SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MERCANTILE BANKSHARES CORPORATION
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Notes:
MERCANTILE BANKSHARES CORPORATION
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of Mercantile Bankshares Corporation
("Mercshares") will be held at 10:30 a.m. on April 24, 2002, in the Boardroom
of Mercantile-Safe Deposit and Trust Company, Two Hopkins Plaza, Baltimore,
Maryland, for the following purposes:
1. To elect five Class III Directors.
2. To approve the Amended and Restated Annual Incentive Compensation Plan,
as more particularly described in the enclosed Proxy Statement.
3. To ratify the appointment of PricewaterhouseCoopers LLP as independent
public accountants to audit the financial statements of Mercshares for
2002.
4. To transact such other business as may be properly brought before the
meeting or any adjournments thereof.
Only stockholders of record at the close of business on March 15, 2002, will
be entitled to receive notice of, and vote at, this meeting.
These matters are explained more fully in the enclosed Proxy Statement.
EACH STOCKHOLDER IS CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO MARK, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
THE GIVING OF THIS PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE IT AND TO VOTE IN
PERSON IF YOU ATTEND THE MEETING.
ALAN D. YARBRO
General Counsel and Secretary
Dated: March 22, 2002
MERCANTILE BANKSHARES CORPORATION
PROXY STATEMENT
This statement is furnished in connection with the solicitation of proxies
by Mercantile Bankshares Corporation ("Mercshares") to be used in voting at the
Annual Meeting of Stockholders on April 24, 2002, and at any adjournments
thereof.
Holders of shares of Common Stock of Mercshares ("Common Stock") of record
at the close of business on March 15, 2002, will be entitled to vote at the
meeting. The Common Stock is entitled to one vote per share. The number of
shares of outstanding Common Stock as of January 31, 2002, entitled to vote is
69,815,113 shares. As of that date, to the best of the knowledge of the
management of Mercshares, no person owned beneficially more than five percent
of the outstanding shares of the Common Stock.
Unless otherwise instructed, it is intended that the shares represented by
valid proxies will be voted for the election of the five persons approved by
the Nominating Committee and named below as nominees to serve as Class III
Directors, for the approval of the Amended and Restated Annual Incentive
Compensation Plan, and for the ratification of the appointment of auditors.
ELECTION OF DIRECTORS
The number of Directors to hold office at the conclusion of the Annual
Meeting is fixed at 15. Pursuant to Maryland law, the Board of Directors is
divided into three classes. Five Class III Directors are nominated for election
to serve for three year terms until the Annual Meeting in 2005 and until their
successors are elected and qualify. The Class I Directors and the Class II
Directors serve until, respectively, the 2003 and 2004 Annual Meetings of
Stockholders. Officers are elected annually by the Board to serve for such
periods of time as the Board determines.
It is not expected that any of the nominees named herein will be unavailable
for election, but if a nominee should be unable to serve, the shares
represented by the enclosed proxy may be voted for a substitute nominee to be
designated by management. Mercshares owns 100% of the capital stock of
Mercantile-Safe Deposit and Trust Company ("Merc-Safe"). As indicated below,
all of the Directors of Mercshares are Directors of Merc-Safe. All nominees
previously have been elected Directors of Mercshares by the stockholders,
except for Wallace Mathai-Davis and Clayton S. Rose.
The Board of Directors of Mercshares meets regularly five times each year
and is subject to call for special meetings. The Board met at its five regular
meetings and at one special meeting in 2001. The Executive Committee of the
Board of Directors held one meeting in 2001. The members of this Committee are
indicated in the list of Directors below.
Mercshares has an Audit Committee, a Compensation Committee, and a
Nominating Committee, which are comprised solely of nonemployee Directors and
are elected annually by the Board. The members of these Committees are
indicated in the list of Directors below.
The Audit Committee recommends to the Board the persons or firms to be
employed as independent public accountants, consults with the independent
public accountants with respect to their independence, the scope of their
audit, the proposed fee and the reports to be rendered, and reviews such audit
reports and the internal audit programs of Mercshares and its affiliates. The
Audit Committee discusses with management and the independent accountants the
financial statements included in the annual report on Form 10-K and performs
other functions described in its charter. The Audit Committee held five
meetings in 2001.
The Compensation Committee performs the functions described in the Report of
the Compensation Committee. It held four meetings in 2001.
The Nominating Committee was convened once in 2001 to nominate Clayton S.
Rose as a Director.
2
The names of the nominees and Directors, their ages as of April 24, 2002,
their principal occupations and business experience for the past five years,
the number of shares of Common Stock deemed under certain federal securities
laws to be "beneficially owned" by each as of January 31, 2002, and certain
other information, are set forth below. In some instances, "beneficial
ownership" of shares may be deemed to exist by reason of voting or investment
power even though other persons, such as a family trust or family members, have
the economic interest in the shares, and in certain instances "beneficial
ownership" may be disclaimed by a nominee or Director.
Nominees for Election as Class III Directors
Term Expiring 2005 Annual Meeting
Name Age Information
---- --- -----------
H. Furlong Baldwin 70 Chairman of the Board, Mercshares. Mr. Baldwin has been Chairman
of the Board since 1984. Until February 28, 2001, Mr. Baldwin had
been President of Mercshares since September, 1997, and Chief
Executive Officer since 1976. He had been Chairman of the Board
and Chief Executive Officer of Merc-Safe since 1976. Mr. Baldwin is a
Director of W.R. Grace & Co., CSX Corp., and The St. Paul
Companies. He was elected a Director of Merc-Safe in 1968.
Elected Director of Mercshares: 1970
Member: Executive Committee
Owns beneficially 369,040 shares of Common Stock, including 59,040
shares subject to exercisable options.
Freeman A. Hrabowski, III 51 President, University of Maryland Baltimore County. Dr. Hrabowski
has served in this capacity since 1993. Dr. Hrabowski is a Director of
Constellation Energy Group, Inc. and McCormick & Company, Inc. He
was elected a Director of Merc-Safe in 1996.
Elected Director of Mercshares: 1996
Owns beneficially 190 shares of Common Stock.
Wallace Mathai-Davis 57 Chairman, Investment and Wealth Management, Mercshares and
Merc-Safe. Mr. Mathai-Davis has held these positions since February,
2002. Prior thereto he was Chief Operating Officer, Chief Financial
Officer and Corporate Secretary of OFFITBANK. He was elected a
Director of Merc-Safe in February, 2002.
Elected a Director of Mercshares: February, 2002.
Owns beneficially 1,200 shares of Common Stock.
Clayton S. Rose 43 Managing Partner, Logan Pass Partners, L.L.C., a private consulting
and investment firm, since October, 2001. Prior thereto, Mr. Rose was
employed by J.P. Morgan Chase & Co., most recently as Vice
Chairman and Chief Operating Officer of J.P. Morgan, and prior to the
merger with Chase Manhattan Corp. was head of the Global
Investment Banking Division at J.P. Morgan & Co. He was elected a
Director of Merc-Safe in September, 2001.
Elected Director of Mercshares: September, 2001
Owns beneficially 600 shares of Common Stock.
3
Name Age Information
---- --- -----------
Donald J. Shepard 55 Chairman of the Board, President and Chief Executive Officer,
AEGON USA, Inc., a holding company owning insurance and
insurance related companies, since May, 2000. He has served as its
President and Chief Executive Officer since 1989 and also its
Chairman of the Board from 1992 until July, 1999. He is a member of
the Executive Board of AEGON N.V., and will become Chairman of
that Board in April, 2002. Mr. Shepard was elected a Director of Merc-
Safe in 1992.
Elected Director of Mercshares: 1992
Member: Compensation Committee
Executive Committee
Nominating Committee
Owns beneficially 13,500 shares of Common Stock.
Class I Directors Continuing in Office
Term Expiring 2003 Annual Meeting
Name Age Information
---- --- -----------
George L. Bunting, Jr. 61 President and Chief Executive Officer, Bunting Management Group, a
private financial management company. Mr. Bunting has occupied this
position since 1991. He is a Director of Guilford Pharmaceuticals, Inc.
Mr. Bunting was elected a Director of Merc-Safe in 1992.
Elected Director of Mercshares: 1992
Member: Audit Committee
Compensation Committee
Executive Committee
Owns beneficially 11,733 shares of Common Stock.
Darrell D. Friedman 60 President and Chief Executive Officer, THE ASSOCIATED: Jewish
Community Federation of Baltimore. Mr. Friedman has held this
position since 1986. He was elected a Director of Merc-Safe in 1999.
Elected Director of Mercshares: 1999
Owns beneficially 100 shares of Common Stock.
Robert A. Kinsley 61 Chairman and Chief Executive Officer, Kinsley Construction, Inc., a
general and heavy construction firm. Mr. Kinsley has served in this
capacity since 1996. Mr. Kinsley was elected a Director of Merc-Safe
in 1996.
Elected Director of Mercshares: 1996
Member: Executive Committee
Owns beneficially 9,049 shares of Common Stock.
Christian H. Poindexter 63 Chairman of the Board, Constellation Energy Group, Inc., a public
utility holding company, since November, 2001. From April, 1999 until
then he was also its Chief Executive Officer. Mr. Poindexter has been
Chairman of the Board of Baltimore Gas and Electric Company since
1993. From 1993 until July, 2000 he was also its Chief Executive
Officer. He was elected a Director of Merc-Safe in 1987.
Elected Director of Mercshares: 1987
Member: Compensation Committee
Executive Committee
Owns beneficially 1,050 shares of Common Stock.
4
Name Age Information
---- --- -----------
James L. Shea (1) 49 Managing Partner, Venable, Baetjer and Howard, LLP, a law firm
engaged in the general practice of law. Mr. Shea has been Managing
Partner of that firm since 1995. Mr. Shea was elected a Director of
Merc-Safe in April, 2001.
Elected Director of Mercshares: April, 2001
Owns beneficially 200 shares of Common Stock.
Class II Directors Continuing in Office
Term Expiring 2004 Annual Meeting
Name Age Information
---- --- -----------
Cynthia A. Archer 48 Vice President of Marketing and Development, Sunoco, Inc., a major
oil refiner. Ms. Archer has occupied this position since January, 2001.
From June, 1999 until January, 2001 she was Senior Vice President,
Operations, Williams-Sonoma, Inc. Prior thereto, she was Senior Vice
President--Intermodal Service Group, Conrail, Inc. and Consolidated
Rail Corporation. Ms. Archer was elected a Director of Merc-Safe in
1997.
Elected Director of Mercshares: 1997
Member: Audit Committee
Nominating Committee
Owns beneficially 550 shares of Common Stock.
