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, 1998
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 30, 1998, registrant had outstanding 71,391,715 shares of Common
Stock.
<PAGE>
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks...................................................................... $ 213,244 $ 337,234
Interest-bearing deposits in other banks..................................................... 100 100
Investment securities:
U.S. Treasury and government agencies
Available-for-sale at fair value........................................................ 1,762,412 1,590,292
States and political subdivisions
Held-to-maturity -- market value of $13,887 (1998) and $11,130 (1997)................... 13,641 11,081
Available-for-sale at fair value........................................................ 1,428 757
Other investments
Held-to-maturity -- market value of $14,643 (1998) and $13,229 (1997)................... 14,643 13,229
Available-for-sale at fair value........................................................ 15,800 16,264
------------- ------------
Total investment securities........................................................... 1,807,924 1,631,623
------------- ------------
Federal funds sold........................................................................... 186,978 1,452
Securities purchased under resale agreements................................................. 75,000
Loans........................................................................................ 5,023,307 4,978,522
Less: allowance for loan losses.............................................................. (113,402) (106,097)
------------- ------------
Loans, net............................................................................ 4,909,905 4,872,425
------------- ------------
Bank premises and equipment, less accumulated depreciation of
$88,420 (1998) and $85,245 (1997).......................................................... 87,862 82,899
Other real estate owned, net................................................................. 1,872 2,627
Excess cost over equity in affiliated banks, net............................................. 48,604 36,230
Other assets................................................................................. 154,460 131,079
------------- ------------
Total assets.......................................................................... $ 7,410,949 $7,170,669
------------- ------------
------------- ------------
LIABILITIES
Deposits:
Noninterest-bearing deposits............................................................... $ 1,276,683 $1,205,563
Interest-bearing deposits.................................................................. 4,486,078 4,488,348
------------- ------------
Total deposits........................................................................ 5,762,761 5,693,911
Short-term borrowings........................................................................ 506,340 402,734
Accrued expenses and other liabilities....................................................... 103,680 89,004
Long-term debt............................................................................... 40,943 50,016
------------- ------------
Total liabilities..................................................................... 6,413,724 6,235,665
------------- ------------
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
71,428,613 shares in 1998 and 71,874,297 shares in 1997.................................... 142,857 143,749
Capital surplus.............................................................................. 44,869 62,089
Retained earnings............................................................................ 781,528 717,978
Accumulated other comprehensive income....................................................... 27,971 11,188
------------- ------------
Total stockholders' equity............................................................ 997,225 935,004
------------- ------------
Total liabilities and stockholders' equity......................................... $ 7,410,949 $7,170,669
============= ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 3
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
FOR THE 9 MONTHS FOR THE 3 MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans............................................. $333,571 $321,954 $112,426 $111,811
-------- -------- -------- --------
Interest and dividends on investment securities:
Taxable interest income.............................................. 72,945 69,445 25,124 23,234
Tax-exempt interest income........................................... 517 493 186 170
Dividends............................................................ 970 813 338 307
Other investment income.............................................. 291 332 128 100
-------- -------- -------- --------
74,723 71,083 25,776 23,811
-------- -------- -------- --------
Other interest income.................................................. 7,578 2,242 3,132 1,338
-------- -------- -------- --------
Total interest income........................................... 415,872 395,279 141,334 136,960
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits................................................... 134,784 130,593 45,061 45,797
Interest on short-term borrowings...................................... 14,921 12,372 5,828 4,718
Interest on long-term debt............................................. 2,385 2,498 718 830
-------- -------- -------- --------
Total interest expense.......................................... 152,090 145,463 51,607 51,345
-------- -------- -------- --------
NET INTEREST INCOME.................................................... 263,782 249,816 89,727 85,615
