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, 1997
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, 1997, registrant had outstanding 71,822,467 shares of Common
Stock.
Page 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
SEPTEMBER 30, December 31,
(Dollars in thousands, except per share data) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 221,584 $ 257,337
Interest-bearing deposits in other banks......................................... 100 100
Investment securities:
U.S. Treasury and government agencies
Available-for-sale at fair value........................................... 1,577,900 1,581,517
States and political subdivisions
Held-to-maturity--market value of $12,333 (1997) and $13,642 (1996)........ 12,285 13,551
Available-for-sale at fair value........................................... 756 36
Other investments
Held-to-maturity--market value of $13,230 (1997) and $12,734 (1996)........ 13,230 12,728
Available-for-sale at fair value........................................... 16,135 15,134
------------- -------------
Total investment securities.............................................. 1,620,306 1,622,966
------------- -------------
Federal funds sold............................................................... 99,428 27,942
Loans............................................................................ 4,979,503 4,582,712
Less: allowance for loan losses.................................................. (106,259) (97,718)
------------- -------------
Loans, net............................................................... 4,873,244 4,484,994
------------- -------------
Bank premises and equipment, less accumulated depreciation of
$84,023 (1997) and $83,383 (1996).............................................. 81,546 80,738
Other real estate owned, net..................................................... 2,734 3,316
Excess cost over equity in affiliated banks, net................................. 36,903 28,276
Other assets..................................................................... 137,086 137,012
------------- -------------
Total assets............................................................. $7,072,931 $6,642,681
============= =============
LIABILITIES
Deposits:
Noninterest-bearing deposits................................................. $1,151,317 $1,090,347
Interest-bearing deposits.................................................... 4,485,342 4,249,308
------------- -------------
Total deposits........................................................... 5,636,659 5,339,655
Short-term borrowings............................................................ 378,635 336,655
Accrued expenses and other liabilities........................................... 94,938 80,940
Long-term debt................................................................... 50,024 49,395
------------- -------------
Total liabilities........................................................ 6,160,256 5,806,645
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 2,000,000 shares; issued and
outstanding--None
Common stock, $2 par value; authorized 130,000,000 shares;
issued 71,818,723 shares in 1997 and 47,435,322 shares in 1996................. 143,637 94,872
Capital surplus.................................................................. 60,600 97,154
Retained earnings................................................................ 699,626 641,212
Unrealized gains (losses) on securities, net of taxes............................ 8,812 2,798
------------- -------------
Total stockholders' equity............................................... 912,675 836,036
------------- -------------
Total liabilities and stockholders' equity........................... $7,072,931 $6,642,681
============= =============
</TABLE>
See notes to consolidated financial statements
Page 2
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
For the 9 Months Ended For the 3 Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................... $321,954 $298,633 $111,811 $101,719
------------ ------------ ----------- -----------
Interest and dividends on investment securities:
Taxable interest income............................ 69,445 67,745 23,234 23,253
Tax-exempt interest income......................... 493 536 170 176
Dividends.......................................... 813 456 307 146
Other investment income............................ 332 436 100 145
------------ ------------ ----------- -----------
71,083 69,173 23,811 23,720
------------ ------------ ----------- -----------
Other interest income................................ 2,242 3,367 1,338 928
------------ ------------ ----------- -----------
Total interest income........................ 395,279 371,173 136,960 126,367
------------ ------------ ----------- -----------
INTEREST EXPENSE
Interest on deposits................................. 130,593 127,856 45,797 43,003
Interest on short-term borrowings.................... 12,372 10,540 4,718 3,656
Interest on long-term debt........................... 2,498 1,783 830 823
------------ ------------ ----------- -----------
Total interest expense....................... 145,463 140,179 51,345 47,482
------------ ------------ ----------- -----------
NET INTEREST INCOME.................................. 249,816 230,994 85,615 78,885
Provision for loan losses............................ 9,943 10,862 3,518 4,188
------------ ------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.. 239,873 220,132 82,097 74,697
------------ ------------ ----------- -----------
NONINTEREST INCOME
Trust division services.............................. 38,317 34,105 13,511 11,094
Service charges on deposit accounts.................. 12,522 12,021 4,336 4,093
Other fees........................................... 19,501 18,324 7,400 7,091
Investment securities gains and (losses)............. (1,491) 74 8
Other income......................................... 4,291 2,243 866 622
------------ ------------ ----------- -----------
Total noninterest income..................... 73,140 66,767 26,121 22,900
------------ ------------ ----------- -----------
NONINTEREST EXPENSES
Salaries............................................. 76,946 73,139 25,876 24,259
Employee benefits.................................... 16,803 17,364 5,366 5,810
Net occupancy expense of bank premises............... 8,670 8,742 3,109 2,974
Furniture and equipment expenses..................... 13,337 13,016 4,727 3,942
Communications and supplies.......................... 8,713 7,869 2,986 2,725
FDIC insurance premium expense....................... 483 156 169 42
Other expenses....................................... 31,030 27,471 11,063 10,141
------------ ------------ ----------- -----------
Total noninterest expenses................... 155,982 147,757 53,296 49,893
------------ ------------ ----------- -----------
Income before income taxes........................... 157,031 139,142 54,922 47,704
Applicable income taxes.............................. 57,708 52,100 20,158 17,697
------------ ------------ ----------- -----------
NET INCOME........................................... $ 99,323 $ 87,042 $ 34,764 $ 30,007
============ ============ =========== ===========
NET INCOME PER SHARE OF COMMON STOCK(2).............. $1.39 $1.22 $.48 $.43
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements
Page 3
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
For the 9 Months Ended
Increase (decrease) in cash and cash equivalents September 30,
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees on loans............................................................. $318,712 $297,875
Interest and dividends on investment securities........................................ 69,308 66,781
Other interest income.................................................................. 2,180 3,205
Noninterest income..................................................................... 74,252 63,794
Interest paid.......................................................................... (144,068) (141,428)
Noninterest expenses paid.............................................................. (130,636) (130,236)
Income taxes paid...................................................................... (60,182) (57,006)
------------ ------------
Net cash provided by operating activities...................................... 129,566 102,985
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-to-maturity..................... 2,265 575
Proceeds from maturities of investment securities available-for-sale................... 427,988 430,835
Proceeds from sales of investment securities available-for-sale........................ 33,291 65,081
Purchases of investment securities held-to-maturity.................................... (535) (382)
Purchases of investment securities available-for-sale.................................. (442,763) (551,690)
Net increase in customer loans......................................................... (341,185) (228,778)
Proceeds from sales of other real estate owned......................................... 2,154 2,418
Capital expenditures................................................................... (10,502) (7,431)
Proceeds from sales of buildings....................................................... 6,610
------------ ------------
Net cash provided by (used in) investing activities............................ (322,677) (289,372)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits........................................... 48,068 110,756
Net decrease in checking plus interest and savings accounts............................ (29,238) (17,230)
Net increase in certificates of deposit................................................ 210,386 58,993
Net increase in short-term borrowings.................................................. 42,680 9,306
Proceeds from issuance of long-term debt............................................... 25,000
Repayment of long-term debt............................................................ (71) (1,221)
Proceeds from issuance of shares....................................................... 5,425 4,328
Repurchase of common shares............................................................ (12,295) (28,578)
