UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission File Number 0-5127
------------------------------
MERCANTILE BANKSHARES CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0898572
--------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Hopkins Plaza, Baltimore, Maryland 21201
------------------------------ ------------
(Address of principal executive offices) (Zip code)
(410) 237-5900
------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of October 31, 1996, registrant had outstanding 47,384,827 shares of Common
Stock.
PAGE 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MERCANTILE BANKSHARES CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, December 31,
(Dollars in thousands, except per share data) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 261,396 $ 247,301
Interest-bearing deposits in other banks......................................... 100 100
Investment securities:
U.S. Treasury and government agencies
Available-for-sale at fair value........................................... 1,575,134 1,535,418
States and political subdivisions
Held-to-maturity--market value of $14,509 (1996) and $15,353 (1995)........ 14,517 15,233
Available-for-sale at fair value........................................... 36 45
Other investments
Held-to-maturity--market value of $5,740 (1996) and $5,359 (1995).......... 5,734 5,352
Available-for-sale at fair value........................................... 15,744 16,206
------------- -------------
Total investment securities.............................................. 1,611,165 1,572,254
------------- -------------
Federal funds sold............................................................... 2,682 26,081
Securities purchased under resale agreements..................................... 49,982
Loans............................................................................ 4,509,484 4,301,270
Less: allowance for loan losses.................................................. (96,288) (91,398)
------------- -------------
Loans, net............................................................... 4,413,196 4,209,872
------------- -------------
Bank premises and equipment, less accumulated depreciation of
$82,335 (1996) and $77,742 (1995).............................................. 79,750 78,363
Other real estate owned, net..................................................... 4,034 2,858
Excess cost over equity in affiliated banks, net................................. 28,747 30,251
Other assets..................................................................... 145,561 132,041
------------- -------------
Total assets............................................................. $6,546,631 $6,349,103
============= =============
LIABILITIES
Deposits:
Noninterest-bearing deposits................................................. $1,093,777 $ 983,021
Interest-bearing deposits.................................................... 4,228,123 4,186,360
------------- -------------
Total deposits........................................................... 5,321,900 5,169,381
Short-term borrowings............................................................ 290,948 281,642
Accrued expenses and other liabilities........................................... 70,474 78,631
Long-term debt................................................................... 49,402 25,623
------------- -------------
Total liabilities........................................................ 5,732,724 5,555,277
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 2,000,000 shares; issued and
outstanding--None
Common stock, $2 par value; authorized 67,000,000 shares;
issued 47,379,968 shares in 1996 and 48,272,451 shares in 1995................. 94,760 96,545
Capital surplus.................................................................. 45,748 66,107
Retained earnings................................................................ 673,180 620,391
Unrealized gains (losses) on securities, net..................................... 219 10,783
------------- -------------
Total stockholders' equity............................................... 813,907 793,826
------------- -------------
Total liabilities and stockholders' equity........................... $6,546,631 $6,349,103
============= =============
See notes to consolidated financial statements
</TABLE>
PAGE 2
MERCANTILE BANKSHARES CORPORATION
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
For the 9 Months Ended For the 3 Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................... $298,633 $282,137 $101,719 $ 95,709
------------ ------------ ----------- -----------
Interest and dividends on investment securities:
Taxable interest income............................ 67,745 60,018 23,253 19,856
Tax-exempt interest income......................... 536 486 176 160
Dividends.......................................... 456 336 146 113
Other investment income............................ 436 156 145 38
------------ ------------ ----------- -----------
69,173 60,996 23,720 20,167
------------ ------------ ----------- -----------
Other interest income................................ 3,367 2,278 928 1,957
------------ ------------ ----------- -----------
Total interest income........................ 371,173 345,411 126,367 117,833
------------ ------------ ----------- -----------
INTEREST EXPENSE
Interest on deposits................................. 127,856 119,340 43,003 42,090
Interest on short-term borrowings.................... 10,540 11,611 3,656 3,180
Interest on long-term debt........................... 1,783 1,400 823 410
------------ ------------ ----------- -----------
Total interest expense....................... 140,179 132,351 47,482 45,680
------------ ------------ ----------- -----------
NET INTEREST INCOME.................................. 230,994 213,060 78,885 72,153
Provision for loan losses............................ 10,862 5,098 4,188 2,123
------------ ------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.. 220,132 207,962 74,697 70,030
------------ ------------ ----------- -----------
NONINTEREST INCOME
Trust division services.............................. 34,105 32,601 11,094 11,053
Rental income........................................ 6,866 6,697 2,253 2,174
Service charges on deposit accounts.................. 12,021 11,758 4,093 3,927
Other fees........................................... 18,324 15,235 7,091 5,408
Investment securities gains and (losses)............. 74 (1,833) 9
Other income......................................... 744 765 179 373
------------ ------------ ----------- -----------
Total noninterest income..................... 72,134 65,223 24,710 22,944
------------ ------------ ----------- -----------
NONINTEREST EXPENSES
Salaries............................................. 73,139 69,984 24,259 23,145
Employee benefits.................................... 17,364 18,420 5,810 5,935
Occupancy expense of bank premises................... 14,109 13,565 4,784 4,747
Furniture and equipment expenses..................... 13,016 11,444 3,942 3,376
Communications and supplies.......................... 7,869 7,205 2,725 2,400
FDIC insurance premium expense....................... 156 5,743 42 272
Other expenses....................................... 27,471 22,424 10,141 9,468
------------ ------------ ----------- -----------
Total noninterest expenses................... 153,124 148,785 51,703 49,343
------------ ------------ ----------- -----------
Income before income taxes........................... 139,142 124,400 47,704 43,631
Applicable income taxes.............................. 52,100 46,908 17,697 16,461
------------ ------------ ----------- -----------
NET INCOME........................................... $ 87,042 $ 77,492 $ 30,007 $ 27,170
============ ============ =========== ===========
NET INCOME PER SHARE OF COMMON STOCK(2).............. $1.82 $1.63 $.63 $.58
============ ============ =========== ===========
See notes to consolidated financial statements