Richard O. Berndt (2) 59 Partner, Gallagher, Evelius & Jones, LLP, a law firm engaged in the
general practice of law. Mr. Berndt has been a partner in that firm
since 1972. He is a Director of Municipal Mortgage and Equity, L.L.C.
Mr. Berndt was elected a Director of Merc-Safe in 1976.
Elected Director of Mercshares: 1978
Member: Executive Committee
Owns beneficially 31,792 shares of Common Stock.
William R. Brody, M.D. 58 President, Johns Hopkins University. Dr. Brody has occupied that
position since 1996. Dr. Brody is a Director of Avistar Communications
Corp. and Medtronic, Inc. He was elected a Director of Merc-Safe in
1996.
Elected Director of Mercshares: 1996
Owns beneficially 2,150 shares of Common Stock.
Member: Nominating Committee
5
Name Age Information
---- --- -----------
Edward J. Kelly, III 48 President and Chief Executive Officer, Mercshares, and Chairman of
the Board and Chief Executive Officer, Merc-Safe, since March 1, 2001.
Mr. Kelly served as Managing Director, Head of Global Financial
Institutions, and as Co-Head of Investment Banking Client Management
of J. P. Morgan, Chase & Co. during January, 2001. Prior thereto,
during the past five years, he was a Managing Director of J. P. Morgan
& Co. Incorporated and held the following additional positions with that
Company: Head, Global Financial Institutions from February, 2000
through December, 2000; Co-Head, Global Financial Institutions and
Head, Latin America Investment Banking from December, 1997 through
February, 2000; Member, Global Investment Banking Committee from
December, 1997 through December, 2000; and Co-Head, Financial
Institutions (Americas) from February, 1996 through December, 1997.
Mr. Kelly is a Director of Adams Express Co., Constellation Energy
Group, Inc., and Hartford Financial Services Group. He was elected a
Director of Merc-Safe effective March 1, 2001.
Elected Director of Mercshares: March 1, 2001
Member: Executive Committee
Owns beneficially 2,000 shares of Common Stock.
Morton B. Plant 66 Chairman, Keywell LLC, a recycler of stainless steel and high
temperature alloy scrap metal. He has occupied that position since
1996. He was elected a Director of Merc-Safe in 1997.
Elected Director of Mercshares: 1997
Member: Audit Committee
Owns beneficially 3,350 shares of Common Stock.
--------
(1) The firm of Venable, Baetjer and Howard, LLP renders legal services to
Mercshares, certain of its affiliates and certain accounts of which
Merc-Safe is a fiduciary. It also leases its Baltimore office space from an
affiliate of Mercshares.
(2) The firm of Gallagher, Evelius & Jones renders legal services to Merc-Safe
and certain accounts of which it is a fiduciary, and certain other
Mercshares affiliates.
All of the Directors serving in 2001 have attended 75% or more of the total
number of meetings of the Board of Directors and Committees of Mercshares on
which they served, including Mary Junck, an incumbent Director who will not
stand for re-election at the Annual Meeting.
No Director, nominee or officer of Mercshares was the "beneficial owner" of
as much as 1.0% of the outstanding shares of Common Stock, as of January 31,
2002. On that date, the Directors, nominees and executive officers of
Mercshares as a group owned beneficially 667,393 shares (including shares
subject to options exercisable or becoming exercisable within 60 days after
January 31, 2002) or 0.95% of the shares of Common Stock outstanding. As to
certain shares, the Directors, nominees and executive officers had no voting or
investment power, but the shares were included above because of ownership by a
family trust or by family members. As to the shares reported above with respect
to which the Directors, nominees and executive officers had or shared voting or
investment power, they had sole voting and investment power as to 624,297
shares of Common Stock and shared voting and investment power as to 21,383
shares of Common Stock.
Of the foregoing holdings, the executive officers named in the Summary
Compensation Table who are not Directors or nominees for election owned
beneficially on January 31, 2002, the following numbers of shares (including
shares subject to options exercisable or becoming exercisable within 60 days
after January 31, 2002), aggregating less than 1.0% of the outstanding Common
Stock: Mr. Reid, 53,940 shares
6
including 39,525 shares subject to options; Mr. Steil, 44,323 shares including
42,000 shares subject to options; Mr. Yarbro, 33,375 shares including 18,375
shares subject to options; and Mr. Troupe, 33,000 shares including 27,000
shares subject to options.
Section 16(a) Beneficial Ownership Reporting Compliance
Due to an administrative oversight by Mercshares, Forms 5 due in February
2001 for Messrs. Berndt, Brody, Friedman, Hrabowski, Kinsley, Plant, and
Shepard and Ms. Archer were filed late. The Forms reported exempt 2000
transactions for these Directors in Phantom Stock Units credited under the
Corporation's Directors Deferred Compensation Plan.
REPORT OF THE COMPENSATION COMMITTEE
Overall Policy
The Board of Directors of Mercshares establishes the overall goals and
objectives of Mercshares, and the policies to be followed in pursuing these
goals and objectives, including the selection of necessary key management
personnel, and the auditing of the performance of those personnel. The major
responsibility for assisting in satisfying the compensatory aspect of the
overall supervisory duty of the Board rests with the Compensation Committee.
The membership of the Compensation Committees (collectively the "Committee") of
Mercshares and Merc-Safe, its leading bank affiliate, is identical, composed of
independent nonemployee Directors of both institutions who do not participate
in any executive compensation plan. All executive officers of Mercshares are
officers of Merc-Safe.
In order to achieve the overall goals and objectives of Mercshares, and
recognizing the interest of the stockholders in that achievement, the
Committee, over a number of years, has developed and maintained an executive
compensation plan based on a philosophy that links executive compensation to
individual and corporate performance, and return to stockholders. This
philosophy was intended to enable Mercshares to attract and retain highly
motivated executive personnel of outstanding ability and initiative, and to
create an identity of interests between executives and Mercshares'
stockholders. Mercshares' executive compensation plan consists of basic cash
compensation, the opportunity for annual incentive compensation based on
corporate performance, and continuing stock based compensation.
The Committee administers the provisions of Mercshares' incentive cash bonus
plan and its stock based plans, which are applicable to all affiliates of
Mercshares. In addition, the Committee is authorized to make recommendations to
the Boards of Mercshares and its affiliates with respect to basic salaries,
supplemental pension, deferred compensation, employment and similar agreements
affecting their executive officers, and performs such other functions as may be
delegated to it by the Boards.
The Committee takes various factors into consideration when establishing and
reviewing executive compensation. There follows an explanation of general
principles governing basic cash compensation, annual incentive compensation
based on corporate earnings performance, stock based compensation, and the
factors considered in establishing basic cash compensation for 2001.
Basic Cash Compensation
The Committee, in determining basic cash compensation of the executive
officers of Mercshares, considers corporate profitability, financial condition,
capital adequacy, return on assets and other factors. The Committee also
considers the performance and compensation levels of other banking institutions
as more fully set forth under the caption "2001 Compensation". The Committee
does not consider these factors by any formula and does not assign specific
weight to any given factor. Instead, the Committee applies its collective
business judgment to reach a consensus on compensation fair to Mercshares, its
stockholders and its executive officers.
7
Annual Incentive Compensation
In addition to basic cash compensation, the Committee, in 1981, developed an
annual incentive compensation plan, which is based on a formula tied directly
to corporate performance and profitability.
Fifty-one executives of Mercshares and its affiliates who are considered by
the Committee to have responsibilities that directly affect corporate
performance and profitability currently participate in the incentive
compensation plan. Participants in the plan are chosen annually by the
Committee. No annual awards are made unless a compounded rate of growth in
earnings per share of Mercshares, and/or in net operating income of the
affiliate (or unit) employing the participant, in excess of five percent per
annum is maintained from the Base Year of the plan. The maximum potential
annual award is subject to attaining a 15 percent annual improvement in such
earnings per share or net operating income. As provided in the plan, the
maximum potential annual award for 2001 is generally 33 percent of a
participant's salary (65 percent in the case of the Chief Executive Officer and
50 percent in the case of five other officers). However, because management of
Mercshares' affiliates is decentralized, not more than one half of any
potential award is based on improvement in Mercshares' earnings per share, and
not more than one half is based on improvement in net operating income of the
affiliate (or unit) employing the participant. Incentive cash bonuses paid to
those executive officers named in the Summary Compensation Table are reflected
in the Table under the caption "Bonus".
The Committee and the Board of Mercshares have approved amendments to the
plan which, subject to stockholder approval, will govern future awards based on
performance in 2002 and thereafter. The amendments are described under the
caption "Approval of Amended and Restated Annual Incentive Compensation Plan"
in this Proxy Statement.
Stock Based Compensation
The 1989 and 1999 Omnibus Stock Plans, previously approved by the
stockholders, are designed to create a common interest between key employees
and stockholders on a long-term basis, encouraging participants to maintain and
increase their proprietary interests as stockholders in Mercshares with the
opportunity to benefit from the long-term performance of Mercshares.
From March, 1995 through 1998, the Committee granted, under the 1989 Omnibus
Stock Plan, options for a total of 1,796,725 shares of Common Stock to 322 key
employees of Mercshares and its affiliates. The exercise price of the stock
options equals the market price of the Common Stock on the date of grant and
the options have a ten year life.
Of the total granted, options for 1,335,750 shares ("performance-based
options") were granted to 51 senior officers of Mercshares and its affiliates.
Generally, 25% of these performance-based options could become exercisable on
and after each anniversary date of the grant. No options became exercisable on
an anniversary date unless Mercshares' earnings per share had increased at a
compounded growth rate of at least five percent over the 1994 Base Year. If
this test was met, then a portion (up to one-half) of the options maturing on
the anniversary date became exercisable based on a sliding scale to the extent
that the percent of increase of earnings per share of Mercshares over the prior
year earnings per share was in a range of six to ten percent; if the percent of
earnings increase was 10% or more, the entire one-half portion of the options
became exercisable. The remaining one-half portion could be exercised only if
the net operating income of the affiliate employing the participant had
increased at a compounded growth rate of at least five percent over 1994. If
this test was met, then up to one-half of the options maturing on the
anniversary date became exercisable, based on the same sliding scale, with
respect to the percent of increase of the net operating income of the affiliate
over its prior year's net operating income. To the extent these tests were not
met, all or a portion of the performance-based options maturing each year were
forfeited and became available for further grants.
The remaining options for 460,975 shares were granted to 271 key employees
of the affiliates of Mercshares. These options were not performance-based
options and were fully exercisable as of the date of grant.
8
No further grants will be made under the 1989 Omnibus Stock Plan. The 1999
Omnibus Stock Plan permits grants for up to 3,000,000 shares of Common Stock.