Dividends paid......................................................................... (40,909) (34,253)
------------ ------------
Net cash provided by financing activities...................................... 224,046 127,101
------------ ------------
Net increase (decrease) in cash and cash equivalents................................... 30,935 (59,286)
Cash and cash equivalents at beginning of period....................................... 285,379 323,464
Adjustment for acquired banks.......................................................... 4,798
------------ ------------
Cash and cash equivalents at end of period............................................. $321,112 $264,178
============ ============
</TABLE>
<TABLE>
For the 9 Months Ended
Reconciliation of net income to net cash provided by operating activities September 30,
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income............................................................................. $ 99,323 $ 87,042
------------ ------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 6,014 6,044
Provision for loan losses............................................................ 9,943 10,862
Amortization of excess cost over equity in affiliates................................ 1,673 1,504
Investment securities (gains) and losses............................................. 1,491 (74)
Write-downs of other real estate owned............................................... 270 124
Gains on sales of other real estate owned............................................ (306) (426)
Gains on sales of buildings.......................................................... (1,382)
Increase in interest receivable...................................................... (5,099) (3,312)
(Increase) decrease in other receivables............................................. 1,309 (2,473)
Decrease in other assets............................................................. 6,341 3,565
Increase (decrease) in interest payable.............................................. 1,395 (1,249)
Increase in accrued expenses......................................................... 11,068 6,284
Decrease in taxes payable............................................................ (2,474) (4,906)
------------ ------------
Total adjustments.............................................................. 30,243 15,943
------------ ------------
Net cash provided by operating activities.............................................. $129,566 $102,985
============ ============
</TABLE>
See notes to consolidated financial statements
Page 4
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
Unrealized
Gains
(Losses) on
Securities,
Common Capital Retained Net of
(Dollars in thousands, except per share data) Stock Surplus Earnings Taxes
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995................................ $96,545 $66,107 $620,391 $10,783
Net income................................................ 87,042
Cash dividends paid:
Common stock ($.48 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)
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
============ =========== =========== ===========
BALANCE, DECEMBER 31, 1996................................ $94,872 $97,154 $641,212 $ 2,798
Net income................................................ 99,323
Cash dividends paid:
Common stock ($.57 per share)........................... (40,909)
Issuance of 91,922 shares for dividend
reinvestment and stock purchase plan.................... 183 2,907
Issuance of 17,177 shares for employee stock
purchase dividend reinvestment plan..................... 34 538
Issuance of 94,645 shares for employee stock option plan.. 189 1,608
Purchase of 394,175 shares under stock repurchase plan.... (788) (11,507)
Issuance of 872,374 shares for bank acquisitions.......... 1,744 16,223
Issuance of 23,701,458 shares for a 3 for 2 stock split... 47,403 (47,437)
Vested stock options...................................... 1,114
Change in unrealized gains (losses) on securities......... 6,014
------------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1997............................... $143,637 $60,600 $699,626 $ 8,812
============ =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
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. Certain previously reported
amounts have been restated to comform to the 1997 presentation.
2) Year to date per share amounts are based on the weighted average number of
common shares outstanding during the period of 71,343,876 shares for 1997
and 71,606,406 shares for 1996.
3) Amounts for the third quarter of 1997 include the accounts of Home Bank,
Newark, Maryland and Farmers Bank of Mardela Springs, Maryland, which
merged into Peninsula Bank, an existing affiliate of the Corporation,
after the close of business on June 30, 1997. These acquisitions were
accounted for using the purchase method of accounting.
4) In June 1997, the Corporation's Board of Directors declared a 3 for 2 stock
split in the form of a stock dividend on its common stock. Average shares
and per share amounts have been adjusted to give effect to the Board
action.
5) 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>
SEPTEMBER 30, December 31,
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with a valuation allowance............................................ $ 7,186 $ 2,649
Impaired loans with no valuation allowance........................................... 20,186 13,128
------------- ------------
Total impaired loans............................................................... $ 27,372 $ 15,777
============= ============
Allowance for loan losses applicable to impaired loans............................... $ 2,713 $ 1,194
Allowance for loan losses applicable to other than impaired loans.................... 103,546 96,524
------------- ------------
Total allowance for loan losses.................................................... $ 106,259 $ 97,718
============= ============
Year-to-date interest income on impaired loans recorded on the cash basis............ $ 840 $ 672
============= ============
Year-to-date average recorded investment in impaired loans during the period......... $ 22,000 $ 19,300
============= ============
Quarter-to-date interest income on impaired loans recorded on the cash basis......... $ 264 $ 34
============= ============
Quarter-to-date average recorded investment in impaired loans during the period...... $ 24,600 $ 18,400
============= ============
</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.
6) Various commitments to extend credit (lines of credit) are made in the
normal course of banking business. At September 30, 1997, total unused
lines of credit approximated $2,287,010,000. In addition, letters of
credit are issued for the benefit of customers by affiliated banks.
Outstanding letters of credit were $139,760,000 at September 30, 1997.
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 1997 was $.48,
an increase of 11.6% over the $.43 for the comparable period last year.
Consolidated net income was $34,764,000, an increase of 15.9% over the
$30,007,000 for the third quarter of 1996.
Consolidated net income per share for the nine months ended September 30,
1997 was $1.39, an increase of 13.9% over the $1.22 for the comparable period
last year. Consolidated net income was $99,323,000, an increase of 14.1% over
the $87,042,000 for the first nine months of 1996.
Amounts for the third quarter of 1997 include the accounts of Home Bank,
Newark, Maryland and Farmers Bank of Mardela Springs, Maryland, which merged
into Peninsula Bank, an existing affiliate of the Corporation, after the close
of business on June 30, 1997. At the acquisition date, Home Bank and Farmers
Bank had assets of $46,993,000 and $29,583,000, respectively. These
acquisitions were not material to the results of operations of the Corporation
and were accounted for using the purchase method of accounting.
In June 1997, the Corporation's Board of Directors declared a 3 for 2 stock
split in the form of a stock dividend on its common stock. Average shares and
per share amounts have been adjusted to give effect to the Board action.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the three months ended September 30, 1997 was 8.5%
higher than the amount for the comparable period in 1996 primarily due to an
increase of 7.7% in average earning assets and a slight increase in net
interest margin on earnings assets. Average total loans increased by 10.9%
over the third quarter of 1996 to $4,943,500,000.
Net interest income for the nine months ended September 30, 1997 was 8.1%
higher than the amount for the comparable period in 1996 due to an increase
of 5.9% in average earning assets and an increase of 2.1%, or 11 basis points,
in net interest margin on earning assets. Average loans increased by 9.1% over
the first three quarters of 1996 to $4,778,500,000 for the first three
quarters of 1997.
NONINTEREST INCOME
Total noninterest income for the quarter ended September 30, 1997 increased
14.1% to $26,121,000 from $22,900,000 for the third quarter of 1996. Factors
contributing to this increase include an increase in trust division revenues
and an increase in other fee income from general bank services and products.
For the first nine months of 1997, total noninterest income increased 9.5%
to $73,140,000 from $66,767,000 for the first three quarters of 1996. Factors
contributing to this increase include an increase in trust division revenues,
an increase in other income primarily due to a gain of $1,175,000 on the sale
of a bank owned building during the first quarter of 1997, and an increase in
other fee income from general bank services and products. These increases were
partially offset by securities losses of $1,491,000 during the first three
quarters of 1997 compared to securities gains of $74,000 in 1996.
NONINTEREST EXPENSES
Total noninterest expenses, excluding the provision for loan losses, for
the third quarter of 1997 increased 6.8% from the comparable period in 1996.
Increases in salaries, furniture and equipment, communications and supplies,
and other expenses, were partially offset by lower expenses related to
employee benefits.