</TABLE>
PAGE 3
MERCANTILE BANKSHARES CORPORATION
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS
<CAPTION>
For the 9 Months Ended
Increase (decrease) in cash and cash equivalents September 30,
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees on loans............................................................. $297,875 $280,447
Interest and dividends on investment securities........................................ 66,781 60,027
Other interest income.................................................................. 3,205 2,153
Noninterest income..................................................................... 69,587 67,910
Interest paid.......................................................................... (141,428) (128,008)
Noninterest expenses paid.............................................................. (135,603) (132,488)
Income taxes paid...................................................................... (57,006) (47,619)
------------ ------------
Net cash provided by operating activities...................................... 103,411 102,422
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-to-maturity..................... 575 138,934
Proceeds from sales of investment securities available-for-sale........................ 65,081 71,721
Proceeds from maturities of investment securities available-for-sale................... 430,835 209,028
Purchases of investment securities held-to-maturity.................................... (382) (38,935)
Purchases of investment securities available-for-sale.................................. (551,690) (225,542)
Net increase in customer loans......................................................... (229,204) (193,622)
Capital expenditures................................................................... (7,431) (6,455)
Proceeds from sales of other real estate owned......................................... 2,418 8,439
------------ ------------
Net cash provided by (used in) investing activities............................ (289,798) (36,432)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits................................ 110,756 (35,010)
Net decrease in NOW and savings accounts............................................... (17,230) (157,382)
Net increase in certificates of deposit................................................ 58,993 382,714
Net increase (decrease) in short-term borrowings....................................... 9,306 (107,741)
Proceeds from issuance of long-term debt............................................... 25,000
Repayment of long-term debt............................................................ (1,221) (5,694)
Proceeds from issuance of shares....................................................... 4,328 3,298
Repurchase of common shares............................................................ (28,578) (28,493)
Dividends paid......................................................................... (34,253) (29,919)
------------ ------------
Net cash provided by financing activities...................................... 127,101 21,773
------------ ------------
Net increase (decrease) in cash and cash equivalents................................... (59,286) 87,763
Cash and cash equivalents at beginning of period....................................... 323,464 257,146
------------ ------------
Cash and cash equivalents at end of period............................................. $264,178 $344,909
============ ============
For the 9 Months Ended
Reconciliation of net income to net cash provided by operating activities September 30,
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Net income............................................................................. $ 87,042 $ 77,492
------------ ------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 6,044 5,802
Provision for loan losses............................................................ 10,862 5,098
Write-down of other real estate owned................................................ 124 1,370
Investment securities (gains) and losses............................................. (74) 1,833
Amortization of excess cost over equity in affiliates................................ 1,504 848
Increase in interest receivable...................................................... (3,312) (2,784)
(Increase) decrease in other receivables............................................. (2,473) 854
Decrease in other assets............................................................. 3,565 2,067
Increase (decrease) in interest payable.............................................. (1,249) 4,343
Increase in accrued expenses......................................................... 6,284 6,210
Decrease in taxes payable............................................................ (4,906) (711)
------------ ------------
Total adjustments.............................................................. 16,369 24,930
------------ ------------
Net cash provided by operating activities.............................................. $103,411 $102,422
============ ============
See notes to consolidated financial statements
</TABLE>
PAGE 4
MERCANTILE BANKSHARES CORPORATION
<TABLE>
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Unrealized
Gains
Common Capital Retained (Losses) on
(Dollars in thousands, except per share data) Stock Surplus Earnings Securities
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994................................ $96,228 $22,988 $606,972 $(2,271)
Net income................................................ 77,492
Cash dividends paid:
Common stock ($.63 per share)........................... (29,919)
Issuance of 90,308 shares for dividend
reinvestment and stock purchase plan.................... 181 1,888
Issuance of 30,395 shares under exercise of stock
appreciation rights..................................... 61 678
Issuance of 19,132 shares for employee stock
purchase dividend reinvestment plan..................... 38 394
Issuance of 2,700 shares for employee stock option plan... 5 53
Purchase of 1,219,064 shares under stock repurchase plan.. (2,438) (26,055)
Transfer to capital surplus............................... 50,000 (50,000)
Change in unrealized gains (losses) on securities......... 4,895
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995............................... $94,075 $49,946 $604,545 $ 2,624
============ =========== =========== ===========
BALANCE, DECEMBER 31, 1995................................ $96,545 $66,107 $620,391 $10,783
Net income................................................ 87,042
Cash dividends paid:
Common stock ($.72 per share)........................... (34,253)
Issuance of 112,698 shares for dividend
reinvestment and stock purchase plan.................... 225 2,669
Issuance of 19,450 shares for employee stock
purchase dividend reinvestment plan..................... 39 490
Issuance of 41,412 shares for employee stock option plan.. 83 822
Purchase of 1,066,043 shares under stock repurchase plan.. (2,132) (26,446)
Additional paid-in capital--vested stock options.......... 2,106
Change in unrealized gains (losses) on securities......... (10,564)
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996............................... $94,760 $45,748 $673,180 $ 219
============ =========== =========== ===========
See notes to consolidated financial statements
</TABLE>
PAGE 5
MERCANTILE BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) The statements include the accounts of the Corporation and all of its
affiliates, with all significant intercompany transactions eliminated, and
in the opinion of management, include all adjustments necessary for a fair
presentation of the results for the interim period. All such adjustments
are of a normal recurring nature. In view of the changing conditions in the
national economy, the effect of actions taken by regulatory authorities and
normal seasonal factors, the results for the interim period are not
necessarily indicative of annual performance.
