Mercantile Bankshares Corporation Quarterly Report on Form 10-Q

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 March 31, 2003

 

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

incorporation or organization)

 

(I.R.S. Employer

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 ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). 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 April 16, 2003, registrant had outstanding 68,926,446 shares of Common Stock.


Page 2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

MERCANTILE BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)

  

March 31, 2003

    

December 31,
2002

    

March 31,
2002

 
                            

ASSETS

                          

Cash and due from banks

  

$

    307,404

 

  

$

   281,130

 

  

$

   229,046

 

Interest-bearing deposits in other banks

  

 

358

 

  

 

358

 

  

 

358

 

Federal funds sold

  

 

245,513

 

  

 

264,293

 

  

 

217,746

 

    


  


  


Total cash and cash equivalents

  

 

553,275

 

  

 

545,781

 

  

 

447,150

 

    


  


  


Investment securities available-for-sale (Note 3)

  

 

2,641,976

 

  

 

2,511,192

 

  

 

2,259,803

 

Investment securities held-to-maturity (Note 3)

  

 

53,918

 

  

 

53,391

 

  

 

53,604

 

                            

Loans held-for-sale

  

 

 

  

 

 

  

 

42,583

 

Loans:

                          

Commercial

  

 

4,403,331

 

  

 

4,317,263

 

  

 

4,055,360

 

Construction

  

 

850,420

 

  

 

810,985

 

  

 

677,274

 

Residential real estate

  

 

1,087,207

 

  

 

1,066,694

 

  

 

1,088,752

 

Consumer

  

 

1,011,637

 

  

 

1,014,905

 

  

 

981,573

 

Lease financing

  

 

93,958

 

  

 

102,180

 

  

 

138,656

 

    


  


  


Total loans

  

 

7,446,553

 

  

 

7,312,027

 

  

 

6,941,615

 

Less: allowance for loan losses

  

 

(140,427

)

  

 

(138,601

)

  

 

(143,505

)

    


  


  


Loans, net

  

 

7,306,126

 

  

 

7,173,426

 

  

 

6,798,110

 

    


  


  


Bank premises and equipment, less accumulated depreciation of
$122,073 (2003), $119,666 (December 2002) and $115,793 (March 2002)

  

 

103,847

 

  

 

102,428

 

  

 

100,897

 

Other real estate owned, net

  

 

194

 

  

 

132

 

  

 

179

 

Goodwill, net

  

 

115,407

 

  

 

102,705

 

  

 

102,705

 

Other intangible assets, net (Note 6)

  

 

17,740

 

  

 

7,530

 

  

 

8,945

 

Other assets

  

 

226,138

 

  

 

293,791

 

  

 

174,365

 

    


  


  


Total assets

  

$

11,018,621

 

  

$

10,790,376

 

  

$

9,988,341

 

    


  


  


LIABILITIES

                          

Deposits:

                          

Noninterest-bearing deposits

  

$

2,121,444

 

  

$

2,086,745

 

  

$

1,850,927

 

Interest-bearing deposits

  

 

6,374,039

 

  

 

6,174,195

 

  

 

5,640,738

 

    


  


  


Total deposits

  

 

8,495,483

 

  

 

8,260,940

 

  

 

7,491,665

 

Short-term borrowings

  

 

768,476

 

  

 

823,385

 

  

 

849,095

 

Accrued expenses and other liabilities

  

 

111,792

 

  

 

94,479

 

  

 

132,838

 

Long-term debt

  

 

290,576

 

  

 

287,214

 

  

 

269,201

 

    


  


  


Total liabilities

  

 

9,666,327

 

  

 

9,466,018

 

  

 

8,742,799

 

    


  


  


SHAREHOLDERS’ 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 shares—68,919,397 (2003), 68,836,092 (December 2002) and 69,891,078 (March 2002); restricted shares— 91,127 (2003), 76,250 (December 2002) and None (March 2002)

  

 

137,839

 

  

 

137,672

 

  

 

139,782

 

Capital surplus

  