Provision for loan losses.............................................. 8,475 9,943 2,849 3,518
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................... 255,307 239,873 86,878 82,097
-------- -------- -------- --------
NONINTEREST INCOME
Trust division services................................................ 43,442 38,317 15,005 13,511
Service charges on deposit accounts.................................... 12,987 12,522 4,391 4,336
Other fees............................................................. 21,537 19,501 7,833 7,400
Investment securities gains and (losses)............................... 9 (1,491) 8
Other income........................................................... 2,054 4,291 677 866
-------- -------- -------- --------
Total noninterest income........................................ 80,029 73,140 27,906 26,121
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries............................................................... 79,591 76,946 26,505 25,876
Employee benefits...................................................... 19,162 16,803 6,756 5,366
Net occupancy expense of bank premises................................. 8,229 8,670 2,952 3,109
Furniture and equipment expenses....................................... 13,823 13,337 4,428 4,727
Communications and supplies............................................ 9,091 8,713 3,130 2,986
FDIC insurance premium expense......................................... 548 483 180 169
Other expenses......................................................... 32,211 31,030 11,553 11,063
-------- -------- -------- --------
Total noninterest expenses...................................... 162,655 155,982 55,504 53,296
-------- -------- -------- --------
Income before income taxes............................................. 172,681 157,031 59,280 54,922
Applicable income taxes................................................ 63,338 57,708 22,016 20,158
-------- -------- -------- --------
NET INCOME............................................................. $109,343 $ 99,323 $ 37,264 $ 34,764
======== ======== ======== ========
NET INCOME PER SHARE OF COMMON STOCK(2):
Basic................................................................ $1.52 $1.39 $.52 $.48
======== ======== ======== ========
Diluted.............................................................. $1.51 $1.38 $.52 $.48
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 4
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
FOR THE 9 MONTHS ENDED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees on loans....................................................................... $ 333,651 $ 318,712
Interest and dividends on investment securities.................................................. 71,669 69,308
Other interest income............................................................................ 7,922 2,180
Noninterest income............................................................................... 79,029 74,252
Interest paid.................................................................................... (154,379) (144,068)
Noninterest expenses paid........................................................................ (163,045) (130,636)
Income taxes paid................................................................................ (63,396) (60,182)
--------- ---------
Net cash provided by operating activities................................................. 111,451 129,566
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-to-maturity............................... 2,567 2,265
Proceeds from maturities of investment securities available-for-sale............................. 356,589 427,988
Proceeds from sales of investment securities available-for-sale.................................. 804 33,291
Purchases of investment securities held-to-maturity.............................................. (1,092) (535)
Purchases of investment securities available-for-sale............................................ (495,111) (442,763)
Net (increase) decrease in customer loans........................................................ 7,937 (341,185)
Proceeds from sales of other real estate owned................................................... 1,232 2,154
Capital expenditures............................................................................. (10,275) (10,502)
Proceeds from sales of buildings................................................................. 321 6,610
--------- ---------
Net cash provided by (used in) investing activities....................................... (137,028) (322,677)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits..................................................... 38,589 48,068
Net increase (decrease) in checking plus interest and savings accounts........................... 32,183 (29,238)
Net increase (decrease) in certificates of deposit............................................... (73,024) 210,386
Net increase in short-term borrowings............................................................ 103,606 42,680
Repayment of long-term debt...................................................................... (9,073) (71)
Proceeds from issuance of shares................................................................. 5,032 5,425
Repurchase of common shares...................................................................... (47,226) (12,295)
Dividends paid................................................................................... (45,793) (40,909)
--------- ---------
Net cash provided by financing activities................................................. 4,294 224,046
--------- ---------
Net increase (decrease) in cash and cash equivalents............................................. (21,283) 30,935