Total noninterest expenses, excluding the provision for loan losses, for
the first three quarters of 1997 increased 5.6% from the comparable period
in 1996. Included in total noninterest expenses are nonrecurring expenses of
$2,250,000 associated with the successful conversion to year 2000 compliant
software during the second quarter of 1997. Increases in salaries,
communications and supplies, furniture and equipment expenses, and other
expenses, were partially offset by lower expenses related to employee
benefits.
ANALYSIS OF FINANCIAL CONDITION
Investment securities decreased slightly to $1,620,306,000 at September 30,
1997 from $1,622,966,000 at December 31, 1996. Total loans outstanding
increased 8.7% to $4,979,503,000 at September 30,1997 from $4,582,712,000 at
December 31, 1996.
Total deposits increased 5.6% to $5,636,659,000 at September 30, 1997 from
$5,339,655,000 at December 31, 1996. Interest-bearing deposits increased 5.6%
to $4,485,342,000 at September 30, 1997, compared to $4,249,308,000 at
December 31, 1996. Interest-bearing deposits represent 79.6% of total deposits
at each of these period ends. The growth in interest-bearing deposit accounts
is due primarily to an increase in time deposits. Noninterest-bearing
deposits also increased 5.6% to $1,151,317,000 as of September 30, 1997,
compared to $1,090,347,000 at December 31, 1996.
Total stockholders' equity increased 9.2% to $912,675,000 at September 30,
1997 from $836,036,000 at December 31, 1996. The increase from net income was
partially offset by dividends paid and by share repurchases. The continued
strong capital position is evidenced by the ratio of stockholders' equity to
total assets of 12.90% at September 30, 1997 compared to 12.59% at December
31, 1996. For more details see the Statement of Changes in Consolidated
Stockholders' Equity on page 5 and Footnote Nos. 3 and 4.
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 judgement, such action is warranted. During the nine months
ended September 30, 1997, non-performing assets increased $10,438,000 to
$34,211,000. Non-performing loans, one of the components of non-performing
assets, increased $11,020,000 while other real estate owned, the other
component, decreased $582,000. The increase in non-performing loans is
primarily attributable to a single commercial loan customer.
Page 7
<TABLE>
Non-Performing Assets SEPTEMBER 30, December 31,
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans (1)................................................................... $31,477 $20,457
Renegotiated loans (1).................................................................. NONE NONE
Loans contractually past due 90 days or more and still accruing interest................ NONE NONE
------- -------
Total non-performing loans.......................................................... 31,477 20,457
Other real estate owned................................................................. 2,734 3,316
------- -------
Total non-performing assets......................................................... $34,211 $23,773
======= =======
</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 $2,273,000
and $1,982,000 for the first nine months of 1997 and the year 1996,
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 $1,144,000 and $875,000 for the first nine
months of 1997 and the year 1996, respectively.
NOTE: The Corporation was monitoring loans estimated to aggregate $2,864,000
at September 30, 1997 and $4,645,000 at December 31, 1996, not classified as
non-accrual or renegotiated loans. These loans have characteristics which
indicated they might 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>
For the 9 Months Ended For the 3 Months Ended
Allowance for Loan Losses September 30, September 30,
(Dollars in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance balance--beginning.................... $ 97,718 $ 91,398 $ 102,127 $ 97,290
Allowance of acquired banks..................... 1,373 1,373
Charge-offs:
Commercial, financial and agricultural........ (1,307) (6,004) (415) (4,664)
Real estate--construction..................... (6) (66) (11)
Real estate--mortgage......................... (483) (349) (337) (162)
Consumer...................................... (2,982) (2,693) (932) (983)
------------ ------------ ------------ ------------
Totals...................................... (4,778) (9,112) (1,684) (5,820)
------------ ------------ ------------ ------------
Recoveries:
Commercial, financial and agricultural........ 433 1,339 245 260
Real estate--construction..................... 11 4 9
Real estate--mortgage......................... 288 856 207 59
Consumer...................................... 1,271 941 464 311
------------ ------------ ------------ ------------
Totals...................................... 2,003 3,140 925 630
------------ ------------ ------------ ------------
Net charge-offs................................. (2,775) (5,972) (759) (5,190)
Provision for loan losses....................... 9,943 10,862 3,518 4,188
------------ ------------ ------------ ------------
Allowance balance--ending....................... $ 106,259 $ 96,288 $ 106,259 $ 96,288
============ ============ ============ ============
Average loans outstanding during period......... $4,778,500 $4,381,500 $4,943,500 $4,459,200
============ ============ ============ ============
Net charge-offs (annualized) as a percentage of
average loans outstanding during period....... .08% .18% .06% .46%
=== === === ===
Allowance for loan losses at period end as a
percentage of average loans................... 2.22% 2.20% 2.15% 2.16%
==== ==== ==== ====
Allowance for loan losses at period end as a
percentage of non-performing loans at period
end........................................... 337.58% 381.76%
====== ======
</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
$2,775,000 for the first nine months of 1997 versus $5,972,000 during the
first nine months of 1996. For further details of charge-offs and recoveries
see the preceding Allowance For Loan Losses table.
Page 8
MERCANTILE BANKSHARES CORPORATION
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.
<TABLE>
1997 1996
-------------------------------------- --------------------------------
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....................................... $1,640,300 $111,663 9.10% $1,431,900 $100,317 9.36%
Real estate...................................... 2,492,400 169,326 9.08 2,325,800 157,541 9.05
Consumer**....................................... 645,800 43,818 9.07 623,800 43,562 9.33
----------- ----------- ----------- ----------
Total loans.................................. 4,778,500 324,807 9.09 4,381,500 301,420 9.19
----------- ----------- ----------- ----------
Federal funds sold................................. 54,400 2,238 5.50 77,000 3,036 5.27
Securities purchased under resale agreements....... 7,000 325 6.20
Securities***:
Taxable securities
U.S. Treasury securities....................... 1,529,300 68,780 6.01 1,543,600 66,994 5.80
U.S. Agency securities......................... 15,900 665 5.57 18,600 751 5.39
Other stocks and bonds......................... 22,900 1,387 8.10 16,500 968 7.82
Tax-exempt securities
States and political subdivisions.............. 13,400 779 7.79 14,900 846 7.58
----------- ----------- ----------- ----------
Total securities............................. 1,581,500 71,611 6.05 1,593,600 69,559 5.83
----------- ----------- ----------- ----------
Interest-bearing deposits in other banks........... 100 4 5.65 200 6 4.65
----------- ----------- ----------- ----------
Total earning assets......................... 6,414,500 398,660 8.31 6,059,300 374,346 8.25
----------- ----------
Cash and due from banks.............................. 195,000 211,600
Bank premises and equipment, net..................... 79,100 79,600
Other assets......................................... 162,200 151,700
Less: allowance for loan losses...................... (101,400) (96,100)
----------- -----------
Total assets................................. $6,749,400 $6,406,100
=========== ===========
Interest-bearing liabilities
Deposits:
Savings deposits................................. $2,199,600 43,174 2.62 $2,218,400 43,695 2.63
Time deposits.................................... 2,141,300 87,419 5.46 2,013,700 84,161 5.58
----------- ----------- ----------- ----------
Total interest-bearing deposits.............. 4,340,900 130,593 4.02 4,232,100 127,856 4.04
Short-term borrowings.............................. 341,600 12,372 4.84 287,600 10,540 4.90
Long-term debt..................................... 49,900 2,498 6.69 36,300 1,783 6.55
----------- ----------- ----------- ----------
Total interest-bearing funds................. 4,732,400 145,463 4.11 4,556,000 140,179 4.11
----------- ----------
Noninterest-bearing deposits......................... 1,055,400 971,500
Other liabilities and accrued expenses............... 86,800 74,700
----------- -----------
Total liabilities............................ 5,874,600 5,602,200
Stockholders' equity................................. 874,800 803,900
----------- -----------
Total liabilities and stockholders' equity... $6,749,400 $6,406,100
=========== ===========
Net interest income.................................. $253,197 $234,167
======== ========
Net interest rate spread............................. 4.20% 4.14%
Effect of noninterest-bearing funds.................. 1.07 1.02
-------- -------
Net interest margin on earning assets................ 5.27% 5.16%
======== =======
Taxable-equivalent adjustment included in:
Loan income...................................... $ 2,853 $ 2,787
Investment securities income..................... 528 386
----------- ----------
Total........................................ $ 3,381 $ 3,173
=========== ==========
</TABLE>
*Presented on a tax equivalent basis using the statutory federal corporate
income tax rate of 35%.