Under that plan, in 2000, 2001 and 2002, the Committee granted options for
1,368,800 shares to 379 key employees, including five of the executive officers
named in the Summary Compensation Table. Of the total, options for 886,500
shares to 66 senior officers of Mercshares and its affiliates are
performance-based and are subject to the same tests, described above, as were
applicable to prior options, except that the Base Year for compounded growth
rate calculations is 1999. The remaining options granted prior to 2002 are not
performance-based and become exercisable in equal annual installments over four
years. The options granted in 2002 included options for: 50,000 shares to
Edward J. Kelly, III; 15,000 shares to J. Marshall Reid; 15,000 shares to Jack
E. Steil; 5,000 shares to Terry L. Troupe; and 70,250 shares to other key
employees. The 2002 options are not performance-based and become exercisable in
equal annual installments over three years. Each option has an exercise price
equal to the market price on the grant date. In addition, in 2002, the
following became entitled to restricted stock grants; Mr. Kelly, 6,250 shares;
Wallace Mathai-Davis, 50,000 shares; Mr. Reid, 5,000 shares; and Mr. Steil,
5,000 shares.
2001 Compensation
The Committee, in determining the 2001 basic cash compensation of the
executive officers of Mercshares, considered the factors described in this
Report.
Until March 1, 2001, H. Furlong Baldwin served as Chairman of the Board,
President and Chief Executive Officer of Mercshares and Chairman of the Board
and Chief Executive Officer of Merc-Safe and, as such, had the ultimate
management responsibility for the strategic direction, performance, operating
results and financial condition of Mercshares and its affiliates, and the
carrying out of corporate policies and procedures. Since 1970, these duties
have also included the primary responsibility for recommending to the Board of
Mercshares the acquisition and establishment of additional affiliates. On March
1, 2001, Mr. Baldwin was succeeded as President and Chief Executive Officer of
Mercshares and as Chairman of the Board of Merc-Safe by Edward J. Kelly, III,
who assumed the management responsibilities described above. Mr. Baldwin became
non-executive Chairman of the Board of Mercshares. J. Marshall Reid is
President and Chief Operating Officer of Merc-Safe; Jack E. Steil is Executive
Vice President of Mercshares and Chairman -- Credit Policy of Merc-Safe; Alan
D. Yarbro is General Counsel and Secretary of Mercshares and Merc-Safe; and
Terry L. Troupe is Chief Financial Officer of Mercshares and Merc-Safe. Mr.
Reid is designated as an executive officer of Mercshares because he
participates in policy making activities affecting Mercshares.
Compensation arrangements with Mr. Kelly and Mr. Baldwin for 2001 were
reviewed and approved by the Committee in February, 2001. In view of Mr.
Kelly's succession to Mr. Baldwin's executive duties, Mr. Baldwin's base rate
of compensation through February, 2001 was not changed. In considering
Mr. Kelly's proposed compensation and the consulting agreement under which Mr.
Baldwin continues to provide services, the Committee reviewed the information
normally used by it for such purposes, which is summarized below.
The Committee was aware of 2000 earnings of Mercshares. The Committee
further reviewed profitability and capital strength ratios (return on assets,
net interest margin, efficiency ratio, equity to assets and return on equity)
and loan loss performance ratios (period-end non-performing assets to loans and
other real estate owned, net charge-offs to average loans and period-end
allowance for loan losses to non-performing loans) for the years 1995 through
1999 and the quarter ended September 30, 2000, as compared to comparable
information for 23 banking companies with assets from $5 to $10 billion,
considered by an independent analyst as a Mercshares' peer group. The Committee
compared similar ratios showing profitability, capital adequacy, reserve
strength, and asset quality with those of the 50 largest banking institutions
in the United States as prepared by that financial analyst. The Committee was
aware that, for the second quarter, 2000 (the then most recent quarter for
which the following rating was published), Mercshares was rated "superior",
compared to six selected banking institutions in Maryland, Delaware, the
District of Columbia and Virginia, based on 39 separate financial ratios that
depict financial strength and profitability compiled by IDC Financial
Publishing, Inc.
9
The Committee compared the proposed compensation of Mr. Kelly with an
independent study published in 2000 reflecting compensation information for
1999 of the 124 commercial banking institutions participating in the study and
with the compensation of executive officers of five banking institutions, based
on proxy information covering the years 1997-1999 (the then most currently
available), selected as generally comparable to Mercshares in terms of criteria
including the nature and quality of operations, or geographic proximity. This
latter group included financial institutions having significant income
generated by trust and investment activities, high returns on assets, capital
significantly in excess of that required by current federal regulations, and
located within a 400 mile radius of Baltimore so as to include companies
operating in a comparable economic climate. No target was established in the
comparison with this group of institutions.
The Committee concluded that Mercshares' profitability and capital strength
ratios continued to be strong, and that loan loss ratios were favorable, both
standing alone and in comparison to the 23 banking companies constituting the
peer group and the 50 largest banking institutions group, and that Mercshares'
performance, overall, was strong. Based on its review and its evaluation of Mr.
Kelly's qualifications, experience and responsibilities, and of the importance
of Mr. Baldwin's continued services for transitional and other purposes, the
Committee approved the compensation and other arrangements with Mr. Kelly and
Mr. Baldwin described in the Summary Compensation Table and under the caption
"Other Arrangements" in this Proxy Statement. The 2001 base compensation of
Messrs. Reid, Steil, Yarbro and Troupe as shown in the Summary Compensation
Table under the "Salary" caption, was fixed in March, 2001, based on the
factors described above and evaluation of their performance and
responsibilities.
While each of the executive officers named in the Summary Compensation Table
was eligible for possible bonuses for 2001, no bonuses were awarded because the
corporate performance tests under the annual incentive compensation plan were
not met.
Section 162(m) of the Internal Revenue Code provides for non-deductibility,
in certain cases, of compensation paid to certain executives in excess of $1
million per year. Mercshares does not have a policy limiting compensation to
amounts deductible under Section 162(m). The annual incentive plan and the
Omnibus Stock Plans have been approved by the stockholders and are designed to
be qualified performance-based plans so that Section 162(m) limits would not
apply to plan benefits. Section 162(m) limits would apply to salary, bonuses in
excess of bonuses under the annual incentive compensation plan and certain
amounts included under "Other Annual Compensation" and "All Other Compensation"
in the Summary Compensation Table.
The Compensation Committee
George L. Bunting, Jr. Christian H. Poindexter
Mary Junck Donald J. Shepard, Chair
10
The following line graph compares cumulative total stockholder return on
Mercshares Common Stock with the Standard & Poor's 500 Index and the Standard &
Poor's Banks Composite Index for the period beginning December 31, 1996,
through December 31, 2001. The graph assumes $100 invested at the closing price
on December 31, 1996, and the reinvestment of all dividends. With reference to
the Report of the Compensation Committee, 23 of the 50 largest banking
institutions whose performance ratios were reviewed, two of the five
institutions considered for compensation purposes and 23 of the 124
institutions participating in the compensation study are included in the S & P
Banks Composite Index. None of the 23 institutions considered as peer
institutions of Mercshares whose performance ratios were reviewed is so
included. The S & P Banks Composite Index consisted, as of December 31, 2001,
of two "Money Center Banks", and 21 "Major Regional Banks", each of which is
substantially larger than Mercshares.
PERFORMANCE GRAPH
[CHART]
1996 $100.00 100.00 100.00
1997 $188.18 133.36 144.46
1998 $189.89 171.47 154.02
1999 $162.02 207.55 133.94
2000 $225.77 188.67 157.97
2001 $231.37 166.23 158.76
1996 1997 1998 1999 2000 2001
------- ------- ------- ------- ------- -------
Mercshares............... $100.00 $188.18 $189.89 $162.02 $225.77 $231.37
S&P 500.................. 100.00 133.36 171.47 207.55 188.67 166.23
S&P Banks Composite Index 100.00 144.46 154.02 133.94 157.97 158.76
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
In 2001, Merc-Safe had banking and other relationships, in the ordinary
course of business, with a number of its Directors and companies associated
with them, including a loan to Mr. Poindexter which was made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with others, and did not involve more than
the normal risk of collectibility or present other unfavorable features. In
2001, Mr. Baldwin was a director of Constellation Energy Group, Inc. of which
Mr. Poindexter is an executive officer.
11
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain summary compensation information as
to the Chief Executive Officer and the other four most highly compensated
executive officers, based on total annual salary for 2001. Mr Baldwin retired
as President and Chief Executive Officer on March 1, 2001, and was succeeded in
those capacities by Mr. Kelly. Mr. Baldwin remains as non-executive Chairman of
the Board under a consulting agreement.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Securities
Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary($) Bonus($) Compensation($) SARs(#) Compensation($)(1)
------------------ ---- --------- -------- --------------- ------------ ------------------
Edward J. Kelly, III............. 2001 768,300 -- 69,000(2) 100,000 60,500
President and Chief
Executive Officer
H. Furlong Baldwin............... 2001 189,800 -- 513,200(3) -- 29,600
Chairman of the Board, and, 2000 850,000 306,000(3) 101,200(3) -- 70,500
until March 1, 2001, President 1999 850,000 442,000(3) 73,300(3) -- 67,900
and Chief Executive Officer
J. Marshall Reid................. 2001 400,000 -- -- -- 49,300
President of Merc-Safe 2000 400,000 90,000 -- 40,000 53,400
1999 350,000 113,800 -- -- 49,000
Jack E. Steil.................... 2001 375,000 -- -- -- 73,300
Executive Vice President, and 2000 375,000 84,400 -- 40,000 76,200
Chairman -- Credit Policy of 1999 300,000 97,500 -- -- 58,200
Merc-Safe
Alan D. Yarbro................... 2001 300,000 -- -- -- 34,700
General Counsel and 2000 260,000 58,500 -- 25,000 32,900
Secretary 1999 260,000 84,500 -- -- 29,600
Terry L. Troupe.................. 2001 240,000 -- -- -- 23,000
Chief Financial Officer 2000 220,000 32,700 -- 20,000 20,400
and Treasurer 1999 200,000 42,900 -- -- 18,700
--------
(1) Represents cost of group-term life insurance deemed to be employee income
under the Internal Revenue Code and contributions made on behalf of the
executive officer by Merc-Safe to the Mercshares Thrift Plan and to
supplemental thrift and cash balance pension plan arrangements as follows:
Supplemental
Year Life Insurance Thrift Plan Plans Total
---- -------------- ----------- ------------ -------
Mr. Kelly.. 2001 $ 700 $ -- $59,800 $60,500
Mr. Baldwin 2001 1,100 5,100 23,400 29,600
2000 6,900 5,100 58,500 70,500
1999 9,100 4,800 54,000 67,900
Mr. Reid... 2001 700 10,200 38,400 49,300
2000 1,300 10,200 41,900 53,400
1999 800 9,600 38,600 49,000
Mr. Steil.. 2001 2,300 10,200 60,800 73,300
2000 1,200 10,200 64,800 76,200
1999 1,900 9,600 46,700 58,200
Mr. Yarbro. 2001 1,900 10,200 22,600 34,700
2000 1,100 10,200 21,600 32,900
1999 1,400 9,600 18,600 29,600
Mr. Troupe. 2001 500 10,200 12,300 23,000
2000 500 10,200 9,700 20,400
1999 600 9,600 8,500 18,700
12
--------
(2) Of the Other Annual Compensation, $14,500 represents travel expenses
incurred by Mr. Kelly and $54,500 represents non-recurring relocation
expenses reimbursed to Mr. Kelly and paid on his behalf.
