. You may place yourself in the queue by pressing one
followed by four on your touch-tone phone. If your question has all ready been
answered, you may remove yourself from the queue by pressing the pound key.
Now I'd like to turn the call over David Borowy, investor relations. Sir, you
may begin.
DAVID BOROWY, INVESTOR RELATIONS: Good morning. Thank you for joining us
today. With me on the call this morning are Ned Kelly, Chairman, President and
CEO of Mercantile Bankshares Corporation, and Terry Troupe, our Chief Financial
Officer. Also joining us on the call today-Faye Cannon, President and CEO, F&M
Bancorp and Kaye Simmons, the Chief Financial Officer of F&M Bancorp.
Before I turn the call over to Mr. Kelly I'd like to address some housekeeping
issues. The press release announcing the acquisition was sent out via PR
Newswire at 7:58 a.m. eastern standard time. I would like to remind you that
during the course of this conference call, we may make forward-looking
statements regarding matters that involve risks and uncertainty. Our actual
financial results and specific events and transactions could differ materially
from those discussed during this call.
These risks include but are not limited to the receipt and timing of regulatory
approvals for the transaction. The possibility that this transaction will not
close. The possibility that F&M stockholders may fail to approve the
transaction. The individual risks facing each business. The possibility that
integration following closing will prove more difficult than expected. And the
risks to the economy and our respective businesses of a possible war in Iraq.
More information about potential factors which could effect either company's
business and financial results is discussed in Mercantile's and F&M's reports,
such as annual reports in Form 10-K, quarterly reports on Form 10-Q, and current
reports on Form 8-K filed with the Securities and Exchange Commission and
available on the SEC's Internet sites at www.sec.gov. And now Mr. Kelly will
take it from here.
EDWARD KELLY, CHAIRMAN, PRESIDENT AND CEO OF MERCANTILE BANKSHARES CORPORATION:
Thank you, David and good morning. I'd like to welcome you all to the call
and appreciate your interest. As you may or may not know this is Mercantile's
inaugural investor call with respect to an acquisition. And I'm delighted to be
joined by Faye and Kaye who are here with me.
Just to give you a sense of what we'd like to do this morning, I'll make some
very brief remarks at the opening and then turn it over to Faye for a few
minutes. And then I will walk through a presentation which I believe has been
posted on our Web site for the last hour-and-a-half or so. And I'll assume for
that purpose that you have most of it and try to hit the highlights. We'll then
open it to questions. And we'd be delighted to answer any that you have.
At the outset, I'm sure it would come as no surprise I'm delighted to be here
and to be able to announce this. I think both institutionally and personally
Mercantile has been focused on F&M for some time. They are in markets that we
believe are extremely good ones. We've long respected them as competitors. And
we believe that they share a client focus and a focus on community banking
that's very consistent with our culture. And we are delighted to be able to have
them join the Mercantile family.
As you know, this is a very rare opportunity. There are three banks in Maryland,
other than ourselves that have in excess of $1 billion in assets. F&M as you
know, is roughly 2.1 billion. It is a great fit with us geographically. It
strengthens our existing positions; it affords us entry to new markets. Because
of the in-market nature of it, I
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think it makes synergies readily achievable. And one thing we have not done as
we'll go through the presentation is to assume any revenue synergies. But I
genuinely believe given F&M focus on the retail side in particular, and our
particular expertise in the commercial side, that we will be able to generate
additional growth as we go forward.
Execution risk is real. And I know the market is very much focused on that.
Having said that, I think there are certain factors in this deal that will help
to mitigate that which is one of the reasons that the deal was so attractive to
us. And one thing that we'll come back to, but that I might offer up at the
outset, is that we are on the same operating systems which will make conversion
obviously, considerably easier than it might be otherwise. And frankly, we're
basically on the same schedule with respect to determining who we might use on
that basis going forward.
With that, and I'll come back in a second to talk, to try to walk you through
the presentation, I'd like to introduce Faye. And to tell you how delighted I
am, as well to be here with her. I've enjoyed getting to know her. We've worked
closely as we've gone through this process. And as I said, I'd like to open it
to her to make a few remarks. And then I'll go through the presentation and
we'll open it up to questions.
FAYE CANNON, PRESIDENT AND CEO, F&M BANCORP: Thank you, Ned, very much. And it
is a pleasure to here. And we are obviously very excited about our joint
announcement this morning. Mercantile and F&M Bancorp obviously share a long
history and a desire to maintain our similar client oriented, community focused
culture.
We believe that this transaction is certainly an excellent one for our
shareholders and obviously will be one for our customers. Both organizations are
relationship driven and highly complimentary with their commercial and retail
banking, our mortgage banking and our investment in wealth management lines of
business.
Our team of companies at F&M Bancorp certainly know what it takes to thrive in
the financial services business. It's a team of dedicated professionals, a
diverse range of financial products and services, foresight and agility to adapt
to change, technology that drives performance and efficiency, and exceptional
execution in delivering personalized service. And just like Mercantile, we've
been thriving throughout the communities we serve for over a century. The
business combination with Mercantile will give our wealth management
professionals a significantly enhanced wealth management product suite that will
benefit clients, while certainly providing greater convenience to our commercial
and retail banking clients through access to Mercantile's expansive network in
Maryland, Virginia and Delaware.
With our announcement this morning, certainly our associates will direct our
energies and focus on providing outstanding client care to all of our clients
throughout all of our lines of business. We are certainly looking forward to
jumping quickly in to the work that will be assigned through the transition
team, and making Mercantile Bankshares, Maryland's preeminent financial
institution for all of their constituencies. Thank you, Ned.
EDWARD KELLY: Thank you, Faye. As I said, I would now plan to walk through the
presentation. I will assume that most of you have seen it. As I said it's on the
web site and I'll refer to the pages as I go through it. Although, as I
mentioned on the assumption that you have seen it, I'll try to hit the
highlights, at least, from our perspective.
On page three which is the transaction highlights, as I said earlier, this
transaction solidifies our position as the largest Maryland based franchise,
enhances our presence in existing markets, supports its entry in to new ones.
And a glance at the map confirms how good the fit is in this case. This makes us
number two in the state in deposits with a leading share in some of the
strongest growth markets. It is accretive to GAAP and cash EPS in the first full
year of combined operations.
We've identified cost savings. We think they are readily achievable given the
in-market nature of the transaction. And we also believe, as I mentioned
earlier, that there are significant revenue enhancement opportunities but we've
made no assumptions on that score in connection with the financial analysis.