Cash and cash equivalents at beginning of period................................................. 413,786 285,379
Adjustment for acquired banks.................................................................... 7,819 4,798
--------- ---------
Cash and cash equivalents at end of period....................................................... $ 400,322 $ 321,112
========= =========
<CAPTION>
FOR THE 9 MONTHS ENDED
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Net income....................................................................................... $ 109,343 $ 99,323
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................................. 6,341 6,014
Provision for loan losses...................................................................... 8,475 9,943
Amortization of excess cost over equity in affiliates.......................................... 2,516 1,673
Investment securities (gains) and losses....................................................... (9) 1,491
Write-downs of other real estate owned......................................................... 208 270
Gains on sales of other real estate owned...................................................... (258) (306)
Gains on sales of buildings.................................................................... (59) (1,382)
Increase in interest receivable................................................................ (2,630) (5,099)
(Increase) decrease in other receivables....................................................... (674) 1,309
(Increase) decrease in other assets............................................................ (18,444) 6,341
Increase (decrease) in interest payable........................................................ (2,289) 1,395
Increase in accrued expenses................................................................... 8,989 11,068
Decrease in taxes payable...................................................................... (58) (2,474)
--------- ---------
Total adjustments......................................................................... 2,108 30,243
--------- ---------
Net cash provided by operating activities........................................................ $ 111,451 $ 129,566
========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 5
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accu-
mulated
Other
Compre-
Common Capital Retained hensive
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total Stock Surplus Earnings Income
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996........................................ $836,036 $ 94,872 $ 97,154 $641,212 $ 2,798
Net income........................................................ 99,323 99,323
Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes................ 6,014 6,014
--------
Comprehensive income.............................................. 105,337
--------
Cash dividends paid:
Common stock ($.57 per share)................................... (40,909) (40,909)
Issuance of 91,922 shares for dividend reinvestment and stock
purchase plan................................................... 3,090 183 2,907
Issuance of 17,177 shares for employee stock purchase dividend
reinvestment plan............................................... 572 34 538
Issuance of 94,645 shares for employee stock option plan.......... 1,797 189 1,608
Purchase of 394,175 shares under stock repurchase plan............ (12,295) (788) (11,507)
Issuance of 23,701,458 shares for a 3 for 2 stock split........... (34) 47,403 (47,437)
Issuance of 872,374 shares for bank acquisitions.................. 17,967 1,744 16,223
Vested stock options.............................................. 1,114 1,114
-------- -------- -------- -------- -------
BALANCE, SEPTEMBER 30, 1997....................................... $912,675 $143,637 $ 60,600 $699,626 $ 8,812
======== ======== ======== ======== =======
BALANCE, DECEMBER 31, 1997........................................ $935,004 $143,749 $ 62,089 $717,978 $11,188
Net income........................................................ 109,343 109,343
Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes(5)............. 16,783 16,783
--------
Comprehensive income.............................................. 126,126
--------
Cash dividends paid:
Common stock ($.64 per share)................................... (45,793) (45,793)
Issuance of 102,086 shares for dividend reinvestment and stock
purchase plan................................................... 3,193 204 2,989
Issuance of 19,057 shares for employee stock purchase dividend
reinvestment plan............................................... 649 38 611
Issuance of 90,993 shares for employee stock option plan.......... 1,190 182 1,008
Purchase of 1,333,500 shares under stock repurchase plan.......... (47,226) (2,667) (44,559)
Issuance of 675,680 shares for bank acquisition................... 23,055 1,351 21,704
Vested stock options.............................................. 1,027 1,027
-------- -------- -------- -------- -------
BALANCE, SEPTEMBER 30, 1998....................................... $997,225 $142,857 $ 44,869 $781,528 $27,971
======== ======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 6
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 basic earnings per share amounts are based on the weighted
average number of common shares outstanding during the period of 71,788,479
shares for 1998 and 71,343,876 shares for 1997. Diluted earnings per share
amounts are based on the weighted average number of common shares outstanding
during the period adjusted for the effect of dilutive stock options. The
adjusted average shares for the nine months ended September 30, 1998 and 1997
were 72,334,160 and 71,746,959, respectively.
