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 June 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
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(Exact name of registrant as specified in its charter)
<TABLE>
<S><C>
MARYLAND 52-0898572
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(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)
</TABLE>
(410) 237-5900
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(Registrant's telephone number, including area code)
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(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 July 31, 1998, registrant had outstanding 71,681,597 shares of Common
Stock.
<PAGE>
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks......................................................................... $ 336,806 $ 337,234
Interest-bearing deposits in other banks........................................................ 100 100
Investment securities:
U.S. Treasury and government agencies
Available-for-sale at fair value........................................................... 1,664,881 1,590,292
States and political subdivisions
Held-to-maturity -- market value of $14,744 (1998) and $11,130 (1997)...................... 14,565 11,081
Available-for-sale at fair value........................................................... 1,404 757
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........................................................... 15,578 16,264
---------- ------------
Total investment securities.............................................................. 1,711,071 1,631,623
---------- ------------
Federal funds sold.............................................................................. 118,247 1,452
Securities purchased under resale agreements.................................................... 75,000
Loans........................................................................................... 4,999,280 4,978,522
Less: allowance for loan losses................................................................. (111,446) (106,097)
---------- ------------
Loans, net............................................................................... 4,887,834 4,872,425
---------- ------------
Bank premises and equipment, less accumulated depreciation of
$86,948 (1998) and $85,245 (1997)............................................................. 85,370 82,899
Other real estate owned, net.................................................................... 2,236 2,627
Excess cost over equity in affiliated banks, net................................................ 49,526 36,230
Other assets.................................................................................... 134,907 131,079
---------- ------------
Total assets............................................................................. $7,326,097 $7,170,669
---------- ------------
---------- ------------
LIABILITIES
Deposits:
Noninterest-bearing deposits.................................................................. $1,280,465 $1,205,563
Interest-bearing deposits..................................................................... 4,498,253 4,488,348
---------- ------------
Total deposits........................................................................... 5,778,718 5,693,911
Short-term borrowings........................................................................... 431,063 402,734
Accrued expenses and other liabilities.......................................................... 94,273 89,004
Long-term debt.................................................................................. 49,951 50,016
---------- ------------
Total liabilities........................................................................ 6,354,005 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
71,784,995 shares in 1998 and 71,874,297 shares in 1997....................................... 143,570 143,749
Capital surplus................................................................................. 56,225 62,089
Retained earnings............................................................................... 759,864 717,978
Accumulated other comprehensive income.......................................................... 12,433 11,188
---------- ------------
Total stockholders' equity............................................................... 972,092 935,004
---------- ------------
Total liabilities and stockholders' equity............................................ $7,326,097 $7,170,669
---------- ------------
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</TABLE>
See notes to consolidated financial statements
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PAGE 3
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
FOR THE 6 MONTHS FOR THE 3 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME
Interest and fees on loans............................................. $221,145 $210,143 $111,629 $107,719
-------- -------- -------- --------
Interest and dividends on investment securities:
Taxable interest income.............................................. 47,821 46,211 24,142 22,885
Tax-exempt interest income........................................... 331 323 194 159
Dividends............................................................ 632 506 307 340
Other investment income.............................................. 163 232 83 111
-------- -------- -------- --------
48,947 47,272 24,726 23,495
-------- -------- -------- --------
Other interest income.................................................. 4,446 904 2,546 517
-------- -------- -------- --------
Total interest income........................................... 274,538 258,319 138,901 131,731
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits................................................... 89,723 84,796 44,878 42,972
Interest on short-term borrowings...................................... 9,093 7,654 4,545 3,945