On page six, there is a transaction summary. It is, as you know, $46 per share
nominally. The aggregate transaction value is about $505 million based on that
nominal price. The structure is 75 percent stock, 25 percent cash. And one thing
I should point out in that respect, I think the best way to think about this is
that there is essentially $11.50 per share, that is 25 percent cash that is
fixed. The exchange ratio with respect to the stock is fixed as well which means
that the stock price, the stock value, the value of that stock floats. So that
there - while the nominal value is
2
$46, the overall value of the transaction shifts depending on movements in our
share price. As you can see this morning, there has been some pressure on the
stock. I suspect that that's being driven by a dearth of M&A activity which has
meant the arbitrageurs are reasonably active at this stage it seems to me.
The fixed exchange ratio is 1.2831 for each share of F&M stock. We did an
extensive due diligence review, including as you might imagine from us, given
our devotion to credit quality, a detailed credit check. And one thing that was
enormously encouraging to me in that process is that my credit people, by and
large, are not ones to hand out compliments readily. And as they went through
this process, they assured me that they had been enormously impressed with F&M's
credit culture, its underwriting and its credit review process.
There will be two F&M directors that will be added to our board. But one thing I
want to stress, and as I will throughout is that we plan to rely very heavily on
the F&M board. They're very rooted in the communities that they serve. We will
have an advisory board. And in addition to the directors who will join the
holding company board, we looked at adding a number of their existing directors
to our affiliate boards which I will get to as we go through.
On page seven, no collars, there is a double trigger walk away. We anticipate
the closing to be third to fourth quarter 2003. We plan to complete the
consolidation by the end of 2003. The reason we're hedging, obviously on the
closing date, as you know, revolves around regulatory approvals.
Transaction summary on page eight. As you look at this, I think as someone had
mentioned to me earlier today, you know, the fact is that this still remains a
seller's market, which is obviously to the benefit of F&M in this case. I think
it's also testimony to the attractiveness of their franchise.
But as you look at the multiples, it's very much in line with comparable deals.
You know, the fact is it's less than 20 times - it is less than 20 times
earnings on a forward basis, which is by and large in line or slightly below the
comps. The tangible book multiple which is 2.71 is slightly below the comps as
well. The deposit premium is slightly above. The market premium and the headline
number is big. There's no question about that. And I suspect that that's
attracted people's attention. But having said that, given the trading
environment, and because of the dynamic in the 75-25 split that I described, and
the fact that F&M has actually been trading at $5 roughly below it's 52 week
high, I think it's easy to overstate the 48.9 percent headline market premium.
As we move to page 10, which is my favorite page, which is the strategic
benefits. The fact is this deal works financially. And financially, obviously,
the financials are extremely important to the strategy. Now related to that as I
said earlier, it solidifies our position, makes us number two, enhances our
existing presence, gives us new markets. Because of the nature of F&M, because
of the nature of the Maryland banking market, it's a unique opportunity to
achieve cost savings and strong growth. The geographic fit, as you can see from
the map, is terrific.
A combination of retail and commercial strength along with investment management
with an expanded client base offers enormous opportunity. And perhaps one of the
most important factors, as both Faye and I had mentioned, is that there is a
shared philosophy here. Customer oriented, communication focused, and strong
credit quality, which has been a hallmark of us and one that we plan to
maintain.
The other thing, as many of you know, is based on our initiatives in wealth
management, we are very much in the talent acquisition business. And one of the
things that F&M offers is the ability to add talent to our organization which
any organization can use.
As I've mentioned, execution risk is real and I recognize that. But there are a
couple of factors, several factors that mitigate that in my view. One is that on
a pro forma basis, this is roughly 15 to 16 percent of the combined firm's
assets. It is in - market, and it is a very good fit. And our affiliate
structure helps. And in that connection, we would plan to take F&M and
essentially leave a very substantial bank in Frederick which would basically be
F&M. Combined with F&M in Frederick, our affiliate in Frederick, which is
Fredericktown [Bank & Trust Company], which would result in a bank of about a
billion - $1.6 billion in assets. That would leave you with about 700 million in
assets roughly that is spread among our affiliates in Montgomery County and
Howard County and in Carroll County with a very small portion, just two branches
I believe that are in the Merc-Safe footprint.
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The great news about that is that the CEOs of each one of those affiliates are
among our very best. Each one of them is extraordinarily excited about doing
this. I think they believe that, given the alternatives that would be out there
for acquisitions, that this is the very best one that they could do. And what
we're able to do basically is to keep the customers - keep our affiliates as
close as possible to the customers and ensure that they get the level of service
that they deserve and that they've become accustomed to with both F&M and
ourselves.
On page 11, and one source of confusion here which I'll clarify immediately is
that because of data limitations these are June 30th 2002 numbers, so they may
equate to some of the later numbers that you see. But the highlights here I've
mentioned earlier, number two in Maryland, number one market share in both
Frederick and Carroll, strengthens our position in Baltimore, Howard, and
Montgomery, allows us to enter Washington County.
As I've discussed with many of you, I think the demographics in Maryland market
while not as spectacular as some are extremely solid and better than most. And
that's one of the things that we hope to capitalize on as we go forward.
Overview of F&M on page 13, just to go through it briefly and the two things
that I would highlight here are loans of $1.3 billion, deposits of $1.6 billion,
which provides us with a very good loan to deposit ratio in terms of funding,
and our ability to grow the loan portfolio. But in one respect, most important
to me is the fact that credit quality is as good as it is. As you can see NPAs
are 19 basis points which is considerably better even than what I believe to be
our sterling record in that connection but it certainly helped us as we thought
about this deal.
Balance sheet composition and again asset quality. As you can see, the things
that jump out at me here on the total loan side, and we'll come back to this,
are that they have 21 percent of the loans are in consumer, 13 percent are in
commercial. The deposit base looks very similar to ours. Credit quality again,
19 basis points. The loan loss reserve is lower than you've become accustomed to
with us. We'll get back to some of the pro forma numbers. I think the pro forma
is roughly 1.77 which is, you know, relative to peers is still extremely strong.
As you can see the coverage ratios here are quite good. And the net charge offs
are extremely small.
Having been through the portfolio and harkening back to my earlier comments, I
think we are very comfortable with the credit quality at F&M, comfortable with
the underwriting process as I said. Comfortable, most importantly with the
culture, and we would certainly see that continuing.
Pro forma financial impact turning to page 15. As I said, I think this I - as I
said earlier, this is one of only three institutions in Maryland excluding
ourselves of more than $1 billion of assets. In order to forestall a question, I
think Columbia at the time we measured this was slightly smaller than a billion,
so there may be four if you want to quibble. But from my standpoint, this for us
was clearly the most attractive partner.
