Decisions on Bank Applications

Farmers & Merchants Bank - Eastern Shore

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Farmers & Merchants Bank - Eastern Shore Onley, Accomack County, Virginia

Application for Consent to Purchase Certain Assets and to Assume Certain Liabilities and for Consent to Establish Two Branches

ORDER AND BASIS FOR CORPORATION APPROVAL

Pursuant to section 18(c) and other provisions of the Federal Deposit Insurance Act ("FDI Act"), Farmers & Merchants Bank - Eastern Shore, Onley, Accomack County, Virginia ("Farmers"), an insured state nonmember bank with total resources of $185,591,000 and total deposits of $147,539,000 as of March 31, 1999, has filed an application for the Corporation's consent to purchase certain assets of and assume certain liabilities of the Oak Hill, Virginia, and Parksley, Virginia, branches of Wachovia Bank, National Association, Winston-Salem, North Carolina ("Wachovia"), a national bank and Bank Insurance Fund ("BIF") member with total assets of $61,879,030,000 and total deposits of $41,134,296,000 as of March 31, 1999, and for the Corporation's consent to establish the two branches as branches of Farmers. Farmers is a banking affiliate of Peninsula Bank, Princess Anne, Maryland ("Peninsula Bank"). Both Farmers and Peninsula Bank ("the affiliates") are banking subsidiaries of Mercantile Bankshares Corporation, Baltimore, Maryland ("Mercantile"). Notice of the proposed transaction, in a form approved by the Corporation, has been published pursuant to the FDI Act.

Competitive Factors

As of June 30, 1998, eleven (ten commercial banks and one thrift) insured depository institutions operated 36 offices in the "Peninsula Area" on Virginia and Maryland's Eastern Shore, which has been identified as the relevant geographic market ("RMG"). The affiliates hold the largest share of area deposits, with 30.4 percent. Of the remaining banks, Crestar Bank, Richmond, Virginia (a subsidiary of Suntrust Banks, Inc.), holds 13.4 percent; Shore Bank, Onley, Virginia, and First Virginia Bank of Tidewater, Norfolk, Virginia, hold 12.7 and 12.6 percent, respectively; and Wachovia's two branches, its only presence in the area, hold an aggregate of 10.2 percent of area deposits. The other four banks and one thrift each hold deposits ranging from 0.3 percent to 6.1 percent or an aggregate of 20.7 percent. As a result of the merger, the affiliates' share of total area deposits would increase to 40.6 percent, and the Herfindahl-Hirschman index would increase by 619.6 points, from 1635.0 to 2254.6.

Although the proposed transaction would increase concentration within the RGM, there are other factors that should be considered when assessing its effect on competitive conditions. Eight insured commercial banks (the affiliates are considered one entity for competitive purposes) and one insured thrift would continue to operate in this largely rural RGM after the merger. Of these, Suntrust Banks, Inc., First Maryland Bancorp, and Bank of America Corporation are among the largest commercial banking organizations in Virginia and Maryland. Moreover, Suntrust Banks Inc. and Bank of America Corporation are among the largest banking companies in the country and First Maryland Bancorp ranks in the top fifty. The market share data, which reflects the presence of these institutions only in the form of small branch offices, understates their competitive significance in the RGM. Taking into account the single thrift institution in the RGM, there would still be nine insured depository institutions providing conveniently located alternative sources of banking services for residents throughout the RGM. The lending activity of the Wachovia branches in the RGM, particularly in the area of commercial loans, has been quite limited. In contrast, Farmers historically invests a large percentage of deposits in loans and offers a wide array of loan products for consumers and businesses.

In its advisory report on competitive effects, the U.S. Department of Justice concluded that the proposed transaction would not have a significantly adverse effect on competition. The Federal Reserve Bank of Richmond's Competitive Effects report concluded that the proposed transaction could have significantly anti-competitive effects, but advised that it did not consider all of the economic factors that may be relevant to the competitive effects of the proposed transaction. Other federal regulatory authorities offered no comments.

Prudential Factors

Farmers is in sound financial condition with adequate capital and satisfactory management. Future prospects appear favorable.

Convenience and Needs Factor

An insured depository institution that was a competing bidder filed a protest with the Corporation claiming that the transaction would harm competition in the RGM. However, the Corporation has determined that the continued existence, after the merger of nine insured depository institutions that are all viable and financially sound provides sufficient competitive financial choices within the community.

The protestant also raised concerns related to the Community Reinvestment Act, indicating that the transaction would result in substantial reductions in banking services and competitive pricing options. Farmers offers a wide array of competitively priced products to businesses and consumers within the RGM. Farmers has historically invested a large portion of total deposits in loans, demonstrating Farmers' commitment to reinvest deposits into communities from which it derives deposits. Farmers' CRA performance was rated as "satisfactory" at the most recent examination. For the reasons cited above and due to sufficient remaining alternative sources of financial services, the Corporation has determined that the transaction will not reduce banking services or competitive pricing options in the RGM.

The Commissioner of Financial Institutions for the Commonwealth of Virginia ("State Authority") has not yet taken action on the proposed merger. Approval by the Corporation will be contingent upon final approval from all required regulatory authorities.

The scope and convenience of banking services offered to the general public should not be significantly affected by the proposal. Farmers will provide no lesser amount of services than is currently offered by Wachovia, and Farmers has no plans at this time to close either of the acquired branches.

Upon consideration of all relevant material, the Board of Directors has concluded that the application should be and hereby is approved subject to the following conditions:

1. That the transaction shall not be consummated before th fifteenth calendar day following the date of this Order or no later than six months after the date of this Order unless such period is extended for good cause by the Corporation;

2. That all necessary and final approvals be received from other regulatory authorities; and

3. That, until the proposed transaction becomes effective, the Corporation shall have the right to alter, suspend, or withdraw its approval should any interim development be deemed by the Board of Directors to warrant such action.

Dated at Washington, D.C., this 10th day of August 1999.

BY ORDER OF THE BOARD OF DIRECTORS

James D. LaPierre
Deputy Executive Secretary