Interest on long-term debt............................................. 1,667 1,668 830 834
-------- -------- -------- --------
Total interest expense.......................................... 100,483 94,118 50,253 47,751
-------- -------- -------- --------
NET INTEREST INCOME.................................................... 174,055 164,201 88,648 83,980
Provision for loan losses.............................................. 5,626 6,425 3,138 3,012
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................... 168,429 157,776 85,510 80,968
-------- -------- -------- --------
NONINTEREST INCOME
Trust division services................................................ 28,437 24,806 14,563 12,684
Service charges on deposit accounts.................................... 8,596 8,186 4,417 4,107
Other fees............................................................. 13,704 12,101 7,248 6,315
Investment securities gains and (losses)............................... 9 (1,499) (288)
Other income........................................................... 1,377 3,425 700 1,203
-------- -------- -------- --------
Total noninterest income........................................ 52,123 47,019 26,928 24,021
-------- -------- -------- --------
NONINTEREST EXPENSES
Salaries............................................................... 53,086 51,070 26,811 25,704
Employee benefits...................................................... 12,406 11,437 5,978 5,537
Net occupancy expense of bank premises................................. 5,277 5,561 2,707 2,949
Furniture and equipment expenses....................................... 9,395 8,610 5,012 4,527
Communications and supplies............................................ 5,961 5,727 2,974 2,947
FDIC insurance premium expense......................................... 368 314 184 172
Other expenses......................................................... 20,658 19,967 11,130 11,470
-------- -------- -------- --------
Total noninterest expenses...................................... 107,151 102,686 54,796 53,306
-------- -------- -------- --------
Income before income taxes............................................. 113,401 102,109 57,642 51,683
Applicable income taxes................................................ 41,322 37,550 21,082 19,138
-------- -------- -------- --------
NET INCOME............................................................. $ 72,079 $ 64,559 $ 36,560 $ 32,545
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER SHARE OF COMMON STOCK(2):
Basic................................................................ $1.00 $.91 $.51 $.46
-------- -------- -------- --------
-------- -------- -------- --------
Diluted.............................................................. $1.00 $.90 $.50 $.46
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 4
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
FOR THE 6 MONTHS
ENDED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS JUNE 30,
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees on loans......................................................................... $220,556 $207,989
Interest and dividends on investment securities.................................................... 48,692 47,190
Other interest income.............................................................................. 4,757 801
Noninterest income................................................................................. 51,543 45,826
Interest paid...................................................................................... (102,147) (94,253)
Noninterest expenses paid.......................................................................... (93,875) (84,155)
Income taxes paid.................................................................................. (42,451) (43,970)
-------- --------
Net cash provided by operating activities................................................... 87,075 79,428
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-to-maturity................................. 1,633 898
Proceeds from maturities of investment securities available-for-sale............................... 219,011 310,631
Proceeds from sales of investment securities available-for-sale.................................... 804 32,415
Purchases of investment securities held-to-maturity................................................ (1,092) (535)
Purchases of investment securities available-for-sale.............................................. (283,903) (274,173)
Net (increase) decrease in customer loans.......................................................... 32,919 (289,523)
Proceeds from sales of other real estate owned..................................................... 748 1,186
Capital expenditures............................................................................... (5,619) (5,520)
Proceeds from sales of buildings................................................................... 321 6,610
-------- --------
Net cash provided by (used in) investing activities......................................... (35,178) (218,011)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits....................................................... 42,371 72,945
Net increase in checking plus interest and savings accounts........................................ 51,526 1,840
Net increase (decrease) in certificates of deposit................................................. (80,192) 58,509
Net increase in short-term borrowings.............................................................. 28,329 27,893
Repayment of long-term debt........................................................................ (65) (63)
Proceeds from issuance of shares................................................................... 3,559 3,868
Repurchase of common shares........................................................................ (33,684) (6,079)