(3) Mr. Baldwin's bonus amounts include $248,600 for 2000 and $359,100 for 1999
under the annual incentive compensation plan and supplemental bonuses of
$57,400 for 2000 and $82,900 for 1999. Of the other annual compensation
amounts, $94,500 in 2001, $88,100 in 2000 and $64,500 in 1999 represent
travel expenses incurred by Mr. Baldwin, and $416,700 in 2001 represents
payments to Mr. Baldwin under a consulting agreement which became effective
on his retirement.
Option Grants
The following table shows certain options to purchase Common Stock granted
by Mercshares in 2001. Information as to the terms of these options, including
those with respect to exercisability and forfeiture, is set forth in footnote
(2) below. Mr. Kelly was the only officer named in the Summary Compensation
Table who was granted options in 2001.
Stock Option Grants in Last Fiscal Year
Individual Grants(1)
----------------------------------------------
% of
Number of Total
Securities Options
Underlying Granted to Exercise Grant
Options Employees or Base Date
Granted in Fiscal Price Value
Name (#) Year ($/Sh) Expiration Date $(2)(3)
---- ---------- ---------- -------- --------------- -------
Mr. Kelly 100,000 76.05 39.25 2/28/11 816,723
--------
(1) All of these options were granted pursuant to the 1999 Omnibus Stock Plan,
are intended to be incentive stock options for federal income tax purposes
to the extent permitted by law and regulations, were granted at market
value on the date of grant and have a term of ten years.
(2) Caution is recommended in interpreting the financial significance of this
figure. The grant date value is not intended to forecast possible future
appreciation. Further, the figure does not reflect the following terms of
these options which are more fully described in the Report of the
Compensation Committee under the caption "Stock Based Compensation": (a) no
more than 25% of the options granted can become exercisable on and after
each anniversary date of the grant; (b) the exercise of the options is
subject to the attainment of certain growth targets with respect to growth
in earnings per share and net after tax operating income on both a
compounded basis from the base year of 1999 and on a year-to-year basis;
and (c) if the growth targets are not met, all or a portion of the options
that will become exercisable are forfeited. No gain to the optionee is
possible without stock price appreciation and the attainment of the targets
as described above and in the Report of the Compensation Committee. Of the
options for Mr. Kelly shown above, options for 25,000 shares were forfeited
in March, 2002 because the growth targets for 2001 were not met.
(3) The grant date present value of options granted ($8.1672 weighted average
per share) is reported using the Black-Scholes option pricing model and
assumes: (a) the grant date of March 1, 2001; (b) the exercise price of
$39.25; (c) a weighted average expected option term of 3.8 years; (d) a
risk-free interest rate of 4.66%; (e) a dividend yield of 2.7%; and (f)
volatility of 26.69%.
13
Aggregate Options Table
The following table sets forth certain information, on an aggregate basis,
concerning the exercise of stock options during 2001 by executive officers
named in the Summary Compensation Table and the December 31, 2001, value of
unexercised stock options. No stock appreciation rights were outstanding in
2001.
Aggregated Option Exercises in Last
Fiscal Year and FY -- End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Value Options at FY-End (#) at FY-End ($)(1)
Shares Acquired Realized ------------------------- -------------------------
Name On Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----------- --------------- -------- ----------- ------------- ----------- -------------
Mr. Kelly.. -- -- -- 100,000 -- 379,000
Mr. Baldwin -- -- 59,040 -- 1,680,100 --
Mr. Reid... 6,100 173,200 37,525 30,000 971,000 531,200
Mr. Steil.. -- -- 42,000 30,000 1,091,300 531,200
Mr. Yarbro. -- -- 18,375 18,750 428,400 331,800
Mr. Troupe. -- -- 26,500 15,000 621,300 265,400
--------
(1) Share values included in the table represent the fair market value of the
shares at the exercise date for exercised options less the exercise price
of the options, and at December 31, 2001, for unexercised options, less the
exercise price of the options. The closing price of the Common Stock on
December 31, 2001, was $43.04 per share.
(2) Of the options shown as unexercisable, options for the numbers of shares
shown below (with related values at December 31, 2001) were forfeited in
March, 2002 because earnings growth targets under the option agreements
were not met.
Number Value
Unexercisable (#) Unexercisable ($)
- ----------------- -----------------
Mr. Kelly. 25,000 94,750
Mr. Reid.. 10,000 176,960
Mr. Steil. 10,000 176,960
Mr. Yarbro 6,250 110,600
Mr. Troupe 5,000 88,500
14
Retirement Agreements and Plans
Deferred Compensation and Supplemental Pension Agreements
Mr. Baldwin has an arrangement with Merc-Safe pursuant to which his rate of
salary prior to 2001 has been reduced. In exchange, Merc-Safe from time to time
invested in life insurance and annuity policies, amounts equal to the salary
reduction amounts and a portion of the cumulative cash surrender values of
those policies. These investments serve as a funding source for the benefit
described below. As a consequence of his retirement, annual payments to him for
a minimum of fifteen years or until death (if later), commencing in March,
2004, would approximate $242,000. The salaries for 2000 and 1999 reported under
the caption "Salary" in the Summary Compensation Table are the full salaries
before the deferred compensation reductions. There were no deferred
compensation reductions in 2001.
Mr. Baldwin also participates in supplemental pension and thrift plan
arrangements whereby he is eligible to receive (1) benefits in the amounts he
would have received had his compensation not been reduced from current levels,
and (2) amounts to which he would have been entitled under the Mercshares cash
balance pension plan and thrift plan but for the maximum salary, benefit and
contribution limitations on defined benefit and contribution plans under the
Internal Revenue Code.
Supplemental Retirement Agreement
Mr. Kelly is a participant in the Mercshares Cash Balance Pension Plan,
Supplemental Cash Balance Pension Plan, Thrift Plan, and Supplemental Thrift
Plan (collectively, "the Plans"), all of which are described below. Mr. Kelly
has an arrangement with Mercshares and Merc-Safe which is designed to provide
him with a total retirement benefit at age 65 of approximately 65% of his final
average annual salary and bonus, less amounts due him from the Plans and Social
Security retirement payments. Final average annual salary and bonus will be the
average of such amounts for the three consecutive 12 month periods, contained
within the last five consecutive 12 month periods immediately preceding Mr.
Kelly's retirement, affording the highest final average compensation. At age
65, Mr. Kelly will have an estimated retirement benefit of $1,237,000, which
includes $701,000 payable under this Supplemental Retirement Agreement, and
$536,000 from the Plans and Social Security. For purposes of this estimate, it
is assumed that Mr. Kelly's salary would increase from 2001 at the Cash Balance
Pension Plan's internal salary increase assumption. Actual salary increases and
possible bonuses may differ from this assumption. Consequently the actual
amount of Mr. Kelly's benefit may differ significantly from the amount stated
above. The Agreement also contains provisions for reduced benefits in case of
early retirement or other termination of employment, disability or death.
Cash Balance Pension Plan
Mercshares is sponsor of an employees' cash balance pension plan adopted by
a majority of its affiliates. Each plan participant who was employed on January
1, 1991, was credited under the cash balance pension plan with a frozen accrued
benefit representing the benefit he had earned under the plan, determined as of
December 31, 1990, and based generally on past service and career average
annual compensation. For service on and after January 1, 1991, the cash balance
pension plan is designed to maintain separate participant accounts for each
eligible employee. These cash balance accounts are credited with annual
contribution allocations equal to various percentages of compensation based on
years of credited service and age. Interest allocations, tied to a Treasury
Bill rate, are also credited annually to these cash balance accounts. Plan
benefits paid at retirement will be paid in annuity form and will consist of
the sum of any frozen accrued benefits and the cash balance accounts. The plan
does not determine benefits primarily by final average compensation.
Estimated annual pension benefits shown below are presented as straight life
annuities, even though retirees may elect to receive a form of benefit other
than a straight life annuity. The benefits are based on cash compensation for
2001. For future years, it is estimated that the executive officers' salaries
will
15
increase through their dates of retirement at the plan's internal salary
increase assumption. Actual salary increases and possible bonuses may differ
from the plan's internal salary increase assumption. Accordingly, the actual
pension benefits at retirement may differ significantly from the amounts stated
below.
At the plan's normal retirement age of 65, the individuals named below would
have the following years of service and estimated annual pension benefits: Mr.
Reid, 18 years and $114,000; Mr. Steil 42 years and $259,000; Mr. Yarbro 10
years and $33,000, and Mr. Troupe 16 years and $55,000. Mr. Baldwin has retired
with 45 years of service and annual pension benefits of $924,000, in addition
to the deferred compensation benefit described above. These amounts are the
total of estimated payments from the plan and under Mr. Baldwin's supplemental
pension arrangement described above and, with respect to Messrs. Reid, Steil,
Yarbro and Troupe under the following section entitled "Supplemental Cash
Balance Pension Plan".
All other officers of Mercshares participate in the cash balance pension
plan. Directors who are not also officers of Mercshares or an affiliate do not
participate in the cash balance pension plan.