2) Year to date per share amounts are based on the weighted average number of
common shares outstanding during the period of 47,738,396 shares for 1996
and 47,658,146 shares for 1995.
3) Amounts for 1996 include the accounts of The Sparks State Bank, Sparks,
Maryland, which became an affiliate after the close of business on October
31, 1995. The affiliation was accounted for using the purchase method of
accounting.
In October 1996, the Corporation announced its plan of affiliation with
Home Bank, Newark, Maryland, in a tax-free exchange of stock. Shareholders
of Home Bank will receive 2.6 shares of Mercantile stock for each of the
175,947 shares outstanding of Home Bank stock (182,776 shares if certain
Home Bank stock options are exercised) and cash in lieu of any fractional
share. The transaction is subject to approval by regulatory authorities and
the Home Bank shareholders. The results of operations of Home Bank prior to
the affiliation date are not expected to be material to Mercantile's results
of operations.
4) Under the provisions of Statements of Financial Accounting Standards
("SFAS") No. 114 and 118, "Accounting by Creditors for Impairment of a
Loan," a loan is considered impaired, based upon current information and
events, if it is probable that the Corporation will not collect all
principal and interest payments according to the contractual terms of the
loan agreement. Generally, a loan is considered impaired once either
principal or interest payments become 90 days past due at the end of a
calendar quarter. A loan may be considered impaired sooner if, in
management's judgement, such action is warranted. The impairment of a loan
is measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral if the repayment is expected to be provided predominantly by the
underlying collateral. A majority of the Corporation's impaired loans are
measured by reference to the fair value of the collateral. Interest income
on impaired loans is recognized on the cash basis. Information with respect
to impaired loans and the related valuation allowance (if the measure of
the impaired loan is less than the recorded investment) is shown below.
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with a valuation allowance............................................ $ 2,866 $ 4,628
Impaired loans with no valuation allowance........................................... 15,902 13,661
------------- ------------
Total impaired loans............................................................... $ 18,768 $ 18,289
============= ============
Allowance for loan losses applicable to impaired loans............................... $ 1,412 $ 1,907
Allowance for loan losses applicable to other than impaired loans.................... 94,876 89,491
------------- ------------
Total allowance for loan losses.................................................... $ 96,288 $ 91,398
============= ============
Year-to-date interest income on impaired loans recorded on the cash basis............ $ 638 $ 471
============= ============
Year-to-date average recorded investment in impaired loans during the period......... $ 19,600 $ 23,300
============= ============
Quarter-to-date interest income on impaired loans recorded on the cash basis......... $ 198 $ 190
============= ============
Quarter-to-date average recorded investment in impaired loans during the period...... $ 19,200 $ 18,500
============= ============
</TABLE>
NOTE: Impaired loans do not include large groups of smaller balance
homogeneous loans that are evaluated collectively for impairment (e.g.
residential mortgages and consumer installment loans). The allowance for loan
losses related to these loans is included in the allowance for loan losses
applicable to other than impaired loans.
5) Various commitments to extend credit (lines of credit) are made in the
normal course of banking business. At September 30, 1996, total unused lines
of credit approximated $1,958,207,800. In addition, letters of credit are
issued for the benefit of customers by affiliated banks. Outstanding letters
of credit were $134,809,400 at September 30, 1996.
PAGE 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MERCANTILE BANKSHARES CORPORATION
EARNINGS SUMMARY
Consolidated net income per share for the third quarter of 1996 was $.63, an
increase of 9% over the $.58 for the comparable period last year. Consolidated
net income was $30,007,000, an increase of 10% over the $27,170,000 for the
third quarter of 1995.
Consolidated net income per share for the nine months ended September 30,
1996 was $1.82, an increase of 12% over the $1.63 for the comparable period
last year. Consolidated net income was $87,042,000, an increase of 12% over
the $77,492,000 for the first nine months of 1995.
Amounts for 1996 include the accounts of The Sparks State Bank, Sparks,
Maryland, which became an affiliate after the close of business on October 31,
1995. The affiliation was accounted for using the purchase method of
accounting.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the three months ended September 30, 1996 was 9%
higher than the amount for the comparable period in 1995 primarily due to an
increase of 8% in average earning assets and the remaining 1% increase due to
improvement in net interest margin. Average total loans increased by 9% over
the third quarter of 1995 to $4,459,200,000.
Net interest income for the nine months ended September 30, 1996 was 8%
higher than the amount for the comparable period in 1995 almost exclusively
due to an increase of 8% in average earning assets. Average loans increased by
8% over the first nine months of 1995 to $4,381,500,000 for the first nine
months of 1996.