3) 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) 1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Impaired loans with a valuation allowance.................................................... $ 4,118 $ 2,785
Impaired loans with no valuation allowance................................................... 16,471 20,805
--------- --------
Total impaired loans....................................................................... $ 20,589 $ 23,590
========= ========
Allowance for loan losses applicable to impaired loans....................................... $ 1,766 $ 1,317
Allowance for loan losses applicable to other than impaired loans............................ 111,636 104,780
--------- --------
Total allowance for loan losses............................................................ $ 113,402 $106,097
========= ========
Year-to-date interest income on impaired loans recorded on the cash basis.................... $ 568 $ 1,207
========= ========
Year-to-date average recorded investment in impaired loans during the period................. $ 21,700 $ 22,600
========= ========
Quarter-to-date interest income on impaired loans recorded on the cash basis................. $ 83 $ 367
========= ========
Quarter-to-date average recorded investment in impaired loans during the period.............. $ 21,700 $ 24,300
========= ========
</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.
4) Various commitments to extend credit (lines of credit) are made in the normal
course of banking business. At September 30, 1998, total unused lines of
credit approximated $2,490,000,000. In addition, letters of credit are issued
for the benefit of customers by affiliated banks. Outstanding letters of
credit were $139,400,000 at September 30, 1998.
<PAGE>
PAGE 7
5) As of January 1, 1998, the Corporation adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. The following table summarizes the
related tax effect of unrealized gains (losses) on securities
available-for-sale included in other comprehensive income, as shown in the
Statement of Changes in Consolidated Stockholders' Equity on page 5.
<TABLE>
<CAPTION>
FOR THE 9 MONTHS ENDED SEPTEMBER 30,
1998 1997
------------------------------- -----------------------------
Tax Tax
Pretax (Expense) Net Pretax (Expense) Net
(DOLLARS IN THOUSANDS) Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the
period................................................... $26,179 $(9,391) $16,788 $8,333 $(3,220) $5,113
Reclassification adjustment for (gains) losses included in
net income............................................... (9) 4 (5) 1,491 (590) 901
------- --------- ------- ------ --------- ------
Total...................................................... $26,170 $(9,387) $16,783 $9,824 $(3,810) $6,014
======= ========= ======= ====== ========= ======
</TABLE>
<PAGE>
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERCANTILE BANKSHARES CORPORATION
EARNINGS SUMMARY
Net income per share for the nine months ended September 30, 1998 was
$1.52, an increase of 9.4% over the $1.39 for the comparable period last year.
Net income was $ 109,343,000, an increase of 10.1% over the $99,323,000 for the
first nine months of 1997.
Net income per share for the third quarter of 1998 was $.52, an increase of
8.3% over the $.48 for the comparable period last year. Net income was
$37,264,000, an increase of 7.2% over the $34,764,000 for the third quarter of
1997.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the nine months ended September 30, 1998 was 5.6%
higher than the amount for the comparable period in 1997 due to an increase of
6.6% in average earning assets. Average loans increased by 4.1% over the first
three quarters of 1997 to $4,975,700,000 for the first three quarters of 1998.
Average securities increased 6.0% to $1,675,800,000 for the first nine months of
1998. Net interest margin on earning assets was 5.24% for the first three
quarters of 1998 and 5.27% for the same period in 1997.
Net interest income for the three months ended September 30, 1998 was 4.8%
higher than the amount for the comparable period in 1997 due to an increase of
5.3% in average earning assets. Average loans increased by 1.3% over the third
quarter of 1997 to $5,009,700,000. Average securities increased 9.6% to
$1,733,700,000 for the third quarter of 1998. Net interest margin on earning
assets was 5.18% for the third quarter of 1998 and 5.20% for the same period in
1997.
NONINTEREST INCOME
For the first nine months of 1998, total noninterest income increased 9.4%
to $80,029,000 from $73,140,000 for the first three quarters of 1997. Factors
contributing to this increase include an increase in trust division revenues, an
increase in other fee income from general bank services and products, and
investment securities gains of $9,000 during 1998 compared to securities losses
of $1,491,000 during 1997. These increases were partially offset by a decrease
in other income which included a gain of $1,175,000 on the sale of a bank owned
building during 1997.
Total noninterest income for the quarter ended September 30, 1998 increased
6.8% to $27,906,000 from $26,121,000 for the third quarter of 1997. 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.