Capital ratios reserves and asset quality remain strong. And we'll come to some
of those pro forma numbers. And you know, they've always been extremely
important to us.
The financial returns from our standpoint are very good. GAAP and cash earnings
accretion of the full first year which is a standard that I've mentioned before.
And that we want to observe continually as we go forward to the extent that we
do any other deals. But I can tell you in the near term our intense focus is
going to be making sure that we get this one right. And the assumptions involved
in the efficiency ratio at the end of the day that are in line with our current
operations. And that gives us some comfort as well with respect to our ability
to realize the synergies that we have in mind.
As I mentioned earlier, very good geographic fit, which makes the integration
easier. The fact that we are dividing it up in the way we are while still
preserving a very substantial bank in F&M's (ph) core market is the health of
the integration and it's finally, as I had mentioned earlier, similar operating
platforms.
On the pro forma financial impact on these transaction assumptions we've done
this based on Iva's meeting earnings estimates for next year. There is no 2004
estimate for F&M so we've taken a long-term consensus growth rate and grown
their earnings on that basis. We just assumed a third quarter closing. We have
cost savings estimated, $26.5 million, which is roughly 35 percent of F&M's
non-interest expense.
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As I mentioned earlier we believe there are revenue enhancements, but we haven't
included them. We have the cash available to complete the transaction, although
I'm sure it would come as no surprise to anyone in the current rate
environment - it's not lost on us - that this might be an opportune time to
raise some debt as we did roughly 16, 17 months ago.
Core deposit intangible estimated at four percent, amortized in a straight-line
basis.
Page 18 - you have the numbers that are necessary to do the accretion analysis
on both a GAAP and a cash basis. I think the assumptions are laid out there and
to the extent you'd like to ask about them we can come back to them later. The
one thing that I would note on this page is that there, we are planning to take
$35 million in nonrecurring charges, which we would anticipate taking this year.
Page 19 - actually in a much simpler form highlights the accretion analysis. As
you can see, 2004, 1.7 percent accretive, a nickel accretive on a GAAP basis,
and nine cents or three percent accretive on a cash basis.
On the cost savings and nonrecurring charges on page 20, as I'd mentioned, we
will be anticipating a 35 million charge in 2003. As you go through this list of
potential cost saves I think the important things to keep in mind clearly the
bulk of it is corporate overhead. One thing, a couple of things to keep in mind
there, $2.5 million of that roughly, which gives you some sense of what we might
be able to do, is based on audit, internal and external audit expense and
advertising. And the more important thing from my standpoint is that the
efficiency ratio, you know, at Merc-Safe is roughly 50 percent. It is at the
affiliates, our affiliates 42 percent. As a firm overall it is 46 percent. The
assumptions that we'd made in doing these cost savings are that essentially we
bring F&M into line with the corporate efficiency, not with the affiliate
efficiency. And I think, based on very helpful conversations we've had with Faye
and with Kaye, our level of comfort about our ability to achieve these synergies
without disrupting revenues is very high.
As many of you know, given my past history I'm extremely sensitive to losing the
top line in connection with a consolidation. You know, the fact is you can
always get costs out. It's not easy, but you can do it. What you can't do, and
what is extremely hard to do, is to get customers back once you lose them. And
our focus here is going to be to get these costs out not at the expense of
customers, assuring that they receive the same levels of service that they've
received historically.
On page 21 on the pro forma financial impact on the loan portfolio, again,
you've got it in front of you. I'll highlight it because three things jump out
at me. If you look at F&M their consumer is 21 percent, ours is 14. Their
commercial is 13, ours is 32. Their residential real estate is 27, ours is 15. I
think this combination achieves better balance for us, but most importantly what
it highlights is our ability, hopefully, to grow their commercial portfolio, and
their ability hopefully throughout our network to help us on the retail front.
They've got consumer loans, and they've got mortgage loans, and the fact is in
the current rate environment as we go forward one of the things that I would
dearly love to do over time, and I'm not sure that's it's possible now given the
fact that where we are in the rates cycle, but every bank in the country as near
as I can tell now is asset sensitive. There's simply no escaping it, you know,
they just are. With rates at these levels and given the compression that
everybody's suffered that's just a fact of life I'm afraid.
We, as you know, we're more asset sensitive than others as we started through
this cycle. Over time, you know, my dearest hope is to achieve better balance in
our own portfolio. And I think F&M offers that opportunity. I would prefer to be
something other than a reverse or an inverse proxy for the bond market, and one
of the things we're going to do as we go through this is to figure out how it is
that we can achieve that sort of balance going forward from an asset and
liability management standpoint.
On the deposit front, F&M has a very strong deposit base. And the fact is
they've got very strong non-interest bearing demand deposits. We have $9.9
billion in deposits pro forma. This is as of 12/31/02. And I'm, it has no
material impact on the overall deposit base other than providing us again, you
know, with access to funds at very efficient levels. F&M's margin as you
know has been in the 430 range, which is roughly 20 to 25 basis points. I think
the difference and it's explained pretty readily in terms of our capital in
excess of theirs and we have slightly
5
more in demand deposits. But by and large, you know, very comparable firms on
that front. And as I said, very attractive funding base from our standpoint.
Page 23 - we've got the capital ratios and the asset quality. You have them in
front of you. These are of 12/31/02. I wanted to share with you a couple things
though that go to the pro forma. We anticipate that our tangible ratio at
closing would be about nine percent. As you know, one could argue that that's a
sea change for Mercantile given the fact that we've been in the 11 and a half to
12 range historically. I also know from conversations that I've had with a
number of you there's been an awful lot of anticipation of what we might do
about that over time. I think this is a very good use of the capital.
The other thing I would point out, even at nine percent we are extremely well
capitalized relative to peers, and by 2004 our projections show that that
tangible ratio goes to nine-seven, and then at 2005 back up again, 10, back up
again over 10. So eventually my own instinct is that I'd like to keep our
capital ratios in the double-digit range on that front, and that's the number
that I focused on. I think we can get back there relatively quickly, and this
assumes no engineering, which would always be available to us because there are
de-leveraging opportunities that we could enter into that we don't anticipate in
this connection. This assumes dividend pay out ratios consistent with those that
we've had in the past. This assumes no stock buybacks. But that's what our
tangible ratio would be.
No surprise, the fact is if you take that into account, you know, our tangible
return on equity is going to go up. In 2002 our tangible return on equity at
Mercantile on a standalone was 16 47. Pro forma for the transaction at the end
of 2004 would be 18 75. Stated ROE however will decline principally because
the addition to goodwill, but again the numbers we focused on as the tangible
ROE, which will in fact go up as a result of this deal.