Dividends paid..................................................................................... (30,193) (26,553)
-------- --------
Net cash provided by (used in) financing activities......................................... (18,349) 132,360
-------- --------
Net increase (decrease) in cash and cash equivalents............................................... 33,548 (6,223)
Cash and cash equivalents at beginning of period................................................... 413,786 285,379
Adjustment for acquired bank....................................................................... 7,819
-------- --------
Cash and cash equivalents at end of period......................................................... $455,153 $279,156
-------- --------
-------- --------
<CAPTION>
FOR THE 6 MONTHS
ENDED
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES JUNE 30,
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Net income......................................................................................... $ 72,079 $ 64,559
-------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................................... 4,177 3,975
Provision for loan losses........................................................................ 5,626 6,425
Amortization of excess cost over equity in affiliates............................................ 1,594 1,000
Investment securities (gains) and losses......................................................... (9) 1,499
Write-downs of other real estate owned........................................................... 136 172
Gains on sales of other real estate owned........................................................ (128) (73)
Gains on sales of buildings...................................................................... (59) (1,382)
Increase in interest receivable.................................................................. (533) (2,339)
Increase in other receivables.................................................................... (384) (1,237)
(Increase) decrease in other assets.............................................................. (1,284) 6,072
Decrease in interest payable..................................................................... (1,664) (135)
Increase in accrued expenses..................................................................... 8,653 7,312
Decrease in taxes payable........................................................................ (1,129) (6,420)
-------- --------
Total adjustments........................................................................... 14,996 14,869
-------- --------
Net cash provided by operating activities.......................................................... $ 87,075 $ 79,428
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements
<PAGE>
PAGE 5
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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>
BALANCE, DECEMBER 31, 1996......................................... $836,036 $ 94,872 $97,154 $641,212 $ 2,798
Net income......................................................... 64,559 64,559
Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes................. 444 444
--------
Comprehensive income............................................... 65,003
--------
Cash dividends paid:
Common stock ($.37 per share).................................... (26,553) (26,553)
Issuance of 57,330 shares for dividend reinvestment and stock
purchase plan.................................................... 2,013 114 1,899
Issuance of 10,509 shares for employee stock purchase dividend
reinvestment plan................................................ 372 21 351
Issuance of 72,131 shares for employee stock option plan........... 1,517 144 1,373
Purchase of 170,000 shares under stock repurchase plan............. (6,079) (340) (5,739)
Issuance of 23,701,458 shares for a 3 for 2 stock split............ (34) 47,403 (47,437)
Vested stock options............................................... 1,114 1,114
-------- -------- ------- -------- -------
BALANCE, JUNE 30, 1997............................................. $873,389 $142,214 $48,715 $679,218 $ 3,242
-------- -------- ------- -------- -------
-------- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1997......................................... $935,004 $143,749 $62,089 $717,978 $11,188
Net income......................................................... 72,079 72,079
Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes(5).............. 1,245 1,245
--------
Comprehensive income............................................... 73,324
--------
Cash dividends paid:
Common stock ($.42 per share).................................... (30,193) (30,193)
Issuance of 63,474 shares for dividend reinvestment and stock
purchase plan.................................................... 2,156 127 2,029
Issuance of 11,571 shares for employee stock purchase dividend
reinvestment plan................................................ 415 23 392
Issuance of 77,473 shares for employee stock option plan........... 988 155 833
Purchase of 917,500 shares under stock repurchase plan............. (33,684) (1,835) (31,849)
Issuance of 675,680 shares for bank acquisition.................... 23,055 1,351 21,704
Vested stock options............................................... 1,027 1,027
-------- -------- ------- -------- -------
BALANCE, JUNE 30, 1998............................................. $972,092 $143,570 $56,225 $759,864 $12,433
-------- -------- ------- -------- -------
-------- -------- ------- -------- -------
</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 71,889,059
shares for 1998 and 71,128,269 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 six months ended June 30, 1998 and 1997 were
72,438,731, and 71,481,452, 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>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