NONINTEREST EXPENSES
Total noninterest expenses, excluding the provision for loan losses, for
the first three quarters of 1998 increased 4.3% to $162,655,000 from
$155,982,000 for the comparable period in 1997. Approximately 35% of this
increase relates to employee benefits expense for 1998, which is primarily
attributable to enhancements made to the employee cash balance pension plan.
Normal increases in other noninterest expenses were offset slightly by a
reduction in net occupancy expenses.
Total noninterest expenses, excluding the provision for loan losses, for
the third quarter of 1998 increased 4.1% to $55,504,000 from $53,296,000 for the
comparable period in 1997. Approximately 63% of this increase relates to
employee benefits expense for 1998, which reflects the previously mentioned
enhancements made to the employee cash balance pension plan. Normal increases in
other noninterest expenses were offset partially by a reduction in net occupancy
expenses and furniture and equipment expenses.
ANALYSIS OF FINANCIAL CONDITION
Investment securities increased 10.8% to $1,807,924,000 at September 30,
1998 from $1,631,623,000 at December 31, 1997. Total loans outstanding increased
slightly less than 1% to $5,023,307,000 at September 30, 1998 from
$4,978,522,000 at December 31, 1997.
Total deposits increased 1.2% to $5,762,761,000 as of September 30, 1998
from $5,693,911,000 at December 31, 1997. Interest-bearing deposits were
$4,486,078,000 as of September 30, 1998, reflecting a slight decrease from the
$4,488,348,000 at December 31, 1997. Interest-bearing deposits represented 77.8%
of total deposits at September 30, 1998 and 78.8% of total deposits at December
31, 1997. Noninterest-bearing deposits increased 5.9% to $1,276,683,000 as of
September 30, 1998, compared to $1,205,563,000 at December 31, 1997. Short term
borrowings, which mainly consist of Federal funds
<PAGE>
PAGE 9
purchased and securities sold under repurchase agreements, increased 25.7% to
$506,340,000 at September 30, 1998 from $402,734,000 at December 31, 1997.
Total stockholders' equity increased 6.7% to $997,225,000 at September 30,
1998 from $935,004,000 at December 31, 1997. The increase from net income was
partially offset by dividends paid and by share repurchases. The Corporation's
continued strong capital position is evidenced by the ratio of stockholders'
equity to total assets of 13.46% at September 30, 1998 compared to 13.04% at
December 31, 1997. For more details see the Statement of Changes in Consolidated
Stockholders' Equity on page 5.
YEAR 2000 ISSUES
The Year 2000 issues relate to systems designed to use two digits rather
than four to define the applicable year. This flaw can cause system failures and
disruptions, including inability to process transactions. While the
Corporation's assessments, programs and costs for Year 2000 compliance have not
changed significantly from prior reports, this discussion provides further
details.
The Corporation began assessing these issues during 1995. The process
basically incorporates an assessment of need, implementation of software
modifications or installation of new software, testing of software and
interfaces thereto and development of contingency plans.
This report focuses primarily on information technology, our computer based
systems and applications. Non-information technology issues, which involve
embedded technology such as microcontrollers affecting performance of machinery
and equipment, are believed to have been assessed and substantially resolved.
As to information technology, the assessment phase is substantially
complete and the Corporation is actively engaged in the remaining phases. A
major part of this project was completed in 1997, when 18 of 21 banking
affiliates converted to a new integrated Year 2000 compliant banking and general
ledger software system. Two more affiliates were converted during the third
quarter of this year and the one remaining affiliate is operating on separate
Year 2000 compliant computer-based systems and software. The Trust accounting
software was upgraded to Year 2000 compliant software in October 1998.
Compliance certification testing for the Banking and Trust systems will be
completed by year end. Accordingly, testing and renovation of mission critical
systems are scheduled for completion in 1998. Of the remaining systems,
approximately 75% of the effort is accomplished, with substantial completion
expected in 1998. Achievement of fully integrated systems and vendor testing,
with development of contingency plans, is expected in the first half of 1999.