Again, I might just highlight on a pro forma basis as you can see on the asset
quality front the reserves are at 1.77, which again, I think, it's still pretty
close to the top of the class with respect to peers. Coverage ratios are strong.
As I said earlier, a little bit to my chagrin, you know, our non performing
assets and net charge off numbers actually go down in combination with F&M which
again is testimony to the strength of the credit culture.
In summary, as I said, I think this is a great transaction for Mercantile. What
these numbers do gives us stronger shares in existing markets, works
financially. My own view is that it's a very strong deal strategically.
One of the conversations that I've had with you in the past, and one of the
issues that I suspect might come up, it's twofold and I'll address them because
I know people have got this on their minds. I do think, my view, scale is
important and can be important. I think we've all had strong evidence of the
fact that scale can also be a detriment. I don't think we're at the point where
scale begins to be a detriment. I think by adding this scope to our franchise,
adding these assets, these people, these customers, scale is an unmitigated
good.
I think we can absorb them very effectively without reducing service levels and
ensuring that we retain revenues, and for us I think it generates increased
optionality going forward assuming that we get this right, and we're very
much focused on the fact that we're going to be under the microscope with
respect to how we execute this. But I can tell you we're going to be working
around the clock to ensure that we do it right.
The other thing that I might mention because I thought about it myself actually
as we went through this process and as we thought about acquisitions had someone
ask why not just buy back a bunch of stock in order to get the nine percent
tangible and think about the pop that you get as an accretion matter then and in
terms what it might do to the stock price. We've actually been through that
analysis, and the fact is if you look at it I'm not sure ultimately the pop in
the stock price would be there because I think there would be some suspicion
that at the end of the day we might not be as good a firm with nine percent
capital on a standalone basis as we are at 11 and a half percent. Moreover, my
horizon for better or for worse is longer than a quarter or two. I'm trying to
think about the longer-term here, and what it is that we can do with this
franchise and for our customers and shareholders over time. And it's hard for me
to imagine given the rarity of this opportunity and the nature of the fit that
there would be a better opportunity than the one that's been presented here.
But with that I would be delighted to open it to questions.
6
OPERATOR: Thank you. The floor is now open for questions. If you do have a
question or a comment you can press the one followed by four on your touch-tone
phone at this time. If at any point your question has been answered you may
remove yourself from the queue by pressing the pound key. Once again ladies and
gentlemen that's one followed by four on your touch-tone phone.
Our first question comes from Chris Marinac of Robinson Humphrey.
CHRIS MARINAC, ROBINSON HUMPHREY: Good morning. Can you talk about pricing as it
pertains to how you looked at this and other options that you've looked at in
the last two years since you've been CEO? Is it something more expensive than
you've looked at other deals or is this in line?
EDWARD KELLY: No it's in line Chris. Actually I would tell you frankly it's less
expensive. Which is another, from the standpoint of other deals, now having said
that, you know, I think part of the issue here, and Faye can address this if
she'd like, although I would certainly, would not put her on the spot in that
connection, is that I think we believe and suspect F&M believes that we were
going to be a better firm combined than we were separately. I think the board at
F&M went through a very good process, a very deliberate process, thought about
this long and hard, and ultimately concluded that a partnership with us in the
terms that we described make sense.
From my own standpoint as you can see given the fact that the multiples are in
line I'm extremely encouraged because I think what distinguishes us from some of
the other deals is that this is an extraordinarily good fit. It is an in-market
deal that's got product complimentarity associated with it and increases
customer scope on a basis that involves less execution risks than I think some
other deals do. So I'm, on a risk adjusted basis I think these multiples are
really quite favorable.
CHRIS MARINAC: OK, then from a standpoint of realizing the cost savings, do you
expect to get all of them in 2004 or would you get partial?
EDWARD KELLY: No, we're going to try and get all of them, Chris, by the end of
2004.
CHRIS MARINAC: Great. Thanks Ned.
EDWARD KELLY: Thank you.
OPERATOR: Thank you. Our next question comes from Brian Harvey of Fox Pitt and
Kellen.
BRIAN HARVEY, FOX PITT AND KELLEN: Thank you. Good morning.
EDWARD KELLY: Hey Brian.
BRIAN HARVEY: Now just a question here about the timing, why now? Why doing a
deal in this type of environment when things are so uncertain and people are
uncertain about the long-term growth rate and where the economy is going to be
from here? Why not wait for a little bit longer?
UNKNOWN MALE #1: Brian I think two things, right, one is that one never gets to
pick one's time unfortunately as much as I would like to. And, but to your
point, and it's a fair one, and frankly we've thought about that. But I think it
comes back to what I said earlier. I genuinely believe, and I think F&M believes
as well that we are better off together than we were separately, and that our
ability to weather what one may assume is a continuing down environment in the
economy and a persistently low rate environment, is stronger together than it
was separately.
In fact, I think given the environment we're in that this deal is an attractive
one to do because it gives us the ability to generate, in my view, incremental
growth beyond that which either one of us would have been able to do
individually. So it helps us to weather the environment, although I admit it I
am like you. You know, I'm very sensitive to it, and I've been around a fairly
long time now unfortunately and I've never seen an environment quite like this.
I mean you've had rates at 40-year lows. You've got an equity market which seems
to be involved in a slow bleed if not a steady hemorrhage. And it's difficult
out there. Having said that I think this combination in any environment is a
very good one for everyone concerned.
7
BRIAN HARVEY: A second question just on other acquisitions, does this preclude
you from doing anything on the trust asset management side and you now so
focused on this deal?
EDWARD KELLY: No not at all. I mean the fact is as you know, Brian, going back
to some earlier conversations we've all had, our inclination as you know is to
grow the asset management business on an organic basis. We have recently done a
couple of acquisitions, Boyd Watterson in particular, but as you also know the
price tag on Boyd Watterson was not large. We paid rough numbers eight times
EBITDA. It was immediately accretive. It buttressed our fixed income business in
a very helpful way, very good synergies with the Taft Hartley plans. It was a
deal that made a lot of sense for us. The other deals by and large we've done
have had very small price tags and have been more in the form of strategic
alliances than anything else.
So my inclination as you know has been to build the distribution side rather
than the manufacturing side and to focus on that connection and on acquiring
people rather than firms. Having said that, if the right opportunity came along
I don't think there is any respect, you know, in which this deal precludes our
doing a sensible deal on the asset management front, and arguably given the fact
that we've got an expanded customer base and even better distribution than we
had before, given the fact that net net we're going to be adding 30 branches or
so throughout Maryland, which is a very, very strong market, I think it helps to
leverage our asset management business.