Impaired loans with a valuation allowance......................................................... $ 3,538 $ 2,785
Impaired loans with no valuation allowance........................................................ 19,594 20,805
-------- ------------
Total impaired loans............................................................................ $ 23,132 $ 23,590
-------- ------------
-------- ------------
Allowance for loan losses applicable to impaired loans............................................ $ 1,830 $ 1,317
Allowance for loan losses applicable to other than impaired loans................................. 109,616 104,780
-------- ------------
Total allowance for loan losses................................................................. $111,446 $106,097
-------- ------------
-------- ------------
Year-to-date interest income on impaired loans recorded on the cash basis......................... $ 485 $ 1,207
-------- ------------
-------- ------------
Year-to-date average recorded investment in impaired loans during the period...................... $ 21,800 $ 22,600
-------- ------------
-------- ------------
Quarter-to-date interest income on impaired loans recorded on the cash basis...................... $ 331 $ 367
-------- ------------
-------- ------------
Quarter-to-date average recorded investment in impaired loans during the period................... $ 22,200 $ 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 June 30, 1998, total unused lines of credit
approximated $2,421,300,000. In addition, letters of credit are issued for
the benefit of customers by affiliated banks. Outstanding letters of credit
were $133,100,000 at June 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:
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED JUNE 30,
1998 1997
----------------------------- ------------------------------
Tax Tax
Pretax (Expense) Net Pretax (Expense) Net
(DOLLARS IN THOUSANDS) Amount Benefit Amount Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
Unrealized gains (losses) on securites available-for-sale:
Unrealized holding gains (losses) arising during the
period.................................................... $2,021 $(771) $1,250 $ (666) $ 204 $(462)
Reclassification adjustment for (gains) losses included in
net income................................................ (9) 4 (5) 1,499 (593) 906
------ --------- ------ ------- --------- ------
Total....................................................... $2,012 $(767) $1,245 $ 833 $(389) $ 444
------ --------- ------ ------- --------- ------
------ --------- ------ ------- --------- ------
</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 six months ended June 30, 1998 was $1.00, an
increase of 9.9% over the $.91 for the comparable period last year. Consolidated
net income was $72,079,000, an increase of 11.6% over the $64,559,000 for the
first six months of 1997.
Net income per share for the second quarter of 1998 was $.51, an increase
of 10.9% over the $.46 for the comparable period last year. Consolidated net
income was $36,560,000, an increase of 12.3% over the $32,545,000 for the second
quarter of 1997.
Amounts for the second quarter of 1998 include the accounts of Marshall
National Bank and Trust Company, Marshall, Virginia, which affiliated with
Mercantile on April 1, 1998. At the acquisition date, Marshall Bank had assets
of $80,084,000. The acquisition was not material to Mercantile's results of
operations and was accounted for using the purchase method of accounting.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the six months ended June 30, 1998 was 6.0% higher
than the amount for the comparable period in 1997 due to an increase of 7.2% in
average earning assets. Average loans increased by 5.6% over the first half of
1997 to $4,958,400,000 for the first half of 1998. Net interest margin on
earning assets was 5.27% for the first six months of 1998 and 5.32% for the same
period in 1997.
Net interest income for the three months ended June 30, 1998 was 5.6%
higher than the amount for the comparable period in 1997 due to an increase of
7.0% in average earning assets. Average total loans increased by 4.1% over the
second quarter of 1997 to $4,978,000,000. Net interest margin on earning assets
was 5.29% for the second quarter of 1998 and 5.35% for the same period in 1997.
NONINTEREST INCOME
For the first six months of 1998, total noninterest income increased 10.9%
to $52,123,000 from $47,019,000 for the first half 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
$1,499,000 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 June 30, 1998 increased
12.1% to $26,928,000 from $24,021,000 for the second quarter 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 losses of $288,000 in the second quarter of 1997.
NONINTEREST EXPENSES
Total noninterest expenses, excluding the provision for loan losses, for
the first half of 1998 increased 4.3% from the comparable period in 1997.
Increases in salaries, employee benefits, and furniture and equipment expenses,
accounted for most of the additional expense.
Total noninterest expenses, excluding the provision for loan losses, for
the second quarter of 1998 increased 2.8% from the comparable period in 1997.
Increases in salaries, furniture and equipment expenses, and employee benefits,
were partially offset by lower expenses related to occupancy and other expenses.
ANALYSIS OF FINANCIAL CONDITION
Investment securities increased 4.9% to $1,711,071,000 at June 30, 1998
from $1,631,623,000 at December 31, 1997. Total loans outstanding increased
slightly to $4,999,280,000 at June 30, 1998 from $4,978,522,000 at December 31,
1997.
Total deposits increased 1.5% to $5,778,718,000 as of June 30, 1998 from
$5,693,911,000 at December 31, 1997. Interest-bearing deposits were
$4,498,253,000 (77.8% of total deposits), as of June 30, 1998, reflecting a less
than 1% increase
<PAGE>
PAGE 9
from the $4,488,348,000 (78.8% of total deposits), at December 31, 1997.