The Corporation has initiated formal communications with important vendors,
customers and other third parties regarding their Year 2000 readiness. Vendors
are requested to represent that their products and services will be compliant
and appropriately tested.
A Year 2000 committee has been established to monitor progress in
addressing all aspects of the Year 2000 plan. Formal reports are made to the
Audit Committee of our lead bank affiliate and to the Board of Directors of the
Corporation at their respective quarterly meetings. Progress is also being
monitored by internal and external audit reviews. Management believes that it is
on an appropriate schedule with its Year 2000 plan.
Through September 30, 1998, the Corporation has incurred incremental costs
of $9.3 million which it has identified as Year 2000 related. Management does
not anticipate that material additional incremental costs will be incurred in
the completion of its Year 2000 plan.
CAUTIONARY STATEMENT
This discussion is permeated with forward-looking statements within the
meaning of and pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. A forward-looking statement encompasses any
estimate, prediction, opinion or statement of belief contained in this
discussion, and the underlying management assumptions. Our expectations stated
in this report concerning matters such as the degree of progress and compliance
to be achieved at various times are based on assessments and assumptions that
involve many unpredictable factors including the readiness, compliance,
representations and performance of third parties. Therefore, these statements
should be read with caution. For example, the daily conduct of a banking
business involves interdependence among banks, other financial institutions and
governmental bodies (such as the Federal Reserve System) which will require
mutual readiness for Year 2000, with potentially serious consequences if
readiness is not achieved. In such an environment, while contingency plans can
be effective to some degree, there may not be viable alternatives if systems are
not compliant or if failure occurs. In such a case, the adverse effects on the
Corporation may be material to an unpredictable extent.
<PAGE>
PAGE 10
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, 1998, non-performing
assets decreased $4,095,000 to $26,988,000. Non-performing loans, one of the
components of non-performing assets, decreased $3,340,000 while other real
estate owned, the other component, decreased $755,000.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS SEPTEMBER 30, December 31,
(DOLLARS IN THOUSANDS) 1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans (1)........................................................................ $25,116 $28,456
Renegotiated loans (1)....................................................................... NONE NONE
Loans contractually past due 90 days or more and still accruing interest..................... NONE NONE
------- -------
Total non-performing loans............................................................ 25,116 28,456
Other real estate owned...................................................................... 1,872 2,627
------- -------
Total non-performing assets........................................................... $26,988 $31,083
======= =======
</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 $1,900,000 and
$2,273,000 for the first nine months of 1998 and the year 1997, 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
$718,000 and $1,144,000 for the first nine months of 1998 and the year 1997,
respectively.
NOTE: The Corporation was monitoring loans estimated to aggregate $3,417,000 at
September 30, 1998 and $3,662,000 at December 31, 1997, not classified as
non-accrual or renegotiated loans. These loans had 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.
<PAGE>
PAGE 11
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) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Allowance balance -- beginning................................. $ 106,097 $ 97,718 $ 111,446 $ 102,127
Allowance of acquired banks.................................... 1,130 1,373 1,373
Charge-offs:
Commercial, financial and agricultural....................... (1,972) (1,307) (346) (415)
Real estate -- construction.................................. (6)
Real estate -- mortgage...................................... (825) (483) (286) (337)
Consumer..................................................... (2,278) (2,982) (842) (932)
---------- ---------- ---------- ----------
Totals.................................................... (5,075) (4,778) (1,474) (1,684)
---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural....................... 960 433 126 245
Real estate -- construction.................................. 175 11 9
Real estate -- mortgage...................................... 601 288 153 207
Consumer..................................................... 1,039 1,271 302 464
---------- ---------- ---------- ----------
Totals.................................................... 2,775 2,003 581 925
---------- ---------- ---------- ----------
Net charge-offs................................................ (2,300) (2,775) (893) (759)
Provision for loan losses...................................... 8,475 9,943 2,849 3,518
---------- ---------- ---------- ----------
Allowance balance -- ending.................................... $ 113,402 $ 106,259 $ 113,402 $ 106,259
========== ========== ========== ==========
Average loans outstanding during period........................ $4,975,700 $4,778,500 $5,009,700 $4,943,500
========== ========== ========== ==========
Net charge-offs (annualized) as a percentage of average loans
outstanding during period.................................... .06% .08% .07% .06%
=== === === ===
Allowance for loan losses at period end as a percentage of
average loans................................................ 2.28% 2.22% 2.26% 2.15%
==== ==== ==== ====
Allowance for loan losses at period end as a percentage of
non-performing loans at period end........................... 451.51% 337.58%
====== ======
</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 $2,300,000 for
the first nine months of 1998 versus $2,775,000 during the first nine months of
1997. For further details of charge-offs and recoveries see the preceding
Allowance For Loan Losses table.