If I'm not mistaken, somebody will correct me if I'm wrong, I think currently
F&M has about $225 million in assets under management?
KAYE SIMMONS: $297 [million].
EDWARD KELLY: $297, my mistake, I'm sorry. Thank you, Kaye. But there is ample
room in my view for us to leverage the network that they've got much more
substantially than that. And if there are opportunities that present themselves
that allow us to do that more efficiently or better we'd seize them.
BRIAN HARVEY: OK, great. Thank you, Ned.
OPERATOR: Thank you. Our next question comes from Arielle Whitman of Sandler
O'Neill.
ARIELLE WHITMAN, SANDLER O'NEILL: Hi guys.
EDWARD KELLY: Hi Arielle. How are you?
ARIELLE WHITMAN: Great, thanks, Ned. The franchise looks great as far as
expanding and filling in the footprint. I'm wondering if you could expand on
some of your cost savings assumptions?
EDWARD KELLY: We could Arielle. We've gone through that as I've said in some
detail with F&M and I'm leading back actually to the page where they are.
If you bear with me for one second. See the branch consolidation I think speaks
for itself. F&M has 49 branches I believe. We are not going to close, we are
going to close net net 21 F&M and Mercantile branches. Now that's not all F&M
branches by any means. What we're going to do is look at the network figure out
which aggregate branch network makes the most sense and close those branches
within the networks that make sense. But that will give us overall 28 net
branches, but we will close 21.
I was hoping the tech and ops front, we have been through that.
Obviously given the way we run the affiliate network, given F&M's platform
and given our analysis that we're comfortable with those.
Business line consolidation, we have been through those numbers in some detail
as well. And the corporate overhead number is the number that you see there that
is arguably a little bit lumpy in terms of 11.5 without much breakout.
I've done that, frankly, for - on purpose, essentially, because I think what's
going to be important in connection with this deal is that we not think about
the cost saves as if they come directly from F&M, but we think about how it is
that we can generate the best team firm-wide.
8
And so, as a result, as we went through this and thought about where we might be
able to save, whether it's in executive finance or marketing and advertising, or
HR or risk management, audit and examination costs, which I mentioned, or
investor relations - it may very well be that people at Mercantile who are
currently here may no longer be here.
So there will be cost saves associated with it, but it may be that F&M people
are taking their place. So I was loathe, actually, to include much detail on
that front, frankly, just ...
ARIELLE WHITMAN: Sure.
EDWARD KELLY: ... from the standpoint of executing it effectively.
But having been through it, I think we're genuinely comfortable that we can get
that $11 million or so out of the corporate overhead.
As I said, I think, personally, based on conversations that I've had with Faye,
and with Kaye and with Terry, that it will be a challenge, only because it's
always a challenge. It's emotionally draining. You worry about the impact on
employee morale generally, and you worry about the impact on customers.
But I think as we look at these two organizations and think about the fit, that
we genuinely believe that we can get at that, and that if we do as well as I
hope we will, we'll be able to offset any shortfall there, which I don't expect
there will be, by generating some more growth throughout the franchise on the
revenue front.
ARIELLE WHITMAN: OK. And on these 21 net branches, will they be part of the
affiliates? Part of the lead bank? Hasn't been decided?
EDWARD KELLY: It has been decided. And, in fact, we've got some detail on that,
which I don't have in front of me. But effectively, the way to think about this
is there are, first, our affiliate, Potomac Valley, which is in Montgomery
County; Citizens, which is in Howard County; Westminster, which is in Carroll
County; Fredericktown, which is in Frederick with F&M.
And there will be - the bulk - the bulk of what is not left at F&M in Frederick,
will go to Westminster in Carroll County. Roughly $500 million in assets. And
this is rough proxy for the branches, as well, if you see what I'm saying.
About 250 will go to Citizens, and about 250 to Potomac, a very small part to
Mercantile, and then our 300 at Fredericktown will be folded into F&M. So as you
can see, odds are, given relative sizes, that the branch closures will be
actually relatively evenly distributed. In fact, if you had to look at
predominance, you'd probably look at Frederick and Carroll.
But having said that, there'll be some in Howard and Montgomery, as well.
But we're going to, as I said, pick and choose those branches that make the most
sense, irrespective of what flag they may be under currently.
ARIELLE WHITMAN: OK. Great. Thank you.
OPERATOR: Thank you. Our next question comes from Clair Percartio of Janney.
EDWARD KELLY: Hi, Clair.
CLAIR PERCARTIO, JANNEY MONTGOMERY SCOTT: Hi. Ned, would you just give a little
bit of detail on the fact that it's the same operating platforms and what you're
thinking of doing there?
9
And then, secondly, just a little bit on the depth of the due diligence. I know
it's an awfully clean franchise, but give us a sense of ...
EDWARD KELLY: The - on the first point where - I may turn that over to Terry and
Faye, but I'll answer it to the best that I can. And as you know, I've never
made any pretense of being an expert on this front.
But from what I understand, we both operate on Kirchmann. F&M has been going
through a process to think about what else they might do. Ironically, so have
we.
And the fact is that we're going to think through together what it is that we
might do going forward. But they are literally identical operating systems
currently.
There are certain wrinkles in it with respect to some of the software and the
terminals and so forth, but by and large, they're the same.
Now, the good news about that, obviously, is that, as I said, you don't have to
go through a conversion. Either one of us has to go through two conversions, if
you will, in other words, the conversion we would have been through, having
thought about changing from Kirchmann, and then another one in connection
with the acquisition.
So that's given us great comfort in terms of eliminating disruption and being
able to speak to each other fluently.
And then the second piece of the question that - you'll have to remind me of it,
Clair. I'm getting old.
CLAIR PERCARTIO: The due diligence.
EDWARD KELLY: Oh, yes, the due diligence. The due diligence was extensive.
F&M was extremely forthcoming. We spent a lot of time with their management
team. We spent a lot of time in document rooms. We spent a lot of time going
through the loan portfolio, because one thing that I have - I lose sleep over at
night, and there aren't many things, is just the notion of having a credit
problem.
I don't like credit problems. And as I said earlier, having been through that,
and having focused in particular on the indirect portfolio, which is one of the
sources of concern to us, I had Bob Johnson, and as I said, he's probably best
described as curmudgeonly on a good day, told me that he was amazed at how good
the credit process was at F&M, which gave me enormous comfort.