Noninterest-bearing deposits increased 6.2% to $1,280,465,000 as of June 30,
1998, compared to $1,205,563,000 at December 31, 1997.
Total stockholders' equity increased 4.0% to $972,092,000 at June 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 13.27% at June 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.
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 six months ended June 30, 1998, non-performing assets
decreased $868,000 to $30,215,000. Non-performing loans, one of the components
of non-performing assets, decreased $477,000 while other real estate owned, the
other component, decreased $391,000.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
Non-accrual loans (1).............................................................................. $27,979 $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.................................................................. 27,979 28,456
Other real estate owned............................................................................ 2,236 2,627
------- -------
Total non-performing assets................................................................. $30,215 $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 $1,401,000 and
$2,273,000 for the first six 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
$563,000 and $1,144,000 for the first six months of 1998 and the year 1997,
respectively.
NOTE: The Corporation was monitoring loans estimated to aggregate $1,522,000 at
June 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 10
The following table presents a summary of the activity in the Allowance for Loan
Losses:
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED FOR THE 3 MONTHS ENDED
ALLOWANCE FOR LOAN LOSSES JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
Allowance balance -- beginning................................. $ 106,097 $ 97,718 $ 107,044 $ 100,202
Allowance of acquired bank..................................... 1,130 1,130
Charge-offs:
Commercial, financial and agricultural....................... (1,626) (892) (351) (444)
Real estate -- construction.................................. (6)
Real estate -- mortgage...................................... (539) (146) (325) (44)
Consumer..................................................... (1,436) (2,050) (703) (1,082)
---------- ---------- ---------- ----------
Totals.................................................... (3,601) (3,094) (1,379) (1,570)
---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and agricultural....................... 834 188 602 88
Real estate -- construction.................................. 175 2 74 2
Real estate -- mortgage...................................... 448 81 401 26
Consumer..................................................... 737 807 436 367
---------- ---------- ---------- ----------
Totals.................................................... 2,194 1,078 1,513 483
---------- ---------- ---------- ----------
Net (charge-offs)/recoveries................................... (1,407) (2,016) 134 (1,087)
Provision for loan losses...................................... 5,626 6,425 3,138 3,012
---------- ---------- ---------- ----------
Allowance balance -- ending.................................... $ 111,446 $ 102,127 $ 111,446 $ 102,127
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average loans outstanding during period........................ $4,958,400 $4,694,700 $4,978,000 $4,781,200
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net charge-offs/(recoveries) -- annualized as a percentage of
average loans outstanding during period...................... .06% .09% (.01)% .09%
--- --- --- ---
--- --- --- ---
Allowance for loan losses at period end as a percentage of
average loans................................................ 2.25% 2.18% 2.24% 2.14%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for loan losses at period end as a percentage of
non-performing loans at period end........................... 398.32% 322.02%
---------- ----------
---------- ----------
</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 $1,407,000 for
the first half of 1998 versus $2,016,000 during the first six months of 1997.
For further details of charge-offs and recoveries see the preceding Allowance
For Loan Losses table.