Supplemental Cash Balance Pension Plan
Mercshares is sponsor of an unfunded, nonqualified, supplemental cash
balance pension plan. All employees of Mercshares and its affiliates having
compensation for a calendar year in excess of $170,000 (as adjusted under the
Internal Revenue Code) and who are approved for participation by the Employee
Benefit Committee of Mercshares are eligible participants under this plan
except that Mr. Baldwin has not participated in the plan. Messrs. Kelly, Reid,
Steil, Yarbro and Troupe, as well as 45 other employees of Mercshares and its
affiliates, participate in the plan. At the end of a calendar year, the account
of each participant is credited with an amount equal to the difference between
the amount with which the participant's account under the cash balance pension
plan would have been credited but for the compensation limitation imposed by
the Internal Revenue Code and the amount actually credited to the participant's
account under the cash balance pension plan. In addition, if a participant's
benefit under the cash balance pension plan is limited by Section 415 of the
Internal Revenue Code and is not already provided for under this plan, an
amount equal to the shortfall will be added to the participant's account. At
the end of a calendar year (but prior to the above credit), each participant's
account is credited with interest equal to the average value of interest rates
on 52 week U. S. Treasury Bills, determined pursuant to a fixed formula, but no
less than four percent nor more than 12 percent, until the participant's
account is fully distributed. For 2001, Mr. Kelly's account was credited with
$41,900, Mr. Reid's with $52,100, Mr. Steil's with $28,800, Mr. Yarbro's with
$17,000 and Mr. Troupe's with $9,200. These amounts are included under the
caption "All Other Compensation" in the Summary Compensation Table. Generally,
an account is distributed after the participant's termination of employment or
death, either in a single-sum payment, or in equal annual installments over a
period not to exceed ten years.
Thrift Plan
Mercshares is sponsor of a thrift plan, of the type described in Section
401(k) of the Internal Revenue Code, which all of its affiliates have adopted
for the benefit of all eligible employees. The plan provides that corporate
contributions, based on a percentage of an employee's salary, are paid to the
employee's thrift plan account. Additionally, employees may elect to defer up
to 25% of their salaries up to the limit prescribed by the Internal Revenue
Code, by redirecting the deferred amount to their thrift plan accounts, in
which case their employers match a portion of the amount deferred. The
corporate contributions for 2001 are included under the caption "All Other
Compensation" in the Summary Compensation Table. Messrs. Reid, Steil, Yarbro
and Troupe elected to defer a percentage of their salaries during 2001. The
amounts so deferred are included under the caption "Salary" and the matching
contributions are included under the caption "All Other Compensation" in the
Summary Compensation Table.
16
Supplemental Thrift Plan
Mercshares is sponsor of an unfunded, nonqualified supplemental thrift plan.
Generally, all vice presidents and above who participate in the thrift plan,
who have compensation for a calendar year in excess of $170,000 (as adjusted
under the Internal Revenue Code) and who are approved for participation by the
Employee Benefit Committee of Mercshares are eligible participants under this
plan except that Mr. Baldwin has not participated in the plan. Messrs. Reid,
Steil, Yarbro and Troupe, as well as 45 other employees of Mercshares and its
affiliates, participate in this plan. At the end of a calendar year, the
account of each participant is credited with an amount equal to 3% of the
portion of the participant's compensation for that calendar year that exceeds
the above limit. At the end of a calendar year (but prior to the above credit),
each participant's account is credited with interest at the per annum rate of
five percent except that interest is pro-rated for accounts that terminate in
midyear. For 2001, Mr. Reid's account was credited with $9,600, Mr. Steil's
with $8,700, Mr. Yarbro's with $5,700 and Mr. Troupe's with $3,100. These
amounts, and Mr. Kelly's amount, are included under the caption "All Other
Compensation" in the Summary Compensation Table. Mr. Kelly's account was
credited with $17,900 in 2001 in connection with his Agreement described under
the caption "Supplemental Retirement Agreement" in this Proxy Statement.
Generally, an account is distributed in a lump sum payment after a
participant's termination of employment or death.
Medical Reimbursement Plan
Mercshares is sponsor of a medical reimbursement plan, of the type described
in Section 105 of the Internal Revenue Code, which a majority of its affiliates
have adopted for the benefit of all eligible employees. Messrs. Steil and
Troupe participated in the plan in 2001. The plan provides that employees may
reduce their salaries on a pre-tax basis, in amounts determined in advance by
them, and direct those amounts to a medical reimbursement account (MRA). Funds
in the MRA then become available to reimburse the employee for certain
uninsured medical expenses. Any balance left in an employee's MRA at year end
reverts to his employer. Amounts directed to the MRA for Messrs. Steil and
Troupe are included under the caption "Salary" in the Summary Compensation
Table.
Other Arrangements
Employment and Consulting Agreements
Mercshares and Merc-Safe have entered into an agreement with Mr. Kelly,
pursuant to which he serves in his executive positions. The agreement is for an
initial term of five years and is subject to annual renewal thereafter. Mr.
Kelly's annual base salary is not less than $850,000, which may be increased
from time to time. The agreement provides that his base salary will not be less
in any year than in the preceding year. He will be eligible for bonuses as a
Class I participant in the Mercshares Annual Incentive Compensation Plan.
Mr. Baldwin's prior employment and change of control termination agreements
have expired. Mr. Baldwin has entered into a three-year consulting agreement
providing for him to serve as Chairman of the Board of Mercshares, Director of
Merc-Safe and consultant to the chief executive officer and Boards of Directors
of those companies. He will receive an annual fee of $500,000 for all services,
plus reimbursement of expenses and continuation of his travel allowance.
Mercshares and Merc-Safe have entered into an agreement with Mr.
Mathai-Davis pursuant to which he serves in his executive positions. The
agreement is for an initial term of four years and is subject to annual renewal
thereafter. Mr. Mathai-Davis's base annual salary is $775,000, which may be
increased from time to
17
time. The agreement provides that his base annual salary will not be less in
any year than in the preceding year. He is entitled to 50,000 shares of
Restricted Common Stock under the 1999 Omnibus Stock Plan, subject to a vesting
requirement based on credited service. Mr. Mathai-Davis will be eligible for
such annual bonus amounts as Merc-Safe shall award, up to the amount of his
initial base annual salary. Mr. Mathai-Davis will participate in all other
Mercshares Plans for which he is eligible, including the Retirement Plans
discussed in other sections of this Proxy Statement.
Change of Control Termination Agreements
Mercshares has entered into Change of Control Termination Agreements with
Messrs. Kelly, Mathai-Davis and Yarbro. In the event that during the effective
period of the agreements, following a "change of control" of Mercshares, the
officer is terminated (prior to his retirement date) within three years of a
change of control without "cause" or if the officer resigns for "good reason",
then such officer is entitled to receive certain cash payments from Mercshares.
Payments which may be made under the agreements are calculated at the maximum
amount (when combined with amounts otherwise payable upon termination) which is
deductible by Mercshares under Section 280G of the Internal Revenue Code.
Generally, the maximum amount deductible is three times average base annual
compensation (including salary, bonus, fringe benefits and deferred
compensation) over five years. Mr. Kelly's and Mr. Mathai-Davis's agreements
provide, however, for additional payments to them to make them whole for the
consequence of any excise tax imposed upon them if the Section 280G limits are
exceeded. For the purposes of the agreements, a "change of control" means any
of the following occurrences: (a) a person or group becomes the beneficial
owner of at least 20% of the Common Stock; (b) there occur certain specified
changes in the composition of the Board of Directors; (c) Mercshares'
stockholders approve a reorganization, merger, consolidation or statutory share
exchange of Mercshares unless after such transaction, holders of the previously
outstanding Common Stock own specified amounts of the combined voting power of
the surviving entity, or (d) a liquidation or dissolution of Mercshares or sale
of all or substantially all of the assets of Mercshares. For purposes of these
agreements, termination by Mercshares for "cause" means termination upon (i) an
act of personal dishonesty taken by the officer intended to result in
substantial personal enrichment of the officer at the expense of Mercshares,
(ii) the officer's willful, deliberate and continued failure to perform
substantially his duties, which is not remedied after receipt of written
notice, or (iii) conviction of a felony. "Good reason" includes the assignment
to the officer of any duties inconsistent with his status and position as they
exist immediately prior to the change of control, a substantial failure by
Mercshares to comply with its obligations to the officer under its employment
arrangement with such officer, relocation of the officer's place of employment
outside of the Mercshares principal office located in the City of Baltimore, a
purported termination of the officer not otherwise permitted under his
employment arrangement with Mercshares or the failure of any successor to
Mercshares to assume expressly the obligations of the agreement.
Director Fees
Directors of Mercshares, who are not also officers of Mercshares or its
affiliates, are paid a retainer at the annual rate of $15,500 in addition to
fees of $750 for each Board meeting and $500 for each Committee meeting
attended. The annual retainer is paid each December. All or a portion of the
annual retainer may be paid in the form of Common Stock, valued at the time the
retainer is payable. In 2001, one Director received 363 shares of Common Stock
in lieu of cash retainer fees. Directors who are also officers of Mercshares or
its affiliates receive no retainer or compensation for attendance at Board or
Committee meetings of Mercshares.
Mercshares is sponsor of a Directors Deferred Compensation Plan which gives
Directors of Mercshares and participating affiliates, who are not also officers
of Mercshares or its affiliates, the option to defer the retainer and other
fees. In 1996, Mercshares amended and restated the Directors Deferred
Compensation Plan. Prior to the amendment, deferred amounts were invested by
Merc-Safe, as agent, in various securities. Under the amendment and
restatement, at the close of each calendar quarter the sum of cash deferred in
that quarter by a Director is converted to units by dividing such sum by the
closing market price
18
of the Common Stock and the units are cumulatively credited to the Director's
account. At the close of each calendar quarter, the sum of the dividends
attributable to the Director's account at the beginning of the quarter is
similarly converted to additional units and cumulatively credited. When a
participating Director ceases to serve as a Director, a cash sum is computed by
multiplying the number of units in his account by the closing market price of
the Common Stock at a time specified in the Plan. This sum is paid in cash to
the Director (or a designated beneficiary) over the period of years (one to
ten) specified by the Director. Any unpaid balance is credited with interest at
five percent. Any Director having a deferred account at the time of the
amendment and restatement could elect to have such account converted to units
as described above. Failing such election, interest at five percent will be
paid on the sum until fully paid out in accordance with the Director's existing
deferral agreement.
Transactions with Directors and Officers
Certain affiliated banks have had, and expect to have in the future, banking
and trust transactions in the ordinary course of business with many of the
Directors and officers of Mercshares, and certain of their associates and
immediate family members, on substantially the same terms, including interest
rates and collateral on loans, and commissions on fiduciary business, as those
prevailing at the time for comparable transactions with others. Loans to such
persons were made in the ordinary course of business and did not involve more
than the normal risk of collectibility or present other unfavorable features.
APPROVAL OF AMENDED AND RESTATED ANNUAL
INCENTIVE COMPENSATION PLAN
General
The Annual Incentive Compensation Plan was adopted by the Board of Directors
of Mercshares in 1981. It was approved by the stockholders with technical
amendments in 1994 to comply with Section 162(m) of the Internal Revenue Code.
In March 2002 the Board approved amendments to the Plan, which are subject
to stockholder approval. The amended and restated Plan is set forth in Appendix
A to this Proxy Statement and reference is made to that Appendix for a complete
statement of its terms and provisions. If approved by the stockholders, the
Plan amendments will be effective for the year 2002.
