Mercantile to offer bonuses to workers tempted to flee

Bank sets aside $39 million to retain key personnel during takeover by PNC

December 07, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

Mercantile Bankshares Corp. has set aside $39 million to pay bonuses and other retention payments to employees to prevent them from being lured to competitors, as the bank prepares to consolidate its operations with acquirer PNC Financial Services Group of Pittsburgh.

Many of the bank's 3,600 employees could be eligible for a bonus, including senior management as well as loan officers, tellers and other rank-and-file workers.

The bulk of the payments, which were disclosed in a recent regulatory filing, would be paid upon the closing of the transaction, which is expected to happen in the first three months of next year.

Mercantile, the largest independent bank in Maryland, agreed in October to be acquired by PNC in a $6 billion deal that not only upended the local banking community but prompted other banks to try to poach Mercantile employees, some of whom may be laid off. A spokesman said yesterday that the company has not seen a "significant" number of departures.

"Headhunters are calling people daily for all different kinds of positions at all different levels, so this is a defensive move," said Stuart Greenberg, a private banking consultant in Baltimore. "It's also an offensive move in that they are trying to keep the better people on board."

The PNC-Mercantile deal comes as the banking industry is in the throes of a years-long consolidation. Mercantile also faces potentially hefty costs to upgrade out-of-date technology and an interest-rate environment that could squeeze earnings.

"The challenges that they were facing as an industry are significant," said Matt Schultheis, an analyst with Ferris Baker Watts Inc. "And when you layer into that some of these other issues like the back office being as outdated as it was, the head winds just appeared very strong and it looked like a good time to get out."

Mercantile and PNC officials are developing plans to combine operations, and officials say no decisions have been made about how many jobs would be cut.

PNC expects to take a $156 million charge related to potential layoffs, canceled contracts with service providers and other costs.

Greenberg estimates that hundreds of jobs at Mercantile could be cut or eliminated through attrition, with the most vulnerable being back-office workers and administrative employees at banking subsidiaries, which were largely under local control in Mercantile's decentralized management structure.

Several top executives -- except Chairman and Chief Executive Officer Edward J. "Ned" Kelly III -- may be entitled to lump-sum severance payments if they are terminated after the merger is completed. A few months before the PNC deal was inked, Kelly gave up his "golden parachute" that would have entitled him to millions in cash payments in the event of a change of control.

However, Kelly and other executives will be entitled to cash-out options and restricted stock, whether the grants have vested or not. The value of those payouts hasn't been disclosed because the amount depends on the price of the stock when the transaction closes.

They could be worth millions to Kelly. He was awarded $5.5 million in restricted stock at the same time the board rescinded his change-in-control payouts this year. He also holds about $3 million in stock options, according to the bank's latest proxy statement.

Mercantile's stock has soared 25 percent since the announcement of the deal, which valued the shares at $47.24 each. The stock rose 2 cents to $45.99 yesterday.

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