We spent time. I'm comfortable. And as you say - as you say, I think to some
extent, the numbers speak for themselves.
CLAIR PERCARTIO: I mean, can you give us a sense of what percentage of the
commercial portfolio and of the, you know, you actually looked at and what
dollar size and up you looked at.
EDWARD KELLY: I might ask Terry to address that, Clair.
TERRY TROUPE: We - trying to recall. I know we looked at all credits above a
certain dollar size. Clair, I can't give you an exact number of files. It was
extensive, though.
EDWARD KELLY: We also, Clair, we did a - and on top, and in addition to that, we
did a sampling, you know, as we went through. But we spent time, more time than
F&M would have liked us to.
CLAIR PERCARTIO: But what can - how much time did you spend?
EDWARD KELLY: Days ... a week...
10
CLAIR PERCARTIO: ... OK, yes ...
EDWARD KELLY: ... and a weekend.
CLAIR PERCARTIO: ... days - OK ...
EDWARD KELLY: Yes.
CLAIR PERCARTIO: OK. And then, that - one more thing, back to the operating
systems. When you say identical by and large, that's the deposit and the loan
system?
EDWARD KELLY: Yes. Now, what I was focused on was, somebody told me last night,
and I don't begin to understand this, is that you may have a different lease
arrangement with respect to branch computer terminals.
FAYE CANNON: Yes, we do.
EDWARD KELLY: How's that, Clair? I picked that up.
OPERATOR: Thank you. Our next question comes from Robert Lacoursiere of Lehman
Brothers.
EDWARD KELLY: Hey, Robert.
ROBERT LACOURSIERE, LEHMAN BROTHERS: Don't want to belabor this point, but on
the cost savings, could you give us a little bit more sense of how quickly you
achieve them throughout the year?
I mean, you know, you start achieving them from the first quarter on? Or do you
know, does it take a little longer to build up to this?
EDWARD KELLY: No, I - Robert, I would hope, you know, if we get to - if we
manage to close this in the third quarter, or the fourth quarter, that we would
relatively immediately begin to realize those costs. Some are easier than
others, right.
There are some that aren't customer sensitive, you know, and those were the ones
that we would go after as quickly as we could in order to make sure that the
deal made sense financially. Those that are customer sensitive, we'd be much
more careful about.
But having said that, assuming that we're able to manage the regulatory shoals,
and assuming that F&M is willing to let us do it, one of the things we're going
to do absolutely at the outset is have those four CEOs that I mentioned, who are
going to be beneficiaries of parts of the F&M franchise, begin to think very
seriously about the people who are in those branches, the people who are in
their own branches, who would make sense to retain and who would sense not to,
and work very hard on that at the outset.
So if I had to bet, I'd think we'd try to do what we could, literally in the
first quarter after closing, and then the bulk of it would probably be in the
second and third quarters after closing. And there would be a tail, you know,
that we would deal with at the end, obviously, as we began to get at the rest of
it.
Is that fair, Terry?
TERRY TROUPE: That's fair. The key will be the systems conversion, which we
believe could be accomplished by the fourth quarter, or in the fourth quarter.
11
EDWARD KELLY: Of this year.
TERRY TROUPE: Of this year.
EDWARD KELLY: Yes.
ROBERT LACOURSIERE: OK. On a separate matter, could you comment a little bit
about from the regulatory perspective? Obviously, you have to get regulatory
approval for this. The concentration, you're not worried about anything on that
front?
EDWARD KELLY: No. I mean, I'm always worried. But the fact is, based on the
analysis that we've done and the preliminary indications we've had, we've got no
divestitures. We have very strong market positions, but no divestitures.
And obviously, a lot of that revolves around how, to some extent, how a market's
defined. But I think that's our friend in this case.
I think, from a regulatory standpoint, I think we both have - both firms have
extraordinarily good relations with the regulators. And I've spoken to them,
certainly haven't gotten any sense there would be any issue on that front.
ROBERT LACOURSIERE: Thank you.
OPERATOR: Thank you. Our next question comes from Jed Gore of Sunova Capital.
JED GORE, SUNOVA CAPITAL: OK. Congratulations picking up a nice franchise,
Ned.
EDWARD KELLY: Thanks, Jed. Appreciate it.
JED GORE: What took you so long?
EDWARD KELLY: I wish - I wish they'd been willing to do it more quickly.
JED GORE: Just a question - I'm looking at page 18 of your slide deck. And F&M's
earnings you have projected growing 9.5 percent in `04. And then there aren't
published earnings estimates out there to `04.
I'm just wondering where you got that number, given the `03 to `02 growth rate.
It's more like six or seven. And is there anything in there in terms of bolting
on larger loans or just where you got the 9.5 percent earnings growth number for
F&M?
EDWARD KELLY: I'll ask Terry to address that.
TERRY TROUPE: Basically, we were looking and maybe Kaye can also help me out,
because it was a joint - working with our bankers on the transaction, and
looking at the opportunities within the different markets.
EDWARD KELLY: It ... Exactly, go ahead.
KAYE SIMMMONS: And it actually is our long-term projected rate, but when you
look at our last couple of years worth of earnings, we've been in the 16 percent
rate this year in terms of earnings growth. The year before that was over 11
percent.
The only reason the projection went down for this coming year in 2003, was
because of the rate environment. But our long-term performance rate should be
higher than what the 2003 projection is.
12
JED GORE: Yes, I should think. And do you have any interest rate projections,
you know, in your forecasting? I mean, are you looking for rates to rise in the
second half of this year, for example? Or is it ceteris paribus?
EDWARD KELLY: No, we are not, Jed. As fondly as I would hope for that, we are
not.
JED GORE: Right. Good luck. Well, congratulations again. Thank you.
EDWARD KELLY: Thank you.
OPERATOR: Thank you. Our next question comes from KC Abrecht of Millennium
Partners.
KC ABRECHT, MILLENNIUM PARTNERS: Hi. Thanks for taking the questions.
EDWARD KELLY: Absolutely, KC
KC ABRECHT: Two questions for you. One, I'm a little confused about the
rationale. And I guess in beginning of your presentation you mentioned that, you
know, the two franchises fit like a - it's a great fit, but my concerns are, it
almost fits too much like a glove in the sense that they perfectly overlap each
other. Can you kind of talk about the rationale?
And of the 49 branches, did you say that 21 are going to remain open?
EDWARD KELLY: No, 28. Net. But understand that probably as we've gone through
this - and, again, not to prejudge it, because we're still going through the
analysis. But if you have 49 F&M branches,...
KC ABRECHT: Yes.