**Includes home equity lines of credit which were previously classified as
real estate loans.
***Balances reported at amortized cost; excludes pretax unrealized gains
(losses) on securities available-for-sale.
Page 9
RECENT FASB PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
was issued in February 1997. This Statement specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS). This
Statement's objective is to simplify the computation of earnings per share
and to make the U.S. standard for computing earnings per share more
compatible with the EPS standards of other countries. This Statement is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. Earlier application is not permitted. After
the effective date, all prior period EPS data presented shall be restated to
conform with the provisions of this Statement. This Statement is not
expected to have a material effect on the computation, presentation or
disclosure of EPS for Mercantile Bankshares Corporation.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, was issued in June 1997. This Statement establishes standards for
disclosing comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity from transactions and other events and circumstances from
nonowner sources. Comprehensive income includes net income which is adjusted
for items such as unrealized gains and losses on certain investment securities
and minimum pension liability adjustments. This Statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information, was issued in June 1997.
This Statement establishes standards for disclosing information about
operating segments in financial statements. Operating segments are
components of a business about which separate financial information is
available that is evaluated by management in deciding how to allocate
resources and in assessing performance. Management has not determined yet
whether additional disclosure will be necessary under the requirements of
SFAS No. 131. For year-end disclosure, this Statement is effective for fiscal
years beginning after December 15, 1997. Interim reporting disclosures would
not be required in the first year of adoption, but would begin the first
quarter immediately after the first year of providing year-end disclosures.
For interim reporting, the preceding year's interim information must be
presented on a comparative basis.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
Exhibit 10 K--Mercantile Bankshares Corporation Omnibus Stock
Plan (As Amended).
Exhibit 10 V--Agreement, dated September 12, 1997 between
Mercantile Bankshares Corporation, Mercantile-Safe Deposit
and Trust Company and Edward K. Dunn, Jr.
Exhibit 27--Financial Data Schedule
(b) Form 8-K filed, dated June 30, 1997, Item 5. Other Events
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 12, 1997 Principal Executive Officer
/s/ H. Furlong Baldwin
By: H. Furlong Baldwin
Chairman of the Board and
Chief Executive Officer
November 12, 1997 Principal Financial Officer
/s/ Terry L. Troupe
By: Terry L. Troupe
Chief Financial Officer
November 12, 1997 Chief Accounting Officer
/s/ Jerry F. Graham
By: Jerry F. Graham
Vice President and Controller
Page 11
EXHIBIT 10-K
MERCANTILE BANKSHARES CORPORATION
OMNIBUS STOCK PLAN
(AS AMENDED)
ARTICLE 1
OMNIBUS STOCK PLAN
For the purposes of this Plan, the definitions set forth in Sections 1.1
through 1.22 shall be applicable.
SECTION 1.1 AFFILIATE. "Affiliate" shall mean: (i) any corporation in
which MBC owns, directly or indirectly, within the meaning of Section424(f) of
the Code, 50% or more of the total combined voting power of all classes of stock
of such corporation on a Grant Date; and (ii) any parent corporation of MBC,
within the meaning of Section424(e) of the Code.
SECTION 1.2 BOARD. "Board" shall mean the Board of Directors of MBC.
SECTION 1.3 CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any regulations issued thereunder.
SECTION 1.4 COMMITTEE. "Committee" shall mean the Committee appointed,
pursuant to Section 3.3 of the Plan, to administer the Plan.
SECTION 1.5 DELIVERY. "Delivery" shall mean the transfer of possession
from MBC to Grantee of certificates for shares of Restricted Stock, at such time
as such shares, in accordance with the provisions of a Restricted Stock
Agreement, are no longer subject to forfeiture.
SECTION 1.6 EXERCISE DATE. "Exercise Date" shall mean the date on which an
Option, SAR, or PSU is exercised, determined in accordance with the provisions
of an Option Agreement, Restricted Stock Agreement, or such rules and
regulations as the Committee may adopt.
SECTION 1.7 FAIR MARKET VALUE. "Fair Market Value" of a share of Stock on
a date shares of Stock are to be valued ("valuation date") in accordance with
the provisions of an Option Agreement or a Restricted Stock Agreement shall
mean: (i) the last reported sale price per share of Stock, regular way, on the
valuation date, or in case no such sale takes place, the average of the closing
bid and asked prices, regular way, on such date, in either case as reported in
the principal consolidated transaction reporting system for securities listed or
admitted to trading on a national securities exchange or included for quotation
on the Nasdaq National Market ("NNM"); or (ii) if the Stock is not so listed or
admitted to trading or included for quotation on the valuation date, the last
quoted price, or if the Stock is not quoted the average of the high bid and low
asked prices, regular way, on such date, in the over-the-counter market, as
reported by the NASD Automated Quotations System, or if such system is no longer
in use, the principal other automated quotation system then in use; or (iii) if
the Stock is not quoted by any such organization, the average of the closing bid
and asked prices, regular way, on the valuation date, as furnished by a
professional market maker making a market in the Stock as selected in good faith
by the Committee; provided, however, that the determination of fair market value
shall be made in good faith in accordance with the Code. If a valuation date is
not a trading day, the determination shall be made as of the next preceding
trading day. "Trading day" shall mean a day on which public trading of
securities occurs and is reported in the principal consolidated reporting system
referred to above, or if the Stock is not listed or admitted to trading on a
national securities exchange or included for quotation on the NNM, any day other
than a Saturday, a Sunday or a day on which banking institutions in the State of
New York are closed.
SECTION 1.8 GRANTEE. "Grantee" shall mean a Key Employee who has been
granted an Option, SAR, PSU, or Restricted Stock pursuant to the provisions of
the Plan.
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<PAGE>
SECTION 1.9 GRANT DATE. "Grant Date" means the date on which the Committee
formally acts to grant an Option, SAR, PSU, or Restricted Stock to a Grantee.
SECTION 1.10 ISO. "ISO" shall mean an option to acquire Stock that is an
incentive stock option as defined in Section422(b) of the Code.
SECTION 1.11 KEY EMPLOYEE. "Key Employee" shall mean any employee of MBC
or an Affiliate whom the Committee determines to be a Key Employee, taking into
account the nature of the services rendered or to be rendered by the particular
employee, the employee's potential contribution to the long-term success of MBC
or an Affiliate, and such other factors as the Committee shall deem relevant.
SECTION 1.12 MBC. "MBC" shall mean Mercantile Bankshares Corporation.
SECTION 1.13 NON-ISO. "Non-ISO" shall mean an option to acquire Stock that
is not an ISO.
SECTION 1.14 OPTION. "Option" shall mean an ISO and/or a Non-ISO.