The purpose of the amendments is to create an appropriate balance between
base salary and incentive bonuses measured by annual improvement in corporate
earnings. If earnings performance targets are met, it is expected that
incentive compensation to Plan participants will increase over prior levels and
will include, for the first time, a restricted stock component. This is
intended to provide for significant portions of total compensation to be
dependent on corporate earnings growth and to establish more substantial share
ownership among Plan participants. Mercshares considers the changes necessary
to continue to attract and retain key executive employees of outstanding
ability and initiative, who have proper incentives to maintain and increase the
profitability of Mercshares and its affiliates. In this regard, Mercshares
believes, based on information reviewed by the Compensation Committee,
including a survey of 136 banking institutions, that under the current
compensation structure its senior executives are being compensated at the lower
end of the middle 50% (i.e. 25/th/ to 75/th/ percentile) range of total
compensation of executives of other banking institutions, despite strong
corporate performance over the years.
Prior Plan Provisions
Under the Plan, as in effect through 2001, the maximum potential award is 65
percent of salary for Class I participants, 50 percent for Class II
participants and 33 percent for Class III participants. Up to one-half of each
award is based on improvement in earnings per share of Mercshares and up to
one-half is based on improvement in net operating income of the affiliate (or
division thereof) employing the participant.
19
No incentive compensation awards are made unless a compounded rate of growth
in earnings per share of Mercshares, and/or in net operating income of the
affiliate employing the participant (or division thereof), in excess of five
percent per annum is maintained from the calculation base year (1985) of the
Plan. If the compounded rate of growth in earnings per share, and/or net
operating income exceeds five percent, and the annual rate of growth in
earnings per share and/or net operating income equals or exceeds six percent,
the participant receives an incentive compensation award based upon the percent
increase in earnings per share and/or net operating income over the preceding
year, with the maximum potential award subject to attaining a 15 percent annual
growth rate. No participant may receive an award in excess of $750,000 for any
calendar year.
Amendments
Under the Plan amendments, the compounded growth rate tests are eliminated,
so that the focus will be on annual earnings improvement. The maximum potential
annual awards will be 100% of salary for Class I participants, 60% of salary
for Class II participants, and 40% of salary for Class III participants.
For the components of each potential award dependent on annual growth in
earnings per share of Mercshares and net operating income of affiliates (or
divisions), the calculation scale will change: no award will be made unless the
annual growth rate equals or exceeds 3%; if the annual rate of growth equals
3%, 10% of the applicable component of the potential award will be made; if the
annual growth rate falls between 3% and 12%, then the percentage of the
applicable component of the potential award to be made will be in proportion to
the excess of the annual growth rate over 2%; and if the annual growth rate
equals or exceeds 12%, the maximum amount of the applicable component of the
potential award will be made. The limit on any award to any participant in any
calendar year will be increased from $750,000 to $1,500,000.
Payments of awards will continue to be made in cash, except that the
Compensation Committee in its discretion may, and currently intends to, pay an
award in restricted shares of Common Stock of Mercshares to the extent of the
amount by which a participant's total Plan award for a particular year exceeds
70% of the participant's maximum potential award. The number of restricted
shares to be granted shall be based on the fair market value of the Common
Stock on the date of the award and shall be issued under and subject to the
terms and limits of the Mercshares 1999 Omnibus Stock Plan or such other stock
incentive plan which shall have been approved by the stockholders.
The Compensation Committee will select Plan participants annually,
designating each as a Class I, Class II or Class III participant. The
Compensation Committee and the Board of Directors reserve the right not to
include certain executive employees in the Plan.
The Compensation Committee will have discretion to determine annually, prior
to March 31 of the award year, what portion of the potential award to each
Participant will be based on earnings per share of Mercshares and what portion
will be based on affiliate (or division) net operating income. This is designed
to align incentives more precisely to the responsibilities of the participants.
For 2002, the Committee has determined that for Messrs. Kelly, Reid, Steil,
Yarbro and Troupe, the entire potential award will be based on earnings per
share of Mercshares and that for all other participants, 20% of the potential
awards will be based on earnings per share of Mercshares and 80% will be based
on affiliate (or division) net operating income.
For 2002, 51 executives have been designated as participants. Messrs. Kelly,
Reid, and Steil will be Class I participants, Messrs. Yarbro, Troupe and three
others will be Class II participants, and the remaining individuals will be
Class III participants.
Plan Benefits
For 2001, total awards under the Plan, prior to the amendments, were
$292,631. The compounded rate of growth tests were met for Mercshares and all
affiliates except for one community bank. No awards were made to participants
employed by Mercshares, Merc-Safe and nine community banks, because the annual
20
earnings growth tests were not met. Awards were made to the chief executive
officers of 11 community bank affiliates and a mortgage banking affiliate.
The specific amounts of benefits payable in the future to Plan participants
are not determinable. Of the 51 participants, seven are executive officers of
Mercshares who, together with 23 officers of Merc-Safe, are senior executives
of Mercshares and Merc-Safe. The remaining participants are executive officers
of 20 community banks and a mortgage banking affiliate. If the Plan amendments
had been in effect for 2001, none of the senior executives of Mercshares and
Merc-Safe would have received awards.
The following table shows what the benefits would have been for 2001 if the
Plan benefits had then been in effect.
Name Dollar Value ($)
---- ----------------
Mr. Kelly...................................... --
Mr. Baldwin.................................... --
Mr. Reid....................................... --
Mr. Steil...................................... --
Mr. Yarbro..................................... --
Mr. Troupe..................................... --
All current executive officers of Mercshares
and Merc-Safe as a group..................... --
All executives of other Affiliates who would
have received awards, as a group (12 persons) $724,744
--------
Total.......................................... $724,744
========
Other Matters
The Plan is administered by the Compensation Committee which consists of not
less than three members of the Board of Directors, all of whom are independent
non-employee directors of Mercshares who do not participate in any executive
compensation Plan of Mercshares. None of the members of the Compensation
Committee is a current employee of Mercshares, or a former employee of
Mercshares who receives compensation for prior services, nor does any member
receive remuneration other than as a director.
The Plan, prior to and after the amendments, permits the Board of Directors
to amend or terminate the Plan at any time. While Mercshares intends to
maintain the amended and restated Plan as a stockholder-approved Plan, it is
possible that the Board could amend the Plan without stockholder approval in
ways that could increase the cost of the Plan to Mercshares or alter the
allocation of benefits to participants.
Section 162(m) of the Internal Revenue Code limits the deductibility, for
federal income tax purposes, of certain compensation in excess of $1,000,000
for the chief executive officer and other executive officers named in the
Summary Compensation Table of the annual proxy statement. The Plan, prior to
and after the effect of the amendments, is designed to comply with those
provisions of Section 162(m) under which such compensation may be deducted.
Stockholder approval of the amended and restated Plan is necessary for these
purposes. However, the Board of Directors expects that absent stockholder
approval, it would nonetheless be necessary for the Board and the Compensation
Committee to make provisions for an executive incentive bonus program of some
kind, which provisions could include continuation or supplementation of the
pre-existing Plan.
The Board of Directors recommends a vote FOR the approval of the Amended and
Restated Annual Incentive Compensation Plan.
21
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed and discussed with management the audited
financial statements of Mercshares and its subsidiaries consisting of the
consolidated balance sheets at December 31, 2001 and 2000, and the statements
of consolidated income, consolidated cash flows and changes in consolidated
stockholders' equity for each of the three years in the period ended December
31, 2001.
The Audit Committee has discussed with PricewaterhouseCoopers LLP, the
independent auditors for Mercshares for 2001, the matters required to be
discussed by Statement on Auditing Standards 61. The Audit Committee has
received the written disclosures and the letter from the independent auditors
required by Independent Standards Board Standard No. 1 and has discussed with
the independent auditors the independent auditors' independence.
Based on the foregoing review and discussions, the Audit Committee
recommended to the Board of Directors of Mercshares that the audited financial
statements be included in the Mercshares Annual Report on Form 10-K for the
year 2001 for filing with the Securities and Exchange Commission.
The Board of Directors of Mercshares has adopted a written charter for the
Audit Committee.
Each member of the Audit Committee is independent, as independence is
defined in Rule 4200(a) of the listing standards of the National Association of
Securities Dealers.
While the Audit Committee has the responsibilities and powers set forth in
its charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the financial statements are complete and accurate and are in
accordance with generally accepted accounting principles. Management is
responsible for preparing the financial statements and the independent auditors
are responsible for auditing those financial statements. Nor is it the duty of
the Audit Committee to insure the adequacy of internal controls, to conduct
investigations or to resolve disagreements, if any, between management and the
independent auditors, or to assure compliance with laws and regulations.
The Audit Committee
Cynthia A. Archer
Mary Junck
George L. Bunting, Jr., Chair
Morton B. Plant
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors, acting upon the recommendation of the Audit
Committee, has appointed PricewaterhouseCoopers LLP, certified public
accountants, as the principal auditors for Mercshares for 2002. The
stockholders are asked to ratify that appointment.
A representative of PricewaterhouseCoopers LLP is expected to be present at
the Annual Meeting of Stockholders, with the opportunity to make a statement if
the representative desires to do so, and will respond to appropriate questions
from stockholders.
If the stockholders do not ratify the appointment of PricewaterhouseCoopers
LLP, other independent certified public accountants will be selected by the
Board upon recommendation of the Audit Committee.
The Board of Directors recommends a vote FOR the proposal to ratify the
appointment of PricewaterhouseCoopers LLP as independent certified public
accountants to audit the financial statements of Mercshares for 2002.
22
Accountants' Fees
The following table sets forth the aggregate fees billed to Mercshares for
the year ended December 31, 2001, by PricewaterhouseCoopers LLP:
Audit Fees...................... $ 237,350
Financial Information Systems
Design and Implementation Fees --
All Other Fees (1).............. $ 366,392
---------
$603,742.
=========
--------
(1) Includes fees for tax consulting, certain audit related services and other
non-audit services. The Audit Committee has considered whether the
provision of these services is compatible with maintaining the independence
of the accountants.
VOTING AND PROCEDURAL INFORMATION
The election of Directors requires a plurality of votes cast at the meeting.
The ratification of the appointment of PricewaterhouseCoopers LLP as the
independent certified public accountants and the approval of the Amended and
Restated Annual Incentive Compensation Plan each requires the affirmative vote
of a majority of the votes cast at the meeting.