<PAGE>
PAGE 12
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>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
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....................................... $1,764,400 $120,230 9.11% $1,640,300 $111,663 9.10%
Real estate...................................... 2,564,300 173,361 9.04 2,492,400 169,326 9.08
Consumer......................................... 647,000 43,410 8.97 645,800 43,818 9.07
---------- -------- ---------- --------
Total loans................................. 4,975,700 337,001 9.06 4,778,500 324,807 9.09
---------- -------- ---------- --------
Federal funds sold.................................. 174,000 7,110 5.46 54,400 2,238 5.50
Securities purchased under resale agreements........ 10,900 464 5.69
Securities**:
Taxable securities
U.S. Treasury securities....................... 1,620,000 72,161 5.96 1,529,300 68,780 6.01
U.S. Agency securities......................... 18,400 784 5.70 15,900 665 5.57
Other stocks and bonds......................... 23,100 1,565 9.07 22,900 1,387 8.10
Tax-exempt securities
States and political subdivisions.............. 14,300 855 7.99 13,400 779 7.79
---------- -------- ---------- --------
Total securities............................ 1,675,800 75,365 6.01 1,581,500 71,611 6.05
---------- -------- ---------- --------
Interest-bearing deposits in other banks............ 100 4 5.28 100 4 5.65
---------- -------- ---------- --------
Total earning assets........................ 6,836,500 419,944 8.21 6,414,500 398,660 8.31
-------- --------
Cash and due from banks............................... 212,500 195,000
Bank premises and equipment, net...................... 85,000 79,100
Other assets.......................................... 173,400 162,200
Less: allowance for loan losses....................... (109,700) (101,400)
---------- ----------
Total assets................................ $7,197,700 $6,749,400
========== ==========
Interest-bearing liabilities
Deposits:
Savings deposits................................. $2,249,600 43,109 2.56 $2,199,600 43,174 2.62
Time deposits.................................... 2,236,300 91,675 5.48 2,141,300 87,419 5.46
---------- -------- ---------- --------
Total interest-bearing deposits............. 4,485,900 134,784 4.02 4,340,900 130,593 4.02
Short-term borrowings............................ 412,500 14,921 4.84 341,600 12,372 4.84
Long-term debt................................... 47,400 2,385 6.72 49,900 2,498 6.69
---------- -------- ---------- --------
Total interest-bearing funds................ 4,945,800 152,090 4.11 4,732,400 145,463 4.11
-------- --------
Noninterest-bearing deposits.......................... 1,198,000 1,055,400
Other liabilities and accrued expenses................ 92,700 86,800
---------- ----------
Total liabilities........................... 6,236,500 5,874,600
Stockholders' equity.................................. 961,200 874,800
---------- ----------
Total liabilities and stockholders'
equity.................................... $7,197,700 $6,749,400
========== ==========
Net interest income................................... $267,854 $253,197
======== ========
Net interest rate spread.............................. 4.10% 4.20%
Effect of noninterest-bearing funds................... 1.14 1.07
------- -------
Net interest margin on earning assets................. 5.24% 5.27%
======= =======
Taxable-equivalent adjustment included in:
Loan income...................................... $ 3,430 $ 2,853
Investment securities income..................... 642 528
-------- --------
Total....................................... $ 4,072 $ 3,381
======== ========
</TABLE>
*Presented on a tax equivalent basis using the statutory federal corporate
income tax rate of 35%.