SECTION 1.15 OPTION AGREEMENT. "Option Agreement" shall mean an agreement
between MBC (or an Affiliate) and a Grantee memorializing the terms and
conditions of an Option granted under Section 4.1 of the Plan, and any SAR
granted in tandem therewith.
SECTION 1.16 OPTION PRICE. "Option Price" shall mean the price per share
of Stock at which an option may be exercised.
SECTION 1.17 PLAN. "Plan" shall mean this Mercantile Bankshares
Corporation Omnibus Stock Plan.
SECTION 1.18 PSU. "PSU" shall mean a phantom stock unit, which, upon
exercise thereof, shall entitle Grantee to the Fair Market Value of a share of
Stock determined as of such date as the Committee shall specify.
SECTION 1.19 RESTRICTED STOCK. "Restricted Stock" shall mean Stock granted
to and registered in the name of a Grantee pursuant to Section 5.1 of the Plan,
but that is non-transferable and subject to forfeiture in accordance with the
provisions of Article 5 of the Plan.
SECTION 1.20 RESTRICTED STOCK AGREEMENT. "Restricted Stock Agreement"
shall mean an agreement between MBC (or an Affiliate) and a Grantee
memorializing the terms and conditions imposed on Restricted Stock issued
pursuant to the provisions of Section 5.1 of the Plan, and any PSUs granted in
tandem therewith.
SECTION 1.21 SAR. "SAR" shall mean a stock appreciation right, which, upon
exercise thereof, shall entitle Grantee to the amount by which the Fair Market
Value of a share of Stock on the Exercise Date exceeds the Fair Market Value of
a share of Stock on the Grant Date.
SECTION 1.22 STOCK. "Stock" shall mean shares of MBC's authorized but
unissued common stock, par value of $2.00 per share.
ARTICLE 2
PURPOSE AND SCOPE
SECTION 2.1 PURPOSE. The purpose of the Plan is to promote the long-term
success of MBC and its Affiliates by providing an incentive to Key Employees of
MBC and its Affiliates and by encouraging Key Employees to acquire a proprietary
interest in MBC. The opportunity to acquire a proprietary interest in MBC
through the grant of Options, SARs, Restricted Stock, and PSUs will provide Key
Employees with additional motivation to further the profitable growth of MBC and
its Affiliates and will encourage them to remain in the employ of MBC or its
Affiliates. The Plan applies only to Options, SARs, Restricted Stock, and PSUs
granted under the Plan and shall not apply to any Option, SAR, Restricted Stock,
or PSU granted under any other plan of MBC or its Affiliates.
SECTION 2.2 SCOPE. The aggregate number of shares of Stock that may be
issued under the Plan shall not exceed 1,935,000 shares, unless such number of
shares is adjusted as provided in Section 6.1 hereof. If an Option expires, is
cancelled, or terminates for any reason without having been exercised in full,
or if the
A-2
<PAGE>
number of shares of Stock subject to the Option is reduced by reason of the
exercise of a SAR granted in tandem therewith, or Restricted Stock is forfeited,
the shares of Stock as to which the Option was not exercised and the Restricted
Stock forfeited shall become available for issuance under the Plan. No employee
may, in any fiscal year, be awarded grants covering more than an aggregate of
300,000 shares of Stock (the "Limit"), provided, however, that (i) Stock
underlying a tandem grant of Options and SARs, or (ii) Restricted Stock and
tandem PSUs shall, in either case, be counted only once in calculating the
Limit. The Limit shall be adjusted to reflect any adjustment of shares of Stock
under Section 6.1.
SECTION 2.3 ELIGIBILITY AS GRANTEE. Only a Key Employee may be a Grantee;
provided that no member of the Committee may be a Grantee.
SECTION 2.4 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become
effective upon its adoption by the Board; provided that no Option, SAR, or PSU
may be exercised, nor may there be any Delivery of share certificates, prior to
the approval of the Plan by the shareholders of MBC. Unless previously
terminated by the Board, the Plan shall terminate on the tenth anniversary of
its adoption by the Board.
ARTICLE 3
ADMINISTRATION OF PLAN
SECTION 3.1 ADMINISTRATION BY COMMITTEE. The Plan shall be administered by
a committee of the Board appointed pursuant to the provisions of Section 3.3 of
the Plan.
SECTION 3.2 POWERS OF COMMITTEE. The Committee shall have full and final
authority, consistent with the exercise of the maximum discretion permitted by
law:
(i) to identify, from time to time, Key Employees;
(ii) to grant Options, SARs, PSUs, and Restricted Stock, from time to
time, to Key Employees;
(iii) to determine the time or times at which Options, SARs, PSUs, and
Restricted Stock shall be granted;
(iv) to determine the duration, terms and provisions of Options, Option
Agreements, SARs, Restricted Stock Agreements, and PSUs, including but not
limited to, any vesting or other restrictions;
(v) to condition the exercise of any Option, SAR, PSU, or the Delivery
of share certificates, on the attainment of specified performance goals by
the Key Employee or by MBC or an Affiliate;
(vi) to restrict the sale or otherwise provide for the repurchase of
Stock acquired pursuant to the exercise of an Option or SAR or in accordance
with the provisions of a Restricted Stock Agreement;
(vii) to determine the Fair Market Value of Stock;
(viii) subject to the provisions of Section 4.2, to determine the Option
Price;
(ix) to interpret the Plan, Options, Option Agreements, SARs, PSUs and
Restricted Stock Agreements;
(x) to prescribe, amend and rescind rules and regulations relating to
the Plan; and
(xi) to make all other determinations, orders and decisions which the
Committee deems necessary or advisable for the administration of the Plan.
With respect to any grant or award under the Plan, the Committee may
condition the grant, award, or the vesting or exercisability of the grant or
award, on one or more pre-established, objective performance goals. Such goals
may include (without limitation) performance criteria such as earnings per
share, return on equity, return on assets, income or net income, operating
income or net operating income, sub-categories or combinations of the foregoing,
and any other performance criteria contemplated by Section 162(m) of the Code
and regulations thereunder.
A-3
<PAGE>
All determinations made, interpretations rendered, rules and regulations
adopted, and other actions taken by the Committee, pursuant to this Section 3.2,
shall be conclusively binding upon MBC, an Affiliate, a Grantee, and upon all
other persons for all purposes.
SECTION 3.3 COMMITTEE.
(a) APPOINTMENT OF COMMITTEE. The Board shall appoint a committee consisting
of at least three members of the Board to administer the Plan. The Committee may
be the Compensation Committee of the Board, or a subcommittee of the
Compensation Committee, or such other committee as the Board may designate. The
Board shall designate one member of the Committee to serve as Chairman of the
Committee, and may, from time to time, in its sole and exclusive discretion,
rescind its prior designation of Chairman and designate a different member of
the Committee as Chairman. The Board may require that members of the Committee
be "outside directors" within the meaning of Section 162(m) of the Code and
"non-employee directors" as defined in Rule 16b-3 of the Securities and Exchange
Commission, as amended from time to time. The Board may from time to time remove
members from, or add members to, the Committee. Vacancies on the Committee,
however caused, shall be filled by the Board.
(b) COMMITTEE MEETINGS. The Committee shall hold meetings at such times and
places as it may determine. The acts of a majority of the Committee during a
meeting, at which at least three members of the Board who are members of the
Committee are present, or acts reduced to and approved in writing by a majority
of the members of the Committee (including at least three members of the Board
who are members of the Committee) without a meeting, shall be the valid acts of
the Committee.