The following principles of Maryland law apply to the voting of shares of
Common Stock at the meeting. The presence in person or by proxy of stockholders
entitled to vote a majority of the outstanding shares of Common Stock will
constitute a quorum. Shares represented by proxy or in person at the meeting,
including shares represented by proxies that reflect abstentions, will be
counted as present in the determination of a quorum. An abstention as to any
particular matter, however, does not constitute a vote "for" or "against" and
will be disregarded in calculating the votes cast as to such matter. "Broker
non-votes" (i.e., where a broker or nominee submits a proxy specifically
indicating the lack of discretionary authority to vote on a matter) will be
treated in the same manner as abstentions.
The Bylaws of Mercshares provide that no business shall be conducted at a
special meeting of stockholders except that stated in the notice of meeting and
that any stockholder proposing to bring business, including any nomination for
election of a Director, before a meeting of stockholders must give prior
written notice thereof. The notice requirements apply to any annual meeting and
to any special meeting as to which the notice of meeting provides for the
election of Directors. The notice must be given to and received by the
Secretary of Mercshares (at the address set forth in the notice of meeting
accompanying this proxy statement) no earlier than 90 days (or, with respect to
notice of a proposal for inclusion in the Mercshares' proxy materials pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934, the earlier date such
proposal is received pursuant to Rule 14a-8) and no later than 60 days prior to
the date of the meeting. If less than 70 days' prior public disclosure of the
meeting date is made by Mercshares, any notice of business by a stockholder
must be received by the Secretary on or before the 10th day following the date
of such public disclosure.
Article Xll of the Bylaws provides that the Bylaws may be added to, altered,
amended, repealed or suspended by a majority vote of the entire Board of
Directors at any regular meeting of the Board or at any special meeting called
for that purpose. Article XII further provides that any action of the Board of
Directors in adding to, altering, amending, repealing, or suspending the Bylaws
must be reported to the stockholders and may be changed or rescinded at the
next annual meeting by holders of the stock then outstanding and entitled to
vote, by a majority vote of all the stock then outstanding and entitled to
vote. If the action to be proposed by a stockholder at an annual meeting is to
change or rescind action by the Board of Directors to add to, alter, amend,
repeal or suspend the Bylaws under Article XII, the notice of business by the
23
stockholder must be received by the Secretary no earlier than the time
prescribed above for stockholder notices and not after the later of the 10th
day following public disclosure by Mercshares of the action of the Board of
Directors or the 60th day prior to the meeting date.
Public disclosure of a meeting date or action by Mercshares may be made by
any general mailing to stockholders of record, by any filing with the
Securities and Exchange Commission, or by public announcement or by other means
reasonably calculated to constitute public disclosure.
Each notice by a stockholder must provide the name and address of the
stockholder and the number of shares of Common Stock which are beneficially
owned by the stockholder. For matters other than proposals to nominate any
person for election as a Director, the notice must include a brief description
of the business desired to be brought before the meeting and any material
interest of the stockholder in such business. With respect to any stockholder
proposal to nominate any person for election as a Director, in order for the
nomination to be considered by the Nominating Committee, the notice must
include (i) the name, age, business address and residence address of the
nominee, (ii) the nominee's principal occupation or employment, (iii) the
number of shares of Common Stock of Mercshares which are beneficially owned by
the nominee, and (iv) any other information relating to the nominee that is
required to be disclosed in solicitations for proxies for election of directors
pursuant to the proxy regulations under the Securities Exchange Act of 1934.
Public disclosure of the date of the 2002 Annual Meeting was given in the
Report on Form 10-Q filed by Mercshares with the Securities and Exchange
Commission on November 9, 2001, and also was mailed to stockholders on February
7, 2002, in the Quarterly Report to stockholders for the period ended December
31, 2001. There were no notices of business proposed by stockholders for the
Annual Meeting. Accordingly, no such proposals will be entertained at the
Annual Meeting.
STOCKHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
The Bylaws specify that the prior notice requirements described above are in
addition to any other applicable requirements. Certain other requirements are
described below.
Any proposals of stockholders to be presented for inclusion in Mercshares
proxy materials for the 2003 Annual Meeting of Stockholders must be received by
the Secretary of Mercshares at Two Hopkins Plaza, Baltimore, Maryland 21201 on
or before November 22, 2002. Such proposals are subject to and must be made in
accordance with Rule 14a-8 under the Securities Exchange Act of 1934.
Rule 14a-4(c) under the Securities Exchange Act of 1934 would permit
Mercshares to exercise discretionary proxy voting authority on any stockholder
proposal made outside the process of Rule 14a-8 at the 2003 Annual Meeting
unless the stockholder submits a notice of such proposal in compliance with
Rule 14a-4(c). Mercshares believes that the Rule would require such a notice to
be received by February 5, 2003.
ANNUAL REPORT OF MERCSHARES
Copies of the Annual Report of Mercshares, for the year ended December 31,
2001, were mailed on or about March 22, 2002, to those persons who were record
holders of stock of Mercshares on March 15, 2002, the record date referred to
above.
OTHER MATTERS
Management knows of no other matters which will be presented at the Annual
Meeting. However, if any other matter requires a vote, it is intended that the
persons named in the enclosed proxy will have discretion to vote the shares
represented thereby pursuant to Rule 14a-4(c) under the Securities Exchange Act
of 1934.
24
Mercshares will bear the cost of solicitation of proxies and may reimburse
persons holding stock in their names, or in the names of their nominees, or
otherwise, for reasonable expenses incurred in sending proxies and proxy
solicitation materials to their principals. In addition to the solicitation of
proxies by mail, proxies may also be solicited personally, or by telephone, or
telegram, by the officers and employees of Mercshares, without additional
compensation to them.
Mercshares has retained the firm of The Altman Group to assist in the
solicitation activities referred to above for a fee of $5,500 plus expenses.
ANY STOCKHOLDER EXECUTING THE ENCLOSED PROXY MAY REVOKE SUCH PROXY AT ANY
TIME BEFORE IT IS EXERCISED.
ALAN D. YARBRO
General Counsel and Secretary
March 22, 2002
25
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APPENDIX A
MERCANTILE BANKSHARES CORPORATION AND AFFILIATES
ANNUAL INCENTIVE COMPENSATION PLAN
(As Amended and Restated)
1. GENERAL
This Annual Incentive Compensation Plan (the "Plan") is intended as an
incentive to increase the profitability of Mercantile Bankshares Corporation
(the "Corporation") and its Affiliates, as defined in Section 3, by providing
an opportunity for certain key executive employees, whose efforts are deemed to
have a direct impact on the earnings of the Corporation or its Affiliates, (the
"Participants") designated by the Compensation Committee (the "Committee") of
the Corporation's Board of Directors to earn incentive payments for outstanding
achievement and performance and thereby to participate in the overall
profitability of the Corporation. Participants may be classified as Class I,
Class II or Class III Participants ("Class of Participants") depending upon and
in recognition of their varying corporate responsibilities. It is intended that
the Plan encourage these key executive employees to attain pre-established
goals by providing recognition and awards in the form of cash and, if certain
conditions are met, restricted stock. The Plan is intended to be the principal,
but not exclusive, mechanism for bonus incentives for key executive employees,
and certain executive employees may be excluded from the Plan.
Those chosen as Participants shall be eligible to receive a maximum
Incentive Award, as defined in Section 5, in an amount not to exceed the
maximum percent of Salary shown below.
Class I Participants 100%
Class II Participants 60%
Class III Participants 40%
The Committee may from time to time designate certain Participants,
regardless of Class, whose Incentive Awards shall be based solely on the Annual
Rate of Growth of Earnings Per Share of the Corporation. As to other
Participants, the Committee may designate a specified percentage of the
Incentive Award to be based on the Annual Rate of Growth of Earnings Per Share
of the Corporation ("EPS Component") and another specified percentage of the
Incentive Award to be based on the Annual Rate of Growth of Net Operating
Income of the particular Affiliate employing the Participant, or the division
of the Affiliate to which the Participant is assigned ("NOI Component"), or the
Committee may designate Participants whose Incentive Awards shall be based
solely on the NOI Component.
2. ADMINISTRATION
The Plan shall be administered by the Committee as it shall, from time to
time, be constituted. In addition to its duties as described in this Plan, the
Committee shall interpret the Plan, may prescribe, amend and rescind rules and
regulations relating to the Plan and shall make all other determinations
necessary or advisable for the administration of the Plan. The interpretation
and construction by the Committee of any provision of the Plan, or award made
under the Plan, and any decision or action made or taken by it in connection
with the Plan shall be conclusive and binding. The Committee may, at the
expense of the Corporation, retain counsel to advise it. No member of the Board
of Directors or the Committee shall be liable for any action or determination
made in good faith, or upon the advice of counsel, with respect to the Plan or
any award made under the Plan.
3. AFFILIATES
"Affiliates" are those corporations or other forms of business entities,
more than 50% of the voting interest of which is owned or controlled, directly
or indirectly, from time to time, by the Corporation.
A-1
4. PARTICIPANTS
Eligibility
Individuals eligible to be Participants in the Plan, and to receive
Incentive Awards under the Plan, shall be those key executive employees of the
Corporation and its Affiliates as the Committee, in its sole discretion, shall
select.
A Participant for any calendar year shall be eligible to receive an
Incentive Award for that year. However the Committee may, in its sole
discretion, deny any such Incentive Award or authorize payment of part thereof
to any Participant for any calendar year who is not a full time employee on
December 31 of that calendar year or whose employment terminates for any reason
during that calendar year, or who is granted a leave of absence during that
calendar year.
Selection
The Committee, prior to December 31 of the year preceding each Award Year,
shall make initial selections of those individuals who are to be Participants
in the Plan for that particular Award Year, designate each Participant as a
Class I, Class II or Class III Participant, determine the extent to which each
Participant's Incentive Award will be based on the EPS Component, the NOI
Component, or both, and determine whether any Component of a Participant's
award attributable to Net Operating Income shall be based on the total Net
Operating Income of the Affiliate employing the Participant, or the Net
Operating Income of the particular division of the Affiliate to which the
Participant is assigned. Failing a specific classification, a Participant shall
be deemed to be a Class III Participant. Each Participant shall be notified of
such selection. Such selections, designations and determinations may be added
to or changed in the Committee's sole discretion, at any time prior to March 31
of the Award Year.
5. THE INCENTIVE AWARD
(a) Definitions
For purposes of determining Incentive Awards made under the Plan:
Incentive Award shall mean payments made pursuant to the computation
described in Section 5(b) below.
Award Year shall mean that particular calendar year for which an award may
be made under this Plan.
Earnings Per Share shall mean the dollar amount of the consolidated basic
earnings per share of the Corporation's common stock, or such other measure
of earnings per share as the Committee may determine in the event of changes
in the calculation of earnings per share under generally accepted accounting
principles or requirements of the Securities and Exchange Commission.