<PAGE>
PAGE 11
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 six 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>
Earning assets
Loans:
Commercial....................................... $1,763,700 $ 79,884 9.13% $1,576,300 $ 71,352 9.13%
Real estate...................................... 2,547,800 114,713 9.08 2,473,700 111,598 9.10
Consumer......................................... 646,900 28,860 9.00 644,700 29,102 9.10
---------- -------- ---------- --------
Total loans................................. 4,958,400 223,457 9.09 4,694,700 212,052 9.11
---------- -------- ---------- --------
Federal funds sold.................................. 146,600 3,979 5.47 34,400 901 5.29
Securities purchased under resale agreements........ 16,500 464 5.69
Securities**:
Taxable securities
U.S. Treasury securities....................... 1,592,000 47,273 5.99 1,530,700 45,800 6.03
U.S. Agency securities......................... 17,700 548 6.25 15,000 411 5.54
Other stocks and bonds......................... 22,800 992 8.75 22,600 882 7.86
Tax-exempt securities
States and political subdivisions.............. 13,800 547 7.99 13,200 509 7.79
---------- -------- ---------- --------
Total securities............................ 1,646,300 49,360 6.05 1,581,500 47,602 6.07
---------- -------- ---------- --------
Interest-bearing deposits in other banks............ 100 3 5.39 100 3 5.97
---------- -------- ---------- --------
Total earning assets........................ 6,767,900 277,263 8.26 6,310,700 260,558 8.32
-------- --------
Cash and due from banks............................... 210,500 186,100
Bank premises and equipment, net...................... 84,200 78,700
Other assets.......................................... 169,600 155,800
Less: allowance for loan losses....................... (108,300) (99,900)
---------- ----------
Total assets................................ $7,123,900 $6,631,400
---------- ----------
---------- ----------
Interest-bearing liabilities
Deposits:
Savings deposits................................. $2,233,700 28,533 2.58 $2,198,800 28,539 2.62
Time deposits.................................... 2,239,700 61,190 5.51 2,087,200 56,257 5.44
---------- -------- ---------- --------
Total interest-bearing deposits............. 4,473,400 89,723 4.04 4,286,000 84,796 3.99
Short-term borrowings............................ 377,200 9,093 4.86 331,700 7,654 4.65
Long-term debt................................... 50,000 1,667 6.72 49,800 1,668 6.75
---------- -------- ---------- --------
Total interest-bearing funds................ 4,900,600 100,483 4.13 4,667,500 94,118 4.07
-------- --------
Noninterest-bearing deposits.......................... 1,176,000 1,018,200
Other liabilities and accrued expenses................ 93,300 84,300
---------- ----------
Total liabilities........................... 6,169,900 5,770,000
Stockholders' equity.................................. 954,000 861,400
---------- ----------
Total liabilities and stockholders'
equity.................................... $7,123,900 $6,631,400
---------- ----------
---------- ----------
Net interest income................................... $176,780 $166,440
-------- --------
-------- --------
Net interest rate spread.............................. 4.13% 4.25%
Effect of noninterest-bearing funds................... 1.14 1.07
------- -------
Net interest margin on earning assets................. 5.27% 5.32%
------- -------
------- -------
Taxable-equivalent adjustment included in:
Loan income...................................... $ 2,312 $ 1,909
Investment securities income..................... 413 330
-------- --------
Total....................................... $ 2,725 $ 2,239
-------- --------
-------- --------
</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 12
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Description of matters voted upon and vote at Annual Meeting of
Shareholders held April 29, 1998.
Results of voting for Election of Directors:
DIRECTORS FOR WITHHELD
--------- --- --------
Cynthia A. Archer 62,831,371 292,112
H. Furlong Baldwin 62,860,796 262,687
Thomas M. Bancroft, Jr. 62,737,415 386,068
Richard O. Berndt 62,676,191 447,292
James A. Block, M.D. 61,528,261 1,595,222
William R. Brody, M.D. 62,667,681 455,802
George L. Bunting, Jr. 62,863,653 259,830
Martin L. Grass 56,120,371 7,003,112
Freeman A. Hrabowski, III 62,602,424 521,059
B. Larry Jenkins 62,875,201 248,282
Mary Junck 62,849,223 274,260
Robert A. Kinsley 62,872,623 250,860
William J. McCarthy 62,641,078 482,405
Morris W. Offit 62,866,307 257,176
Morton B. Plant 62,868,777 254,706
Christian H. Poindexter 62,825,603 297,880
William C. Richardson 62,698,129 425,354
Donald J. Shepard 62,875,163 248,320
Results of voting on Ratification of Appointment of Auditor (Coopers &
Lybrand L.L.P.):
FOR AGAINST ABSTAINED
--- ------- ---------
62,197,590 591,996 298,044
There were no broker non-votes on these matters except for 35,853 non-votes
on Ratification of Appointment of Auditor.