(c) MINUTES AND REPORTS OF COMMITTEE. The Committee shall keep minutes of
its proceedings and shall advise the Board of all decisions, actions, and
determinations made by the Committee. The Committee shall file with the Board,
at least annually, a report that shall state the total number of shares of Stock
subject to Options; the total number of SARs and PSUs granted; the total number
of shares of Restricted Stock granted under the Plan; the total number of shares
of Stock issued pursuant to the exercise of any Option or SAR; the total number
of shares of Stock as to which there has been Delivery of share certificates
under the Plan; and the amount of cash paid, if any, upon the exercise of a PSU
or SAR; all from the inception of the Plan and from the date of the last report
of the Committee.
SECTION 3.4 LIABILITY LIMITED. To the maximum extent permitted by law, no
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan and/or any Option,
SAR, or PSU granted, Stock or Restricted Stock issued, or share certificates as
to which there has been Delivery, under the Plan.
SECTION 3.5 INDEMNIFICATION. To the maximum extent permitted by law, the
members of the Board and Committee shall be indemnified by MBC in respect of all
their activities under the Plan.
ARTICLE 4
OPTIONS AND TANDEM SARS
SECTION 4.1 GRANT OF OPTIONS TO KEY EMPLOYEES. The Committee may grant
Options to Key Employees for such number of shares of Stock as the Committee may
determine.
4.2 Option Price.
(a) ISOS GRANTED TO NON-TEN PERCENT OWNERS. The Option Price of Stock
subject to an ISO shall not be less than the Fair Market Value of the Stock
on the Grant Date.
(b) ISOS GRANTED TO TEN PERCENT OWNERS. If, immediately before an ISO is
granted, a Key Employee owns (within the meaning of Section422(b)(6) of the
Code, after the application of the attribution rules contained in Section 424(d)
of the Code) more than 10% of the total combined voting power of all classes of
stock of either MBC or an Affiliate, the Option Price of Stock subject to an ISO
shall not be less than 110% of the Fair Market Value of the Stock on the Grant
date.
A-4
<PAGE>
(c) NON-ISOS. The Option Price of Stock subject to a Non-ISO shall be
determined by the Committee and may be less than the Fair Market Value of the
Stock on the Grant Date but not less than the par value of the Stock.
SECTION 4.3 GRANT OF TANDEM SARS. For each share of Stock as to which an
Option is granted, the Committee may grant one SAR. All SARs shall be granted in
tandem with either ISOs or Non-ISOs and, if granted in tandem with an ISO, shall
conform to the requirements of Section422 of the Code with respect to the grant
and exercise of alternative rights issued in connection with ISOs.
SECTION 4.4 EXERCISE OF OPTIONS. Except as provided herein, each Option
shall be exercisable in accordance with the provisions of the Option Agreement,
and/or such rules and regulations as the Committee may have prescribed, and /or
such determinations, orders, or decisions as the Committee may have made. If an
Option is not immediately exercisable in full, the Committee may, in its
discretion, accelerate the time when such Option may be exercised. MBC or an
Affiliate may make or guarantee a loan to the Grantee to assist in the payment
of the Option Price.
SECTION 4.5 EXERCISE OF SARS. SARs shall be exercisable only to the extent
the Option to which they relate is exercisable; provided, however, that the
exercise of SARs may be limited to periods specified for the exemption provided
by Rule 16b-3 under the Securities Exchange Act of 1934. A SAR may not be
exercised or be deemed to have been exercised when the Fair Market Value of a
share of Stock on the Grant Date exceeds the current Fair Market Value of the
Stock.
SECTION 4.6 OPTION AGREEMENT. As condition of the grant of an Option, MBC
and the Key Employee shall execute an Option Agreement that shall incorporate
the terms of the Plan, specify the Option Price, the number of shares of Stock
subject to the Option, and the number of any related SARs, and contain such
other terms and conditions as the Committee may determine. If the Option granted
is an ISO, the Option Agreement shall also contain such provisions as are
required by the Code.
ARTICLE 5
RESTRICTED STOCK AND TANDEM PSUS
SECTION 5.1 ISSUANCE OF RESTRICTED STOCK. The Committee may grant such
number of shares of Restricted Stock to a Key Employee as the Committee may
determine. The grant of Restricted Stock shall be subject to the provisions of
the Plan and such other terms and conditions as the Committee may prescribe.
Each certificate for Restricted Stock shall be registered in the name of the
Grantee and deposited by him, together with a stock power endorsed in blank,
with MBC.
SECTION 5.2 GRANT OF TANDEM PSUS. For each share of Restricted Stock
issued, the Committee may grant one PSU. All PSUs shall be granted in tandem
with Restricted Stock.
SECTION 5.3 EXERCISE OF PSUS. PSUs shall be exercisable only as provided
in the Restricted Stock Agreement to which they are subject, and such other
rules and regulations as the Committee may have adopted; provided, however, that
the exercise of PSUs may be limited to periods specified for the exemption
provided by Rule 16b-3 under the Securities Exchange Act of 1934.
SECTION 5.4 RESTRICTED STOCK AGREEMENT. As a condition of the grant of
Restricted Stock or the grant of Restricted Stock and tandem PSUs, the Key
Employee and MBC shall execute a Restricted Stock Agreement that shall
incorporate the provisions of the Plan, specify the number of shares of
Restricted Stock granted and the number of any tandem PSUs, and contain such
other terms and conditions as the Committee may determine. Except for such
restrictions as are imposed by the Restricted Stock Agreement, the Grantee shall
have all the rights of a shareholder of Stock. At such time as shares of
Restricted Stock are no longer subject to forfeiture in accordance with the
provisions of a Restricted Stock Agreement, Grantee may require Delivery by MBC
of share certificates representing the number of shares of Stock that are not
subject to forfeiture; provided that, in lieu of Delivery of all or some of such
share certificates, a Grantee, who is also a Grantee of PSUs related to such
shares, may elect to exercise such PSUs.
A-5
<PAGE>
ARTICLE 6
STOCK ADJUSTMENTS
SECTION 6.1 CHANGES IN CAPITAL STRUCTURE. In the event of a
reclassification, recapitalization, combination, or exchange of stock, stock
split, stock dividend, or other similar event affecting Stock, the number and
class of shares of Stock issued, the number of SARs or PSUs, the number and
class of shares of stock which may be issued upon exercise of Options or SARs
previously granted, and the price per share payable upon exercise of Options,
SARs, or PSUs, or the Delivery of Restricted Stock shall be equitably adjusted
by the Committee to reflect the change. No fractional shares of stock shall be
issued under the Plan on account of such adjustments.
SECTION 6.2 SALE, MERGER OR TENDER OFFER. In the event of any proposed
merger, consolidation, share exchange, or similar transaction to which MBC would
be a party, or in the case of a tender or exchange offer for stock of MBC, the
Committee or the Board may take such action as is deemed appropriate to
effectuate the purposes of this Plan and to protect the Grantees of Options,
SARs, PSUs, and Restricted Stock, which action may include, but without
limitation, any one or more of the following: acceleration or change of the
Exercise Dates of any Option, SAR or PSU, or the date of Delivery of Restricted
Stock; arrangements with Grantees for the payment of appropriate consideration
to them for the cancellation and surrender of any Option, SAR, PSU, or
Restricted Stock; and in any case where equity securities other than Stock of
MBC are proposed to be delivered in exchange for or with respect to Stock of
MBC, arrangements providing that any Option, SAR or PSU shall become one or more
Options, SARs, or PSUs with respect to such other equity securities.