**Balances reported at amortized cost; excludes pretax unrealized gains (losses)
on securities available-for-sale.
<PAGE>
PAGE 13
RECENT FASB PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 132, Employers'
Disclosures about Pensions and Other Post-
retirement Benefits, was issued in February 1998. This Statement revises the
disclosure requirements for pension and other postretirement benefit plans and
is effective for fiscal years beginning after December 15, 1997. The Corporation
expects to follow industry standards in reporting the required information.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized as either assets or liabilities in the statement of financial
position and be measured at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and whether
or not the derivative is designated as a hedging instrument. This Statement is
effective for fiscal years beginning after June 15, 1999 with initial
application in the first quarter of the fiscal year. SFAS No. 133 is not
expected to have a material effect on the Corporation's financial statements.
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, was issued in October 1998. This
Statement amends existing classification and accounting treatment of
mortgage-backed securities, retained after mortgage loans held for sale are
securitized, for entities engaged in mortgage banking activities. These
securities previously were classified and accounted for as trading and now may
be classified as held-to-maturity or available-for-sale, also. This Statement is
effective for the first fiscal quarter beginning after December 15, 1998. SFAS
No. 134 is not expected to have a material effect on the Corporation's financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Dr. William C. Richardson resigned as a director of the Registrant in
August, 1998. Accordingly, the Bylaws of the Registrant were amended by the
Board of Directors to reduce the number of directors of the Registrant from 18
to 17.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
Exhibit 27 -- Financial Data Schedule
(b) No Forms 8-K filed.
<PAGE>
PAGE 14
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 10, 1998 Principal Executive Officer
/s/ H. Furlong Baldwin
_______________________________________
By: H. Furlong Baldwin
Chairman of the Board and
Chief Executive Officer
November 10, 1998 Principal Financial Officer
/s/ Terry L. Troupe
_______________________________________
By: Terry L. Troupe
Chief Financial Officer
November 10, 1998 Chief Accounting Officer
/s/ Jerry F. Graham
_______________________________________
By: Jerry F. Graham
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998, FROM THE INCOME STATEMENT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND FROM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 213,244,000
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 186,978,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,779,640,000
<INVESTMENTS-CARRYING> 28,284,000
<INVESTMENTS-MARKET> 28,530,000
<LOANS> 5,023,307,000
<ALLOWANCE> 113,402,000
<TOTAL-ASSETS> 7,410,949,000
<DEPOSITS> 5,762,761,000
<SHORT-TERM> 506,340,000
<LIABILITIES-OTHER> 103,680,000
<LONG-TERM> 40,943,000
0
0
<COMMON> 142,857,000
<OTHER-SE> 854,368,000
<TOTAL-LIABILITIES-AND-EQUITY> 7,410,949,000
<INTEREST-LOAN> 333,571,000
<INTEREST-INVEST> 74,723,000
<INTEREST-OTHER> 7,578,000
<INTEREST-TOTAL> 415,872,000
<INTEREST-DEPOSIT> 134,784,000
<INTEREST-EXPENSE> 152,090,000
<INTEREST-INCOME-NET> 263,782,000
<LOAN-LOSSES> 8,475,000
<SECURITIES-GAINS> 9,000
<EXPENSE-OTHER> 162,655,000
<INCOME-PRETAX> 172,681,000
<INCOME-PRE-EXTRAORDINARY> 172,681,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,343,000
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 5.24
<LOANS-NON> 25,116,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,417,000
<ALLOWANCE-OPEN> 106,097,000
<CHARGE-OFFS> 5,075,000
<RECOVERIES> 2,775,000
<ALLOWANCE-CLOSE> 113,402,000
<ALLOWANCE-DOMESTIC> 113,402,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