NONINTEREST INCOME
Total noninterest income for the quarter ended September 30, 1996 increased
8% to $24,710,000 from $22,944,000 for the third quarter of 1995. Contributing
to this increase were higher mortgage banking revenues and other fees.
For the first nine months of 1996, total noninterest income increased 11% to
$72,134,000 from $65,223,000 for the first nine months of 1995. Factors
contributing to this increase include $74,000 in gains on investment
securities during the first nine months of 1996 compared to $1,833,000 in
losses on securities in 1995, a 5% increase in trust division revenues and
higher mortgage banking revenues and other fees.
NONINTEREST EXPENSES
Total noninterest expenses, excluding the provision for loan losses, for the
third quarter of 1996 increased 5% from the comparable period in 1995.
Increases in salaries, furniture and equipment expenses, communications and
supplies, and other expenses, were partially offset by a reduction in FDIC
insurance premiums paid and to lower expenses related to employee benefits.
Total noninterest expenses, excluding the provision for loan losses, for the
first nine months of 1996 increased 3% from the comparable period in 1995.
Increases in salaries, furniture and equipment expenses, communications and
supplies, occupancy expense of bank premises, and other expenses, were largely
offset by a reduction in FDIC insurance premiums paid and lower expenses
related to employee benefits. Other expenses for the first nine months of 1995
reflect a net recovery of $1,940,000 of expenses related to foreclosed
property when the property was sold during the second quarter of 1995.
ANALYSIS OF FINANCIAL CONDITION
Investment securities increased 2% to $1,611,165,000 at September 30, 1996
from $1,572,254,000 at December 31, 1995. Total loans outstanding increased 5%
to $4,509,484,000 at September 30, 1996 from $4,301,270,000 at December 31,
1995.
Total deposits increased 3% to $5,321,900,000 at September 30, 1996 from
$5,169,381,000 at December 31, 1995. Noninterest-bearing deposits increased
11% to $1,093,777,000, or 21% of total deposits at September 30, 1996 compared
to $983,021,000, or 19% of total deposits at December 31, 1995 while interest-
bearing deposits increased 1% to $4,228,123,000, but declined to 79% of total
deposits at September 30, 1996 compared to $4,186,360,000, or 81% of total
deposits at December 31, 1995. The growth in interest-bearing deposit accounts
is primarily due to an increase in time deposits.
An increase of $23,779,000 in long-term debt reflects the issuance of
$25,000,000 in 6.94% senior notes during the second quarter of 1996 and the
amortization of principal on pre-existing debt. The proceeds of the new notes
are to be used for general corporate purposes.
Total stockholders' equity increased 3%. The increase from net income for
the nine months ended September 30, 1996 was largely offset by dividends paid,
share repurchases, and the change in unrealized gains on investment
securities. However, exceptional capital strength is still maintained as
evidenced by the ratio of stockholders' equity to total assets, which stood at
12.4% at September 30, 1996 and 12.5% at December 31, 1995.
For more details see the Statement of Changes in Consolidated Stockholders'
Equity on page 5.
ASSET QUALITY
Non-Performing Assets
Non-performing assets consist of non-accrual loans, renegotiated loans and
other real estate owned (i.e., real estate acquired in foreclosure or in lieu
of foreclosure). With respect to non-accrual loans, the Corporation's policy
is that, regardless of the value of the underlying collateral and/or
guarantees, no interest is accrued on the entire balance once either principal
or interest payments on any loan become 90 days past due at the end of a
calendar quarter. All accrued and uncollected interest on such loans is
eliminated from the income statement and is recognized only as collected. A
loan may be put on non-accrual status sooner than this standard if, in
management's judgment, such action is warranted. During the nine months ended
September 30, 1996, non-performing assets increased $5,163,000 to $29,256,000.
Other real estate owned, one of the components of non-performing assets,
increased $1,176,000 while non-performing loans, the other component,
increased $3,987,000.
PAGE 7
<TABLE>
<CAPTION>
Non-Performing Assets SEPTEMBER 30, December 31,
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans (1)................................................................... $25,222 $21,235
Renegotiated loans (1).................................................................. NONE NONE
Loans contractually past due 90 days or more and still accruing interest................ NONE NONE
------------ ------------
Total non-performing loans.......................................................... 25,222 21,235
Other real estate owned................................................................. 4,034 2,858
============ ============
Total non-performing assets......................................................... $ 29,256 $24,093
============ ============
</TABLE>
1) Total interest on these loans is not considered to be material in any of
the periods reported herein. Aggregate gross interest income of $1,782,000
and $1,946,000 for the first nine months of 1996 and the year 1995,
respectively, on non-accrual and renegotiated loans, would have been
recorded if these loans had been accruing on their original terms
throughout the period or since origination if held for part of the period.
The amount of interest income on the non-accrual and renegotiated loans
that was recorded totalled $804,000 and $1,086,000 for the first nine
months of 1996 and the year 1995, respectively.
NOTE: As of September 30, 1996, the Corporation was monitoring loans estimated
to aggregate $4,869,000 not currently classified as non-accrual or
renegotiated loans. These loans have characteristics which indicate they may
result in such classification in the future.