SECTION 6.3 LIQUIDATION OR DISSOLUTION. If MBC dissolves and liquidates
(other than pursuant to a plan of merger or reorganization), then
notwithstanding any restrictions on exercise set forth in this Plan or any
Option Agreement or Restricted Stock Agreement; (i) each Grantee of an Option,
SAR or PSU shall have the right to exercise his Option, SAR, or PSU, and each
Grantee of Restricted Stock shall have the right to require Delivery of share
certificates representing such Stock, at any time up to ten days prior to the
effective date of such liquidation and dissolution; and (ii) the Committee or
the Board may make arrangements with Grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any Option, SAR,
PSU, or Restricted Stock that is so cancelled or surrendered at any time up to
ten days prior to the effective date of such liquidation and dissolution. The
Committee or the Board may establish a different period for such exercise,
Delivery, cancellation, or surrender by notice to the Grantee, and it may
establish limitations on exercise, Delivery, cancellation, or surrender to avoid
subjecting the Grantee to liability under Section 16(b) of the Securities
Exchange Act of 1934. Any Option, SAR, or PSU not so exercised, cancelled, or
surrendered shall terminate on the last day for exercise prior to such effective
date; and any Restricted Stock as to which there has not been such Delivery of
share certificates or that has not been so cancelled or surrendered, shall be
forfeited on the last day prior to such effective date.
SECTION 6.4 LIMITATION ON RIGHTS OF GRANTEE. Except as expressly provided
in Section 5.4, 6.1, 6.2 or 6.3 hereof, the Grantee of an Option, SAR, PSU, or
Restricted Stock shall have no rights by reason of the issuance or grant of (i)
shares of Stock or Restricted Stock of MBC pursuant to the Plan, (ii) additional
shares of stock of MBC (regardless of class or whether issued pursuant to the
Plan), (iii) any other security or debenture convertible into stock of MBC, or
(iv) any other equity security, including issuance pursuant to a plan of merger,
consolidation, or statutory share exchange, and no adjustment by reason thereof
shall be made with respect to the number of shares of Stock subject to an Option
or SAR, or with respect to the number of shares of Restricted Stock or PSUs
granted, or an Option Price or the consideration to be received upon the
exercise of a SAR or PSU.
SECTION 6.5 RIGHTS OF MBC. Neither the grant of an Option, SAR, PSU, or
Restricted Stock, nor the issuance of Stock pursuant to the exercise of an
Option or SAR, nor the Delivery of share certificates pursuant to the Plan shall
affect in any way the right or power of MBC to issue additional shares of Stock;
to make adjustments, reclassifications, reorganizations or changes in its
capital or business structure; to participate in a merger, consolidation, or
share exchange with another corporation; or to dissolve, liquidate, or sell or
transfer all or any part of its business or assets. In making any adjustment or
taking any action under this
A-6
<PAGE>
Article 6, or in determining that no such adjustment or action is appropriate,
the Committee and the Board may rely upon the advice of counsel and accountants
of MBC and the determination shall be conclusive.
ARTICLE 7
AMENDMENT OF THE PLAN
The Board may at any time terminate, suspend, or amend the Plan. The Board
may require any Plan amendments to be submitted for approval by the stockholders
of MBC in its discretion, including but not limited to cases in which such
approval is deemed appropriate for compliance with Section 162(m) or other
provisions of the Code, or to secure exemption from Section 16(b) of the
Securities Exchange Act of 1934.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 NON-TRANSFERABILITY OF OPTIONS, SARS AND PSUS. No Option, SAR,
or PSU granted hereunder shall be transferable otherwise than by will or the
laws of descent and distribution. During the lifetime of the Grantee, an Option,
SAR, or PSU may be exercised only by him or, during the period he is under a
legal disability, by his guardian or legal representative.
SECTION 8.2 LEGAL RESTRICTIONS. MBC will not be obligated to issue shares
of Stock or to undertake Delivery of share certificates if counsel to MBC
determines that such issuance or Delivery would violate any law or regulation of
any governmental authority or any agreement between MBC and any securities
association or exchange upon which the Stock is traded. In connection with any
Stock issuance or Delivery of share certificates, the person acquiring the
shares shall, if requested by MBC, give assurances satisfactory to counsel to
MBC regarding such matters as MBC may deem desirable to assure compliance with
all legal requirements. MBC shall in no event be obliged to take any action in
order to cause the exercise of any Option, SAR, or PSU.
SECTION 8.3 MODIFICATION, EXTENSION, AND RENEWAL OF RIGHTS. Subject to the
terms and conditions of the Plan and any Option Agreement, the Committee may
modify, extend or renew outstanding Options, SARs, or PSUs, or accept the
surrender of outstanding Options, SARs, and PSUs to the extent not previously
exercised, and authorize the granting of new Options, SARs, and PSUs in
substitution therefor. The Committee may not change the terms or conditions
attached to any outstanding Option, SAR, PSU, or share of Restricted Stock in a
manner that would adversely affect the rights of the Grantee without the express
written consent of the Grantee unless so permitted by the terms of the Option
Agreement or Restricted Stock Agreement.
SECTION 8.4 APPLICATION OF FUNDS. The proceeds received by MBC from the
sale of Stock pursuant to the exercise of Options shall be used for its general
corporate purposes.
SECTION 8.5 COMPLIANCE WITH SECURITIES LAW. MBC may require that a
Grantee, as a condition to exercise of the Option, and as a condition of
Delivery of any share certificate, provide to MBC, at the time of each such
exercise and each such Delivery, a written representation that the shares of
Stock being acquired shall be acquired by the Grantee solely for investment and
will not be sold or transferred without registration or the availability of an
exemption from registration under the Securities Act of 1933 and applicable
state securities laws. MBC may also require that a Grantee submit other written
representations which will permit MBC to comply with federal and applicable
state securities laws in connection with the issuance of the Stock, including
representations as to the knowledge and experience in financial and business
matters of the Grantee and his ability to bear the economic risk of his
investment. MBC may require that the Grantee obtain a "purchaser representative"
as that term is defined in applicable federal and state securities laws. The
stock certificates for any shares of Stock issued pursuant to this Plan may bear
a legend restricting transferability of the shares of Stock unless such shares
are registered or an exemption from registration is available under the
Securities Act of 1933 and applicable state securities laws. MBC may notify its
transfer agent to stop any transfer of shares of Stock not made in compliance
with these restrictions.
A-7
<PAGE>
SECTION 8.6 PLAN SUBJECT TO CHARTER AND BY-LAWS. This plan is subject to
the Charter and By-laws of MBC, and any applicable federal or state laws, rules
or regulations.
SECTION 8.7 GENDER. As used herein the masculine gender shall include the
feminine as the identity of an employee may require.
SECTION 8.8 GOVERNING LAW. The validity, interpretation and administration
of the Plan, Option Agreements, Restricted Stock Agreements, and of any rules,
regulations, determinations or decisions made thereunder, and the rights of any
and all persons having or claiming to have any interest therein or thereunder,
shall be determined exclusively in accordance with the laws of the State of
Maryland, without regard to its conflict of laws rules and principles. Without
limiting the generality of the foregoing, the period within which any action in
connection with the Plan must be commenced shall be governed by the laws of the
State of Maryland without regard to the place where the act or omission
complained of took place, the residence of any party to such action or the place
where the action may be brought.
SECTION 8.9 HEADINGS. The headings in this Plan are for reference purposes
only and shall not affect the meaning or interpretation of the Plan.
SECTION 8.10 NOTICES. All notices and other communications made or given
pursuant to this Plan shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to the employee
at the address contained in the records of MBC or an Affiliate, or to MBC for
the attention of its Secretary at its principal office.