EDWARD KELLY: ... my guess is you may have as many as 35 or 40 of those that
remain open. In other words, when you get to the 21 branch closures, remember
that that's a combination of our branches and theirs, because - precisely
because of the geographic overlap.
But then, let me address the other question that you raised, which I think is an
important one.
We basically have a $300 million presence in Frederick - currently. Frederick is
equidistant from Washington with Baltimore. It's a triangle that's got
enormously positive demographics, and we have historically been
underrepresented, not only in Frederick, which has enjoyed tremendous growth,
but also in Hagerstown, which is further west in Maryland, where F&M has a
substantial presence.
Effectively, there is no overlap out there, which is why I highlighted the fact
that the Frederick-based bank will have roughly $1.6 billion in assets, but if
you think about it, is only $400 million less than F&M has currently. And that
other 400 or 500 effectively is going to be rationed out to our affiliates in
Montgomery, Howard and Carroll Counties, where they have very good presences,
but the fact is, they don't have complete coverage.
And the reason it fits so well geographically is this franchise fills holes for
us in those counties, as well. It's not as if we're across the street from each
other.
The reason the affiliate presidents are as happy about it as they are, is
because F&M is in certain communities where we're not. And our ability to bulk
up, if you will, reasonably quickly and begin to get at the underlying growth in
those counties and communities that we don't currently serve is huge.
KC ABRECHT: OK. And then one additional follow-up. Kind of Jed Gore touched on
it.
Can you kind of talk about your pro forma asset sensitivity and how we should
think about that?
EDWARD KELLY: I don't think our pro forma asset sensitivity changes. And Terry
will correct me and Kaye will correct me quickly if I'm wrong.
13
I think the fact is that you could argue at one point F&M was more - less asset
sensitive and arguably liability sensitive. I think over time, for the - because
of the dynamic I've described, I think they've probably become marginally asset
sensitive themselves.
I don't see, frankly in this environment, you guys tell me. I don't see how you
avoid that. I think as we go through the next cycle, though, we can take steps
to mitigate it with respect to us.
I mean, as you know, I firmly believe that there's nothing wrong with being long
liabilities at all, right. I think having lots of capital and lots of demand
deposits is a terrific thing. And as some of you have heard me say, I think
falling rates are good for bad banks, not good for good banks, right?
Having said that, I would love at some point, you know, two, three, four years
down the road as we go through a cycle, to find a circumstance where Mercantile
literally wasn't hammered, just because there was a perception of falling rates,
and where we, in fact, we could balance a portfolio with more fixed rate
lending, more consumer loans, more mortgages than we have currently.
F&M helps us do that. And in fact, as we've looked at it, and as I've thought
about it, as we go through repositioning our securities portfolio, which we've
talked about, because for years we just laddered Treasuries here, and we've now
undertaken an effort to make it throw off more cash and make it less
reinvestment sensitive.
Why are we going into the market buying mortgage securities, when inside we've
got the ability to originate mortgages? And F&M significantly enhances our
capability on that front.
So while I can't quantify in the near term the benefit on the asset sensitivity
front, my instinct - and I think it's founded in fact - is that we will going -
we will be going forward a much more balanced firm.
KC ABRECHT: OK. And then just one last quick question. Of your 9.5 percent kind
of target long-term growth rate in `04, does that include any additional rate
cuts?
EDWARD KELLY: It - no, it doesn't. We're assuming flat.
KC ABRECHT: OK.
EDWARD KELLY: I've got my fingers crossed.
KC ABRECHT: OK. Thanks.
OPERATOR: Thank you. Our next question comes from Bob Feitler of Solomon
Brothers.
EDWARD KELLY: Hey, Bob. How are you?
BOB FEITLER, SOLOMON BROTHERS: How are you.
EDWARD KELLY: Fine ...
BOB FEITLER: I guess you mentioned that there's still somewhat of a seller's
market, as indicated by the price. And I'm wondering whether or not you look at
the metrics of going the other way, and Mercantile looking for a similar
valuation, which from current levels would be something like 60 percent upside.
It seems like it would take a long time to re-accumulate that money for
shareholders by staying independent.
EDWARD KELLY: Yes, Bob, and I'm sure that, you know, we've - you and I have had
this conversation, and of course we constantly think about, you know, what our
alternatives are. We'd be negligent if we didn't, and we do.
As I look at it, though, the decision you have to make every day is whether you
want your currency or someone else's. And you look at your prospects versus
someone else's.
14
You know, my own assessment of the environment out there, especially given
what's happened, not only to our stock, but everybody else's, and given what I
perceive to be problems throughout the industry, I'm much more comfortable
currently remaining independent and holding our stock and trying to capitalize
on opportunities like this.
I think the notion, you know, frankly, given our performance, and given where we
are, and given where our potential "partners" might be, the notion that we could
attract premiums like this I think is pretty remote.
BOB FEITLER: OK. Thank you.
OPERATOR: Our next question comes from Mike Szepa of Crest Investments.
MIKE SZEPA, CREST INVESTMENTS: Hey, good morning.
EDWARD KELLY: Hey, Mike.
MIKE SZEPA: I'm just a little surprised at the premium that was paid in the
current environment. Did - when you looked at your comparables, were there any
other similar premiums that you saw?
EDWARD KELLY: From a market standpoint?
MIKE SZEPA: Yes.
EDWARD KELLY: Yes. I'm sure there are. There were some smaller deals, actually,
up in Pennsylvania, and I don't have them at my fingertips that were pretty
close to this market premium.
The other thing that I'd point out as I tried to earlier is that I think the
market premium is a little misleading in two respects obviously. And I think
52-week high for F&M was $35 and change, if I'm not mistaken, Kaye.
If you think about it in that light, that takes part of the edge off of it. And
then, the second aspect of it is that we are generally, you know, going through
a depressed market.
The other thing that helps me, of course, is that if you look at the other
metrics, which I think are the most important ones, which are book value and P/E
and core deposit premiums, they're very much in line. And sometimes, although
not often, you know, the market price actually doesn't reflect the underlying
fundamentals.
And from our standpoint if you look at this as a set on a risk adjusted multiple
basis and you think about what the multiples really look like in terms of if we
are able to get the costs out as effectively as I believe we might, I think it's
a pretty attractive deal.
MIKE SZEPA: OK. That's fair. Also, you talked about scale of the import to
Mercantile.
EDWARD KELLY: Yes.
MIKE SZEPA: I'm curious to know what sort of size you're looking for and what
scale would be the sweet spot for Mercantile and if you'd be willing to pay a
premium similar to this in future deals.