Provision and Allowance for Loan Losses
Each Mercantile Bankshares Corporation (MBC) affiliate is required to maintain
an adequate allowance for loan losses and their boards of directors, along
with MBC management, maintain a regular overview to assure that adequacy. On a
periodic basis, significant credit exposures, non-accrual loans, impaired
loans, other non-performing assets and various statistical measurements of
asset quality are examined to assure the adequacy of the allowance for loan
losses.
The following table presents a summary of the activity in the Allowance for
Loan Losses.
<TABLE>
<CAPTION>
For the 9 Months Ended For the 3 Months Ended
Allowance for Loan Losses September 30, September 30,
(Dollars in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance balance--beginning.................... $ 91,398 $ 91,257 $ 97,290 $ 89,547
Charge-offs:
Commercial, financial and agricultural........ (6,004) (6,681) (4,664) (2,900)
Real estate--construction..................... (66) (1,125) (11) (1,016)
Real estate--mortgage......................... (458) (1,396) (200) (347)
Consumer...................................... (2,584) (1,472) (945) (587)
------------ ------------ ------------ ------------
Totals...................................... (9,112) (10,674) (5,820) (4,850)
------------ ------------ ------------ ------------
Recoveries:
Commercial, financial and agricultural........ 1,339 617 260 156
Real estate--construction..................... 4 50 22
Real estate--mortgage......................... 865 192 59 73
Consumer...................................... 932 695 311 164
------------ ------------ ------------ ------------
Totals...................................... 3,140 1,554 630 415
------------ ------------ ------------ ------------
Net charge-offs................................. (5,972) (9,120) (5,190) (4,435)
Provision for loan losses....................... 10,862 5,098 4,188 2,123
------------ ------------ ------------ ------------
Allowance balance--ending....................... $ 96,288 $ 87,235 $ 96,288 $ 87,235
============ ============ ============ ============
Average loans outstanding during period......... $4,381,500 $4,042,300 $4,459,200 $4,080,100
============ ============ ============ ============
Net charge-offs (annualized) as a percentage of
average loans outstanding during period....... .18% .30% .46% .43%
============ ============ ============ ============
Allowance for loan losses at period end as a
percentage of average loans................... 2.2 % 2.2 % 2.2 % 2.1 %
============ ============ ============ ============
Allowance for loan losses at period end as a
percentage of non-performing loans at period
end........................................... 381.8 % 392.7 %
============ ============
</TABLE>
Charge-Offs
Intensive collection efforts continue after charge-off in order to maximize
the recovery of amounts previously charged off. Net charge-offs were
$5,972,000 for the first three quarters of 1996 versus $9,120,000 during the
first nine months of 1995. For further details of charge-offs and recoveries
see the preceding Allowance For Loan Losses table.
PAGE 8
MERCANTILE BANKSHARES CORPORATION
<TABLE>
ANALYSIS OF INTEREST RATES AND INTEREST DIFFERENTIALS
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense and annualized yields earned and rates
paid through the first nine months of the year.
<CAPTION>
1996 1995
-------------------------------------- --------------------------------
Average Income*/ Yield*/ Average Income*/ Yield*/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Loans:
Commercial....................................... $1,431,900 $ 99,603 9.3% $1,333,300 $ 96,610 9.7%
Mortgage and construction........................ 2,458,900 167,537 9.1 2,221,300 153,803 9.3
Consumer......................................... 490,700 34,280 9.3 487,700 34,426 9.4
----------- ----------- ----------- ----------
Total loans.................................. 4,381,500 301,420 9.2 4,042,300 284,839 9.4
----------- ----------- ----------- ----------
Federal funds sold................................. 77,000 3,036 5.3 42,700 1,820 5.7
Securities purchased under resale agreements....... 7,000 325 6.2 11,300 455 5.4
Securities:
Taxable securities
U.S. Treasury securities....................... 1,543,600 66,994 5.8 1,461,700 59,024 5.4
U.S. Agency securities......................... 18,600 751 5.4 25,200 994 5.3
Other stocks and bonds......................... 16,500 968 7.8 8,500 553 8.7
Tax-exempt securities
States and political subdivisions.............. 14,900 846 7.6 13,200 768 7.8
----------- ----------- ----------- ----------
Total securities............................. 1,593,600 69,559 5.8 1,508,600 61,339 5.4
----------- ----------- ----------- ----------
Interest-bearing deposits in other banks........... 200 6 4.7 100 3 4.0
----------- ----------- ----------- ----------
Total earning assets......................... 6,059,300 374,346 8.3 5,605,000 348,456 8.3
----------- ----------
Cash and due from banks.............................. 211,600 195,800
Bank premises and equipment, net..................... 79,600 75,200
Other assets......................................... 151,700 140,500
Less: allowance for loan losses...................... (96,100) (91,800)
----------- -----------
Total assets................................. $6,406,100 $5,924,700
=========== ===========
Interest-bearing liabilities
Deposits:
Savings deposits................................. $2,218,400 43,695 2.6 $2,198,800 48,985 3.0
Time deposits.................................... 2,013,700 84,161 5.6 1,717,600 70,355 5.5
----------- ----------- ----------- ----------
Total interest-bearing deposits.............. 4,232,100 127,856 4.0 3,916,400 119,340 4.1
Short-term borrowings.............................. 287,600 10,540 4.9 284,600 11,611 5.5
Long-term debt..................................... 36,300 1,783 6.6 28,600 1,400 6.5
----------- ----------- ----------- ----------
Total interest-bearing funds................. 4,556,000 140,179 4.1 4,229,600 132,351 4.2
----------- ----------
Noninterest-bearing deposits......................... 971,500 881,900
Other liabilities and accrued expenses............... 74,700 68,600
----------- -----------
Total liabilities............................ 5,602,200 5,180,100
Stockholders' equity................................. 803,900 744,600
----------- -----------
Total liabilities and stockholders' equity... $6,406,100 $5,924,700
=========== ===========
Net interest income.................................. $234,167 $216,105
=========== ==========
Net interest rate spread............................. 4.2% 4.1%
Effect of noninterest-bearing funds.................. 1.0 1.0
-------- -------
Net interest margin on earning assets................ 5.2% 5.1%
======== =======
Taxable-equivalent adjustment included in:
Loan income...................................... $ 2,787 $ 2,702
Investment securities income..................... 386 343
----------- ----------
Total........................................ $ 3,173 $ 3,045
=========== ==========
*Presented on a tax equivalent basis using the statutory federal corporate
income tax rate of 35%.