A-8
Note
------
Pursuant to a 3-for-2 split of the Stock (in the form of a stock
dividend) on June 30, 1997, the maximum number of shares of Stock issuable
under the Plan and the Limit on the number of such shares underlying grants
to any employee in any fiscal year, set forth in Section 2.2 of the Plan,
were adjusted to 2,902,500 shares and 450,000 shares, respectively.
[LOGO] MERCANTILE BANKSHARES CORPORATION
September 12, 1997
Mr. Edward K. Dunn, Jr.
Two Hopkins Plaza
Baltimore, MD 21201
Dear Mr. Dunn:
This letter will confirm our agreement, effective September 9, 1997
(the "Effective Date") concerning changes in your employment relationship
with Mercantile Bankshares Corporation ("Mercshares"), Mercantile-Safe
Deposit and Trust Company ("Merc-Safe") and subsidiaries of Mercshares and
Merc-Safe.
1. As agreed, you have been elected Chairman of the Board of Mercantile
Mortgage Corporation and you have resigned as President and a director
of Mercshares, as President (and Chief Operating Officer) and a director of
Merc-Safe, and from all positions with subsidiaries of Mercshares and
Merc-Safe except Mercantile Mortgage Corporation.
2. For the calendar year 1997, you will receive the balance of your
current annual base compensation of $550,000 and such incentive
compensation as would be awardable to you as a Class I participant for
all of 1997 under the Annual Incentive Compensation Plan of Mercantile
Bankshares Corporation and Affiliates ("AICP"). The incentive
compensation will be payable, as is customary, in the first quarter of
1998. Commencing on January 1, 1998, you will receive an annual salary
of $160,000, which will be your only salary, and you will cease
participation in the AICP (except for your receipt of incentive
compensation for 1997, as described above). Amounts payable to you
under this letter agreement will not be subject to reduction or offset
by your outside income.
3. Your employment with Mercantile Mortgage Corporation will be as the
Chairman of its Board, and you also agree to provide cooperation with
and support of Mercshares and its subsidiaries in relationships with
customer accounts. Mercantile Mortgage Corporation has the separate
position of a President and Chief Executive Officer who reports
directly to the President of Merc-Safe. You will not be required to
perform executive or line management duties. You will be allowed time
for attention to personal investments, participation in family
businesses, outside directorships and charitable and public service
activities, and other business activities (provided such other
activities are not inconsistent with your employment responsibilities).
Your employment will continue from the Effective Date until your normal
retirement date on June 1, 2000, at which time you will retire from
Mercantile Mortgage Corporation and from any positions then held with
Mr. Edward K. Dunn, Jr.
September 12, 1997
Page Two
Mercshares or any subsidiary of Mercshares, and commence receiving
retirement benefits under the Mercshares benefit plans by which you are
covered.
4. If, prior to your normal retirement date on June 1, 2000, any event or
transaction occurs by which Mercantile Mortgage Corporation is no longer
controlled by Mercshares (or by a subsidiary of Mercshares) or by which
Mercantile Mortgage Corporation no longer exists, Mercshares will cause your
employment under this letter agreement to be continued by another subsidiary
of Mercshares.
5. Until two years after the termination of your employment under this
letter agreement, you agree not to engage in banking or investment
management activities in the State of Maryland as an employee or
director of, consultant to, or in any other comparable capacity with,
any other banking institution or bank holding company or entity engaged
in investment management, but this prohibition shall not apply to
engaging in investment banking activities which do not involve your
participation in commercial banking or investment management activities
and which, during the term of your employment under this letter
agreement, are not inconsistent with your employment responsibilities
under paragraph 3 of this letter agreement. You agree that this
provision shall be enforceable by injunctive relief.
6. Your Supplemental Pension Agreement with Mercshares and Merc-Safe of
January 10, 1992 is amended to change your monthly benefit from $5,000
to $6,750 (and to change all references therein to "$5,000" from
"$5,000" to "$6,750") and to include Mercantile Mortgage Corporation
(and any other subsidiary of Mercshares by which you may subsequently
be employed) within the definition of the word "Company."
7. Your Option Agreement with Mercshares of August 17, 1995 will remain in
effect in accordance with its terms. Your Executive Employment
Agreement with Mercshares and Merc-Safe of December 13, 1988 and your
Executive Severance Agreement with Mercshares and Merc-Safe of December
31, 1989 are terminated as of the Effective Date.
8. For each of the years 1998, 1999, and 2000, you will be entitled to
have your charitable contributions matched under the Mercshares
matching gift program at levels which would be permitted if your annual
salary were $550,000 and also to designate up to $50,000 of the
Mercshares direct annual giving to charities which are on the
Mercshares approved list.
Mr. Edward K. Dunn, Jr.
September 12, 1997
Page Three
9. As an employee of Mercantile Mortgage Corporation you will be covered
by all employee benefit plans for which employees of Mercshares
affiliates are eligible generally with the additional provision that
your life insurance coverage will be not less than $500,000. You will also
be entitled to expense reimbursement in accordance with the
current practices available to you prior to the Effective Date.
Further, you will be furnished with office space and a secretary (at
your current secretary's salary) until the later of June 1, 2000 or the
end of your term as Chairman of the Board of Directors of Johns Hopkins
Medicine. You will continue to be entitled to use of a company
automobile in accordance with current policies and practices, title to
which will be transferred to you upon your retirement.
10. As an obligor under this letter agreement, Mercshares will be
responsible for the performance of the obligations of any of its
subsidiaries pursuant to this agreement. In the event of a material
breach of this letter agreement by Mercshares or any of its
subsidiaries, your entitlement to damages shall not be subject to any
obligation on your part to mitigate or offset damages by other
employment earnings or other income, and any such other earnings or
income shall not offset such damages.
11. This letter agreement represents the entire agreement among the
parties with respect to its subject matter, and any amendment to this
letter agreement must be in writing and signed by each party.
Mercantile Bankshares Corporation
By: /s/ H. Furlong Baldwin
_____________________________________
H. Furlong Baldwin, Chairman and CEO
Mercantile-Safe Deposit and Trust Company
By: /s/ H. Furlong Baldwin
_____________________________________
H. Furlong Baldwin, Chairman and CEO
Agreed: /s/ Edward K. Dunn, Jr.
_____________________________________
Edward K. Dunn, Jr.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1997, FROM THE INCOME STATEMENT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND FROM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 221,584,000
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 99,428,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,594,791,000
<INVESTMENTS-CARRYING> 25,515,000
<INVESTMENTS-MARKET> 25,563,000
<LOANS> 4,979,503,000
<ALLOWANCE> 106,259,000
<TOTAL-ASSETS> 7,072,931,000
<DEPOSITS> 5,636,659,000
<SHORT-TERM> 378,635,000
<LIABILITIES-OTHER> 94,938,000
<LONG-TERM> 50,024,000
0
0
<COMMON> 143,637,000
<OTHER-SE> 769,038,000
<TOTAL-LIABILITIES-AND-EQUITY> 7,072,931,000
<INTEREST-LOAN> 321,954,000
<INTEREST-INVEST> 71,083,000
<INTEREST-OTHER> 2,242,000
<INTEREST-TOTAL> 395,279,000
<INTEREST-DEPOSIT> 130,593,000
<INTEREST-EXPENSE> 145,463,000
<INTEREST-INCOME-NET> 249,816,000
<LOAN-LOSSES> 9,943,000
<SECURITIES-GAINS> (1,491,000)
<EXPENSE-OTHER> 155,982,000
<INCOME-PRETAX> 157,031,000
<INCOME-PRE-EXTRAORDINARY> 157,031,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,323,000
<EPS-PRIMARY> 1.39
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<YIELD-ACTUAL> 5.27
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