EDWARD KELLY (?): I think - I think - and I know that some of you out there
raise this question from time to time is, you know, I didn't do any bank deals
the first two years I was here even though there was some suspicion that there
might be a closet lunatic out there who would - who would be doing those deals.
I think we've tried to be as disciplined as we possibly can. I think this was a
unique opportunity, I genuinely do, for all the reasons that I tried to
describe, I think as a result of that, did it involve a market premium certainly
beyond that which I would have anticipated? Absolutely. But with respect to the
other metrics, as I said, I thought it was attractive.
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With respect to the size issue, we will look at opportunities as they come
along. Almost impossible for me to predict, you know, what might come along and
how good the fit might be and what the dynamic might be in terms of what it is
that we'd like to pay.
I, of course, would always like to pay less rather than more. I do think that
this was a special circumstance in terms of the nature of the opportunity.
From a scale point, I think we're still a long way from getting to the
point where we've got diseconomies of scale. And to the extent that there are
opportunities that present themselves in markets that make sense and prices that
make sense, we'd be - we continue - we continue to look at them.
MIKE SZEPA: Great. Thanks.
EDWARD KELLY: Yes.
OPERATOR: Thank you. Our next question comes from Collyn Gilbert of Ryan Beck.
EDWARD KELLY: Collyn, how are you?
COLLYN GILBERT, RYAN BECK: Thanks. Good morning, Ned. Thanks. Good. A question
about - you guys really haven't addressed it much - is about F&M's insurance
business. I mean, that's been a big driver of earnings for them.
Do you guys, sort of - I mean, you'd mentioned the opportunities on the wealth
management side. But how are you looking at their insurance business and how do
you anticipate that to grow and tie into Mercantile's franchise?
EDWARD KELLY: I think it's - Collyn, I think it's something that we're going
to learn more about. I think my - Kaye will again, correct me if I'm wrong. But
my understanding, Kaye, is the revenues roughly are $10 million...
KAYE SIMMONS: Yes.
EDWARD KELLY: ... and that the net income is about $1.6 million. Is that
right?
KAYE SIMMONS: That's right.
EDWARD KELLY: It is, Collyn, an attractive business. The issue for me is,
you know, and we've talked about this before, you know, is whether insurance is
enough of a core competency for us to be involved in it. We are going to - given
the attractiveness of these franchises, we are going to look at them hard and
have conversations about it.
The one thing that takes the edge off of it a little bit and I know you all
focus on this, as well, is the efficiency ratio in this business is not what
you're accustomed to.
If you think investment management has got low margins, you know, the fact is
that insurance business has even lower ones. And that's one of the things that
we want to look at from a return standpoint.
I think we are confident, given the attractiveness of those franchises and given
what I understand to be the terms of the agreements between F&M and those
franchises, there's certainly no issue of our being hung with any sort of
millstone.
You know, the fact is that if we keep them, they'll be terrific. And if we
conclude or they conclude ultimately that it makes sense to be a part of someone
else, I think we're going to be very well situated, as well.
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COLLYN GILBERT: OK. And - Kaye, this question might be for you too, to get to
that and, kind of, following up on Jed's question about the $29 million
projected for F&M.
Can you just roughly gauge or tell us from a, you know, insurance growth
standpoint, mortgage banking standpoint, I mean, kind of, the business lines,
what the growth projections are to get to that $29 million?
EDWARD KELLY: Sure. I'm not - well, do you want to -, you want to go ahead or
Kaye? Well, I can - well, I can - I can address that, if I will. And then, I'll
turn it over to Kaye.
I think from my standpoint, the areas of huge opportunity that I see are really
twofold and then, a third, which I think is a - in one respect, a very cheap
option for us.
The first two are on the retail side. And I think of the retail side as being
consumer lending and mortgages. And as I mentioned earlier, one thing that I
would like us to do particularly at Merc-Safe, you know, which is a lead bank in
Baltimore, is think more about the mortgage business and think about doing more
with our retail franchise.
I think F&M actually has done a very good job on that front. I think there's
some thinking and some value they can bring to the table that should help us
there.
I think the second aspect of it is the commercial business. Merc-Safe to
some extent and that's where, as you know, we do a lot of the commercial lending
as the lead bank has been landlocked a little bit in terms of its relationships
with the affiliates and the markets that we're currently in.
Given what we described earlier, I think their ability to go to Frederick and
beyond and to have more penetration in some of these communities in those high
growth counties is huge. And I think what we can bring to F&M on the commercial
front should be terrific and hopefully is going to result in some increased
growth in and of itself.
And then finally, as somebody had mentioned earlier and as I've mentioned, as
well, I think our ability to generate more revenues on the investment management
front, given the scope and scale of their client base is also very real.
But those are my three areas for me, you know, that strike me as growth
opportunities. Those are it.
COLLYN GILBERT: How do you see it? Do you see their - the profile of their
investment or their wealth management customer much different from
Mercantile's...
EDWARD KELLY: No.
COLLYN GILBERT: ... customer profile?
EDWARD KELLY: No. No. Well, let me put it this way. Do they have the high
end customers that we have? No. You can tell that from the numbers. Do they have
customers that we would like to have? Yes.
COLLYN GILBERT: OK. OK. That's it. Thanks very much.
OPERATOR: Thank you, ladies and gentlemen. Due to time constraints, we only have
time for one final question. Our last question comes from Michael Hess of Hess
Investments.
MICHAEL HESS, HESS INVESTMENTS: Thank you. Congratulations on the transaction.
EDWARD KELLY: Thank you, Michael.
MICHAEL HESS: I was just - I was interested in being able to view the investor
presentation on-line. Do you know how I can go about doing that? Is it
available?
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EDWARD KELLY: Someone more facile than I is going to have to address that.
DAVID BOROWY: Www.mercantile.com. It's available. I'll e-mail it to him.
EDWARD KELLY: We will e-mail it to you. But, David, do you want to
tell - you've - how he can get it on-line.
DAVID BOROWY: Www.mercantile.com. Did you get that, Michael?
MICHAEL HESS: Yes. But I haven't been able - I went there and was unable to pull
up the presentation.
DAVID BOROWY: OK. You might - just shareholder news. And you might have to
refresh your browser. I'll tell you what. I'll come - as a moderator, come back
to you off line, if you can. And I'll take your e-mail address personally.
MICHAEL HESS: Thank you so much.
DAVID BOROWY: OK.
EDWARD KELLY: Thank you very much. I appreciate all your time and
interest.
OPERATOR: Ladies and gentlemen, thank you. This does conclude today's
teleconference. Please disconnect your lines at this time. And have a wonderful
day.
END
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