</TABLE>
PAGE 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
Exhibit 10 V--Agreement, dated July 12, 1996, between
Mercantile-Safe Deposit and Trust Company, Brian B. Topping
and Mercantile Bankshares Corporation.
Exhibit 10 W--Sixth Amendment, dated July 12, 1996, to Deferred
Compensation Agreement between Mercantile-Safe Deposit and
Trust Company and Brian B. Topping.
Exhibit 27--Financial Data Schedule
(b) No Forms 8-K filed.
PAGE 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCANTILE BANKSHARES CORPORATION
November 13, 1996 /s/ H. Furlong Baldwin
By: H. Furlong Baldwin
Chairman of the Board and
Chief Executive Officer
November 13, 1996 /s/ Jerry F. Graham
By: Jerry F. Graham
Vice President and Controller
PAGE 11
AGREEMENT
---------
This agreement (the "Agreement") made as of the 12th day of
July, 1996, is between MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
("Merc-Safe"), a corporation with its principal place of business
at 2 Hopkins Plaza, P. O. Box 2257, Baltimore, Maryland 21203, and
BRIAN B. TOPPING, an individual residing at 215 Paddington Road,
Baltimore, Maryland 21212. MERCANTILE BANKSHARES CORPORATION
("Mercshares"), a corporation with its principal place of business
at 2 Hopkins Plaza, Baltimore, Maryland 21201, joins in this
Agreement as to certain agreements to which it is a party. This
Agreement governs certain matters with respect to Mr. Topping's
anticipated retirement and the provision of services by Mr.
Topping to Merc-Safe thereafter, which services are mutually
agreed to be of substantial value.
1. Retirement. Mr. Topping is currently a member of the
Board of Directors and a Vice President of Mercshares and is Vice
Chairman of the Board of Directors and an executive officer of
Merc-Safe. Effective November 1, 1996 (or earlier at the request
of Merc-Safe), Mr. Topping's line management responsibilities will
cease but his other duties shall continue without change in
compensation or benefits. On December 31, 1996, Mr. Topping will
cease his service as a director of Mercshares and will retire as
an officer and employee of Mercshares and Merc-Safe ceasing to be
eligible for benefits available to active employees, and becoming
eligible for all retirement and supplemental retirement benefits
under the applicable agreements with and retirement benefits of
Mercshares and Merc-Safe. Mr. Topping's Deferred Compensation
Agreement made as of September 30, 1982, as subsequently amended,
will be further amended by a Sixth Amendment executed
simultaneously with this Agreement. On December 31, 1996, Mr.
Topping's Executive Employment Agreement dated March 13, 1984 (as
subsequently amended) and his Executive Severance Agreement dated
December 31, 1989, with Mercshares and Merc-Safe, shall terminate.
2. Service on Board of Merc-Safe. From and after January
1, 1997, Mr. Topping will, for such period of time prior to
December 31, 2001 as Merc-Safe shall request, serve as a non-
employee Director and as a non-employee Vice Chairman of the Board
of Merc-Safe.
3. Retention as Consultant. For a five-year period
commencing January 1, 1997 and ending December 31, 2001, Merc-Safe
hereby retains Mr. Topping as a consultant ("Consultant") and
Consultant hereby agrees to provide the consulting services
described in this Agreement.
4. Services to be Provided. In addition to his service as
a Director of Merc-Safe and in his capacity as Vice Chairman of
the Board, Consultant shall, with respect to Merc-Safe's Trust
Division, consult in the formulation of investment policies and
security selection, assist in facilitation of client service,
attend reasonable numbers of client and prospective client
presentations and provide guidance and assistance to portfolio
managers of certain accounts (the "Accounts"). The initially
selected Accounts are listed in Appendix A, which is part of this
Agreement. Such services are expected to include, at Merc-
Page 1
Safe's request, attendance at meetings of the Investment Policy and
Strategy Committee, the Equity Research Council and MSD&T Funds,
Inc. The precise scope of these services shall be as determined
by mutual agreement of Consultant and Merc-Safe from time to time.
In view of the proprietary interest of Merc-Safe and
considerations of confidentiality, such services shall be
conducted exclusively for Merc-Safe, but nothing herein contained
shall preclude Consultant from engaging in other business
activities or from attending to personal affairs and those of his
family. Consultant will make himself available to devote such
time as shall be appropriate to provide the services described
above, it being agreed, however, that the services need not be
provided on a full-time basis and further agreed that Consultant
shall have reasonable latitude for other activities and vacation
time.