ITEM 5. OTHER INFORMATION
The information presented here relates to the 1999 Annual Meeting of
Stockholders of the Registrant, as affected by recent amendments to Rule 14a-4
and Rule 14a-8 promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
<PAGE>
PAGE 13
The 1999 Annual Meeting of Stockholders of the Registrant is expected to be
held on April 28, 1999. The deadline in the Registrant's Bylaws for giving
notice (in the form and with the content specified in the Bylaws) to the
Registrant of any proposal to be presented at the meeting by any stockholder,
outside the process of Rule 14a-8, is February 27, 1999, the 60th day before the
meeting. (Under the Bylaws, such notice should be submitted no earlier than
January 28, 1999, the 90th day before the meeting). To be timely, the notice
must be addressed to the Secretary, Mercantile Bankshares Corporation, Two
Hopkins Plaza, Baltimore, Maryland 21201, and must be received by the Secretary
after January 27, 1998 and before the due date of February 27, 1999. If timely
notice of the proposal is not given, the proposal may not be considered at the
meeting.
In addition, in the case of a stockholder proposal to be presented at the
1999 Annual Meeting, outside the process of Rule 14a-8, amended Rule 14a-4(c)
permits the Registrant to exercise discretionary proxy voting authority on the
proposal without limitation unless the stockholder gives the Registrant a timely
notice of the proposal. Under the Rule, the 1999 required notice date is the
date corresponding to the 45th day prior to mailing of the Registrant's proxy
materials for its 1998 annual meeting. Accordingly, the required notice date
will be February 10, 1999. If, on or before that date, notice of the proposal is
not received by the Secretary at the address set forth above, the Registrant may
vote on the proposal under the general discretionary authority granted in its
proxies, without discussion of the proposal in its proxy materials. Timely
notices submitted under Rule 14a-4(c), containing specified information, can in
certain circumstances require the Registrant to comment on a proposal in its
proxy materials or to vote its proxies on the proposal only where specific
voting authority is given.
For information concerning notice of any proposals to be made under Rule
14a-8, please refer to the Registrant's Proxy Statement dated March 27, 1998.
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
August 11, 1998 Principal Executive Officer
/s/ H. Furlong Baldwin
______________________
By: H. Furlong Baldwin
Chairman of the Board and
Chief Executive Officer
August 11, 1998 Principal Financial Officer
/s/ Terry L. Troupe
___________________
By: Terry L. Troupe
Chief Financial Officer
August 11, 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 JUNE 30, 1998, FROM THE INCOME STATEMENT FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND FROM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 336,806,000
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 118,247,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,681,863,000
<INVESTMENTS-CARRYING> 29,208,000
<INVESTMENTS-MARKET> 29,387,000
<LOANS> 4,999,280,000
<ALLOWANCE> 111,446,000
<TOTAL-ASSETS> 7,326,097,000
<DEPOSITS> 5,778,718,000
<SHORT-TERM> 431,063,000
<LIABILITIES-OTHER> 94,273,000
<LONG-TERM> 49,951,000
0
0
<COMMON> 143,570,000
<OTHER-SE> 828,522,000
<TOTAL-LIABILITIES-AND-EQUITY> 7,326,097,000
<INTEREST-LOAN> 221,145,000
<INTEREST-INVEST> 48,947,000
<INTEREST-OTHER> 4,446,000
<INTEREST-TOTAL> 274,538,000
<INTEREST-DEPOSIT> 89,723,000
<INTEREST-EXPENSE> 100,483,000
<INTEREST-INCOME-NET> 174,055,000
<LOAN-LOSSES> 5,626,000
<SECURITIES-GAINS> 9,000
<EXPENSE-OTHER> 107,151,000
<INCOME-PRETAX> 113,401,000
<INCOME-PRE-EXTRAORDINARY> 113,401,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,079,000
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 5.27
<LOANS-NON> 27,979,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,522,000
<ALLOWANCE-OPEN> 106,097,000
<CHARGE-OFFS> 3,601,000
<RECOVERIES> 2,194,000
<ALLOWANCE-CLOSE> 111,446,000
<ALLOWANCE-DOMESTIC> 111,446,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