Net Operating Income shall mean the dollar amount of the net after tax
operating income of each Affiliate or one or more divisions of an Affiliate,
as the Committee shall determine, and calculated without giving effect to
any accruals for incentive compensation which may be payable under the Plan.
Preceding Year Earnings Per Share shall mean the Earnings Per Share for the
year preceding the Award Year, to be stated in the Corporation's Annual
Report to Stockholders for the Award Year, which may be adjusted, as
necessary, from time to time, to reflect mergers, acquisitions, sales, stock
dividends, or other corporate changes affecting earnings per share.
A-2
Preceding Year Net Operating Income shall mean the Net Operating Income for
the year preceding the Award Year, as reported to the Board of Directors of
the Corporation, or otherwise published, which may be adjusted, as
necessary, from time to time, to reflect mergers, acquisitions, sales, stock
dividends, intercorporate and intracorporate transfers of operations or
operating divisions, or other corporate changes.
Award Year Earnings Per Share shall mean the Earnings Per Share for the
Award Year.
Award Year Net Operating Income shall mean the Net Operating Income for the
Award Year.
Annual Rate of Growth shall be the percent determined by calculating the
annual rate of growth between: (1) the Preceding Year Earnings Per Share and
the Award Year Earnings Per Share and (2) the Preceding Year Net Operating
Income and the Award Year Net Operating Income, as the case may be.
Salary shall mean the Participant's annual base rate of pay in effect on the
last day of the Award Year.
(b) Computation
The Committee, prior to March 1 following each Award Year, shall compute the
Annual Rate of Growth of both Award Year Earnings Per Share, and Award Year Net
Operating Income for each Affiliate, or division of an Affiliate, that employs
a Participant.
With respect to any potential Incentive Award or Component thereof based on
the Annual Rate of Growth of Award Year Earnings Per Share, if such Annual Rate
of Growth shall not equal or exceed 3.00%, no award based on Award Year
Earnings Per Share shall be made. If such Annual Rate of Growth shall equal or
exceed 12.00%, then the maximum potential award or Component thereof based on
Award Year Earnings Per Share shall be earned. If such Annual Rate of Growth
shall fall between 3.00% and 12.00%, then the applicable award or Component
thereof will be the percentage of Salary obtained by: (i) determining the
amount by which the Annual Rate of Growth (expressed as a percentage) exceeds
2.0%; (ii) multiplying the result by 10; and (iii) applying such percentage to
the maximum potential award or Component thereof which could be earned by the
Participant based upon his or her Class.
With respect to any potential Incentive Award or Component thereof based on
the Annual Rate of Growth of Award Year Net Operating Income, the calculation
set forth above, using the percentages set forth above, shall be applied to
determine the extent of any award or portion thereof based on Net Operating
Income of an Affiliate or division of an Affiliate.
Percentages used in the calculations set forth above shall be rounded to two
decimal points, except that the determination of whether the minimum 3.00%
Annual Rate of Growth test is met shall be made without rounding.
No Participant shall be entitled to receive in total Incentive Awards more
than the percent of Salary applicable to the Class of that Participant as shown
in Section 1 for any one calendar year, nor shall any Participant receive an
Incentive Award in excess of $1,500,000 for any one calendar year.
(c) Notification of Award
The Committee, prior to the March 1 following each Award Year shall
determine, based on the above computation, whether any Participant shall be
entitled to an Incentive Award under the Plan and shall make such award. The
Committee shall then notify all Participants of the results of its
determination and shall advise each Affiliate employing a Participant of the
amount to be paid that Participant.
A-3
6. PAYMENT
(a) Payment of Incentive Awards made under this Plan shall be paid promptly
upon receipt of the notice described in Section 5 by each Affiliate with
respect to Participants employed by that Affiliate.
(b) Payment of any Incentive Award due a Participant who dies prior to
receipt of the payment of that award shall be made to the person, estate,
trust, organization or other entity designated by the Participant to receive
benefits under the Corporation's or any Affiliate's Group Life Insurance Policy
unless another Beneficiary is designated by the Participant. In the absence of
any Beneficiary so designated, the estate of the Participant shall be the
Beneficiary.
(c) Payments of Incentive Awards shall be made in cash, except that the
Committee may in its sole discretion pay a portion of an Incentive Award in
restricted shares of Common Stock of the Corporation ("Restricted Stock") to
the extent of the amount (the "monetary amount") by which the total amount of
the award exceeds 70.00% of a Participant's maximum potential Incentive Award
for an Award Year. The number of shares of Restricted Stock to be so issued
shall be determined by dividing the monetary amount by the fair market value
per share of the Common Stock (on the date the Award is made by the Committee),
and the consideration deemed to be received by the Corporation for the
Restricted Stock shall be equal to the monetary amount. Any such Restricted
Stock shall be issued pursuant to and subject to the terms and limitations of
the Corporation's 1999 Omnibus Stock Plan (as amended from time to time, or
such other Plan as shall have been approved by the stockholders of the
Corporation) and the fair market value of the Restricted Stock on the date of
the Award shall be determined in accordance with such Plan.
7. COMMITTEE REPORTS
The Committee shall file with the Board of Directors of the Corporation, and
each Affiliate employing a Participant, on or before April 1 of each calendar
year, a report which shall set forth the total Incentive Awards paid under the
Plan for the prior year together with the basis for the computation of those
awards.
8. REVOCATION OR REDUCTION OF SELECTION OR AWARD
Any Incentive Award made by the Committee, or the selection of a Participant
by the Committee, may be revoked or, in the case of an Incentive Award, reduced
by the Committee at any time if such Participant's employment by the
Corporation, or an Affiliate, is terminated because of dishonesty, fraud,
embezzlement, conviction of a felony, or for any other reason as determined in
the sole discretion of the Committee.
9. ASSIGNMENT
A Participant's rights and interests under this Plan may not be assigned,
transferred, pledged or hypothecated and are not subject to attachment,
garnishment, execution or any other creditor's processes and, to the extent
permitted by law, the Corporation and any Affiliate shall not be bound by any
attempted assignment, alienation or creditor's process and shall be entitled to
make any payment under the Plan directly to a Participant or Beneficiary.
10. EMPLOYMENT MATTERS
Nothing contained in this Plan, nor any selection or award made pursuant to
this Plan shall confer upon any Participant any rights to continue in the
employ of the Corporation or any Affiliate or to interfere in any way with the
right of the Corporation or any Affiliate to reduce a Participant's
compensation at any time and all Participants shall remain subject to
discharge, or compensation reduction, the same as if this Plan had not been
adopted. Nothing contained in this Plan shall preclude the Corporation or any
Affiliate from providing for any additional compensation or benefits to Plan
Participants under other plans, contracts or arrangements.
A-4
11. AMENDMENT OR TERMINATION
This Plan may be amended or terminated at any time by action of the Board of
Directors of the Corporation and notice of such action shall be given promptly
to the Boards of Directors of the Affiliates.
12. EFFECTIVENESS
This Plan was adopted by the Board of Directors on March 12, 2002, to be
effective for the year 2002, subject to approval by the stockholders of the
Corporation.
****************
A-5
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MERCANTILE BANKSHARES CORPORATION
YOUR PROXY CARD IS ATTACHED BELOW.
PLEASE READ THE ENCLOSED PROXY STATEMENT,
THEN MARK, DATE, SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT.
THANK YOU.
. DETACH PROXY CARD HERE .
--------------------------------------------------------------------------------
Sign, Date, and Return the
[_] Proxy Card Promptly Using [X]
the Enclosed Envelope. Votes MUST be indicated
(X) in Dark or Blue Ink.
The Board of Directors recommends a vote FOR Proposals 1, 2 and 3.
1. Election of Directors FOR AGAINST ABSTAIN
FOR all nominees [_] WITHHOLD AUTHORITY [_] EXCEPTIONS [_] 2. Approval of Amended and Restated [_] [_] [_]
listed below for all nominees Annual Incentive Compensation Plan.
listed below
Nominees: H. Baldwin, F. Hrabowski, W. Mathai-Davis, D. Shepard, C. Rose. 3. Ratification of appointment of
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, PricewaterhouseCoopers LLP as the
mark the "Exceptions" box and mark a line through that nominee's name.) Independent certified public
accountants for Mercshares. [_] [_] [_]
4. Upon such other matters as may properly come before
the meeting.
To change your address, please mark this box. [_]
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S C A N L I N E
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Borrower(s) should follow exactly the name(s) on the mark
certificate. As co-owner's should sign, Executors and
Administrators may sign as such. Attorneys-in-fact should
sign both names. Witness the hand and seal of the
undersigned.
Date Share Owner sign here Co-Owner sign here
----------------------------------- ---------------------------
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MERCANTILE BANKSHARES CORPORATION
PROXY
This Proxy is Solicited on behalf of the Board of Directors
The undersigned hereby appoints H. Furtong Baldwin and Alan D. Yarbro,
and each of them, the proxies of the undersigned, with several powers of
substitution, to act and vote at the Annual Meeting of Stockholders of
Mercantile Bankshares Corporation, Two Hopkins Plaza, Baltimore, MD 21201 to be
held on Wednesday, April 24, 2002, at 10:30 a.m., and at any and all
adjournments thereof.
The shares represented by this Proxy will be voted as directed or, if
directions are not indicated, will be voted for the election of Directors, the
approval of the Amended and Restated Annual Incentive Compensation Plan, and for
ratification of the appointment of auditors. If a Director or nominee is unable
to serve, the within Proxy may be voted for a substitute nominee.
Receipt of notice of the meeting and Proxy Statement is hereby
acknowledged, and the terms of the notice and statement are hereby incorporated
by reference into this Proxy. The undersigned hereby revokes all proxies
heretofore given for said meeting and any adjournment thereof.
(Continued, and to be signed and dated, on reverse side.)
MERCANTILE BANKSHARES CORPORATION
P.O. BOX 11023
NEW YORK, N.Y. 10203-0023
MERCANTILE BANKSHARES CORPORATION
Two Hopkins Plaza
Baltimore, Maryland 21201
To The Stockholders:
AN IMPORTANT REMINDER. . .
The Annual Meeting of Stockholders of Mercantile Bankshares Corporation will be
held on April 24, 2002.
Unless you return a proxy card, or attend the meeting and vote in person, your
shares will not be voted at this meeting. If your proxy is in the mail, thank
you for responding. If not, would you please take the time now to complete and
mail the enclosed duplicate proxy card. A postage-paid envelope has been
provided for your convenience.
YOUR VOTE IS IMPORTANT!
PLEASE ACT IMMEDIATELY!