5. Compensation and Related Matters. The fee for services
which the Consultant shall perform hereunder shall be One Hundred
Twenty-Five Thousand Dollars ($125,000) per year, payable in
monthly installments, continuing throughout the five-year term of
this Agreement, notwithstanding Consultant's disability or death.
In the case of death, payments shall be made to one or more
beneficiaries designated by Consultant in writing from time to
time or, failing such designations, to his estate.
Consultant will be furnished with suitable office facilities
and secretarial services and will be reimbursed for reasonable
expenses incurred in providing his services, but Consultant will
not be required to provide the services on the premises of Merc-
Safe except when necessary for attendance at meetings.
6. Stock Options. The Option Agreement between Consultant
and Mercshares dated August 23, 1995 will be amended, as to any of
Consultant's stock options which would have first become
exercisable on March 14, 1997 if Consultant were employed by Merc-
Safe on that date, to provide that such options will be
exercisable as if December 31, 1996 were Consultant's normal
retirement date instead of an early retirement date.
7. Independent Contractor. In rendering services
hereunder, the Consultant shall be a self-employed professional
person who is acting solely as a Director and independent
contractor and not as an agent, employee or partner of Merc-Safe
for any purpose. The Consultant shall have no authority to bind
Merc-Safe in any contractual manner, nor to represent to others
that the relationship between Merc-Safe and the Consultant is
other than as a Director or Vice Chairman of the Board of Merc-
Safe or as otherwise stated herein. The Consultant shall control
the conduct and means of performing the services required under
this Agreement. Accordingly, it is recognized by the parties that
there will be no withholding by Merc-Safe, and the Consultant
shall be responsible for payment of all taxes arising out of the
activities of the Consultant, unless and to the extent such
withholding is required under any existing or future tax law with
respect to payments to independent contractors.
Page 2
8. Indemnification of Consultant. Merc-Safe agrees that
the Consultant shall be indemnified as a Director of Merc-Safe to
the same extent as other Directors, and with respect to his
consulting services, shall have no liability for any business
decisions, actions, policies and practices of Merc-Safe, and
agrees to indemnify and hold the Consultant harmless from and
against any claim by any third party with regard to Merc-Safe's
decisions, actions, policies or practices.
9. Termination of Agreement. Merc-Safe shall have the
right to terminate this Agreement if Consultant shall commit
uncured material illegal acts or uncured material breaches of his
duties as a Director or of this Agreement, provided, that if
Merc-Safe believes Consultant has committed such acts or breaches
it shall provide written notice thereof to Consultant and shall
provide thirty (30) days after delivery of such notice for
Consultant to cure such specified acts or breaches.
Consultant may terminate this Agreement by written notice to
Merc-Safe if Merc-Safe commits uncured material breaches of this
Agreement, provided that if Consultant believes such a material
breach has been committed, he shall provide written notice thereof
to Merc-Safe and provide thirty (30) days after delivery of such
notice to cure the breach. Such a termination by Consultant shall
not affect his right to receive the payments provided for in
Section 5 of this Agreement.
This agreement may also be terminated by mutual written
consent of Merc-Safe and the Consultant.
10. Miscellaneous.
(a) This Agreement constitutes the entire agreement
between the parties with respect to the services provided for
herein, and does not affect Consultant's entitlement to
compensation or benefits for services performed prior to the date
of this Agreement or provided pursuant to any other agreement
between or among the parties. This Agreement may not be amended
or any provision hereof waived except for a document signed by all
parties hereto.
(b) This Agreement is made in and shall be governed by
and construed in accordance with the laws of the State of
Maryland, excluding principles of conflicts of law.
(c) Any notice given under this Agreement shall be
deemed given when delivered in person or by registered or
certified mail, postage prepaid, return receipt requested, or by
other delivery service providing evidence of receipt to the party
to whom such notice is to be given, at the addresses stated at the
beginning of this Agreement or at such other address as either
party shall hereafter designate to the other in writing.
(d) This Agreement shall become effective upon its
approval by the Compensation Committee of Mercshares, the
Committee on Executive Compensation, Promotion and Retirement of
Merc-Safe and by the Board of Directors of Merc-Safe (which
approval may be by the Trust Executive and Banking Executive
Committees of the Board of Directors of Merc-Safe), and shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
Page 3
To evidence their agreement to the terms stated in this
Agreement, the parties hereto have signed this Agreement or caused
it to be signed by their duly authorized representatives as of the
day and year stated at the beginning of this Agreement.
ATTEST: MERCANTILE-SAFE DEPOSIT
AND TRUST COMPANY
/s/ ALAN D. YARBRO By: /s/ H. FURLONG BALDWIN
ALAN D. YARBRO H. FURLONG BALDWIN
Secretary Chairman and Chief
Executive Officer
WITNESS:
/s/ ALAN D. YARBRO /s/ BRIAN B. TOPPING
BRIAN B. TOPPING
ATTEST: MERCANTILE BANKSHARES CORPORATION
/s/ ALAN D. YARBRO By: /s/ H. FURLONG BALDWIN
ALAN D. YARBRO H. FURLONG BALDWIN
Secretary Chairman and Chief
Executive Officer
Page 4
Date of Approval of Compensation Date of Approval of Committee
Committee of Mercantile Bankshares on Executive Compensation,
Corporation Promotion and Retirement of
Mercantile-Safe Deposit and
Trust Company
July 17, 1996 July 17, 1996
/s/ Alan D. Yarbro /s/ Alan D. Yarbro
Alan D. Yarbro, Secretary Alan D. Yarbro, Secretary
Effective Date of Agreement per approval of the Trust Executive
and Banking Executive Committees of the Board of Directors of
Mercantile-Safe Deposit and Trust Company
July 24, 1996
/s/ Alan D. Yarbro
Alan D. Yarbro, Secretary
Page 5
SIXTH AMENDMENT
TO
DEFERRED COMPENSATION AGREEMENT
This SIXTH Amendment to the Deferred Compensation Agreement is executed
as of July 12, 1996, by and between Mercantile-Safe Deposit and Trust Company
(hereinafter called "Corporation") and Brian B. Topping (hereinafter called
"Employee").
WHEREAS, Corporation and Employee entered into a Deferred Compensation
Agreement dated September 30, 1982, and a First Amendment thereto dated October
24, 1983, and a Second Amendment thereto dated March 13, 1984, and a Third
Amendment thereto dated January 1, 1987, and a Fourth Amendment thereto dated
December 8, 1987, and a Fifth Amendment thereto dated January 1, 1989
(hereinafter referred to as the "Agreement"); and
WHEREAS, Employee will retire as an employee of the Corporation
effective December 31, 1996, and the Corporation desires to promote and
enhance Employee's early retirement, recognizing that under an Agreement
executed simultaneously herewith Employee's relationship with the Corporation
will be substantially changed, and in consideration thereof the parties desire
to modify Section 5 of the Agreement, to provide a stipulated benefit;
NOW THEREFORE, in accordance with and for the consideration recited
above, the Corporation and Employee hereby agree as follows:
1. Section 5 is hereby amended as of the effective date of this
Amendment to read as follows:
5. Employee's retirement from employment by the
Corporation on December 31, 1996 shall, for purposes
of this Agreement, be treated as a normal retirement
with the following benefit:
Minimum
Employee's Age Annual Term for which
at Retirement Benefit Benefit is Payable
62 $175,700 18 years.
The annual benefit shall be payable until the later
of (i) Employee's death or (ii) expiration of the
minimum term set forth above. The benefit shall be
Page 1
payable in equal monthly installments commencing
within one (1) month after Employee's retirement.
2. This Amendment shall become effective upon Employee's
retirement at December 31, 1996, after approval by the Committee on Executive
Compensation, Promotion and Retirement of the Corporation and by the Board of
Directors of the Corporation (which approval may be by the Trust Executive and
Banking Executive Committees of the Board of Directors of the Corporation).
3. In all other respects, the provisions of the Agreement remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this SIXTH
Amendment to the Agreement as of the day and year first above written.
ATTEST: MERCANTILE-SAFE DEPOSIT
AND TRUST COMPANY
/s/ ALAN D. YARBRO By: /s/ H. FURLONG BALDWIN
ALAN D. YARBRO H. FURLONG BALDWIN
Secretary Chairman and Chief Executive Officer
WITNESS: EMPLOYEE:
/s/ ALAN D. YARBRO By: /s/ BRIAN B. TOPPING
BRIAN B. TOPPING
Date of Approval of Committee Effective Date of Agreement per
on Executive Compensation, Approval of the Trust Executive
Promotion and Retirement of and Banking Executive
Mercantile-Safe Deposit and Committees of the Board of
Trust Company Directors of Mercantile-Safe
Deposit and Trust Company
July 17, 1996 July 24, 1996
/s/ Alan D. Yarbro /s/ Alan D. Yarbro
Alan D. Yarbro Alan D. Yarbro
Secretary Secretary
Page 2
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MERCANTILE BANKSHARES CORPORATION SEPTEMBER 30, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 261,396,000
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 2,682,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,590,914,000
<INVESTMENTS-CARRYING> 20,251,000
<INVESTMENTS-MARKET> 20,249,000
<LOANS> 4,509,484,000
<ALLOWANCE> 96,288,000
<TOTAL-ASSETS> 6,546,631,000
<DEPOSITS> 5,321,900,000
<SHORT-TERM> 290,948,000
<LIABILITIES-OTHER> 70,474,000
<LONG-TERM> 49,402,000
0
0
<COMMON> 94,760,000
<OTHER-SE> 719,147,000
<TOTAL-LIABILITIES-AND-EQUITY> 6,546,631,000
<INTEREST-LOAN> 298,633,000
<INTEREST-INVEST> 69,173,000
<INTEREST-OTHER> 3,367,000
<INTEREST-TOTAL> 371,173,000
<INTEREST-DEPOSIT> 127,856,000
<INTEREST-EXPENSE> 140,179,000
<INTEREST-INCOME-NET> 230,994,000
<LOAN-LOSSES> 10,862,000
<SECURITIES-GAINS> 74,000
<EXPENSE-OTHER> 153,124,000
<INCOME-PRETAX> 139,142,000
<INCOME-PRE-EXTRAORDINARY> 139,142,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,042,000
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 5.2
<LOANS-NON> 25,222,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,869,000
<ALLOWANCE-OPEN> 91,398,000
<CHARGE-OFFS> 9,112,000
<RECOVERIES> 3,140,000
<ALLOWANCE-CLOSE> 96,288,000
<ALLOWANCE-DOMESTIC> 96,288,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