 

124,029

 

  

 

120,577

 

  

 

162,721

 

Retained earnings

  

 

1,038,143

 

  

 

1,010,248

 

  

 

931,147

 

Accumulated other comprehensive income (loss)

  

 

52,283

 

  

 

55,861

 

  

 

11,892

 

    


  


  


Total shareholders’ equity

  

 

1,352,294

 

  

 

1,324,358

 

  

 

1,245,542

 

    


  


  


Total liabilities and shareholders’ equity

  

$

11,018,621

 

  

$

10,790,376

 

  

$

9,988,341

 

    


  


  


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 3

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CONSOLIDATED INCOME

 

    

For the 3 Months Ended

March 31,

 

(Dollars in thousands, except per share data)

  

2003

  

2002

 
                 

INTEREST INCOME

               

Interest and fees on loans

  

$

110,992

  

$

116,698

 

    

  


Interest and dividends on investment securities:

               

Taxable interest income

  

 

21,195

  

 

24,343

 

Tax-exempt interest income

  

 

467

  

 

480

 

Dividends

  

 

229

  

 

283

 

Other investment income

  

 

6,553

  

 

2,993

 

    

  


    

 

28,444

  

 

28,099

 

    

  


Other interest income

  

 

726

  

 

1,665

 

    

  


Total interest income

  

 

140,162

  

 

146,462

 

    

  


INTEREST EXPENSE

               

Interest on deposits

  

 

25,129

  

 

33,134

 

Interest on short-term borrowings

  

 

1,545

  

 

3,312

 

Interest on long-term debt

  

 

2,362

  

 

2,828

 

    

  


Total interest expense

  

 

29,036

  

 

39,274

 

    

  


NET INTEREST INCOME

  

 

111,126

  

 

107,188

 

Provision for loan losses

  

 

3,016

  

 

3,083

 

    

  


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

  

 

108,110

  

 

104,105

 

    

  


NONINTEREST INCOME

               

Investment and wealth management

  

 

17,365

  

 

16,527

 

Service charges on deposit accounts

  

 

8,060

  

 

7,463

 

Mortgage banking related fees

  

 

2,388

  

 

3,174

 

Investment securities gains and (losses)

  

 

815

  

 

(2

)

Other income

  

 

9,225

  

 

7,677

 

    

  


Total noninterest income

  

 

37,853

  

 

34,839

 

    

  


NONINTEREST EXPENSES

               

Salaries

  

 

33,638

  

 

31,646

 

Employee benefits

  

 

9,428

  

 

8,531

 

Stock-based compensation expense

  

 

102

  

 

403

 

Net occupancy expense of bank premises

  

 

4,096

  

 

3,905

 

Furniture and equipment expenses

  

 

6,799

  

 

6,432

 

Communications and supplies

  

 

3,436

  

 

3,256

 

Other expenses

  

 

12,282

  

 

12,018

 

    

  


Total noninterest expenses

  

 

69,781

  

 

66,191

 

    

  


Income before income taxes

  

 

76,182

  

 

72,753

 

Applicable income taxes

  

 

27,196

  

 

26,578

 

    

  


NET INCOME

  

$

48,986

  

$

46,175

 

    

  


NET INCOME PER SHARE OF COMMON STOCK (Note 2):

               

Basic

  

$

.71

  

$

.66

 

    

  


Diluted

  

$

.71

  

$

.66

 

    

  


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 4

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CONSOLIDATED CASH FLOWS

 

Increase (decrease) in cash and cash equivalents

  

For the 3 Months Ended March 31,

 

(Dollars in thousands)

  

2003

    

2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                 

Net income

  

$

48,986

 

  

$

46,175

 

Adjustments to reconcile net income to net cash provided by operating activities:

                 

Provision for loan losses

  

 

3,016

 

  

 

3,083

 

Depreciation and amortization

  

 

3,122

 

  

 

3,163

 

Amortization of intangible assets

  

 

560

 

  

 

522

 

Investment securities (gains) and losses

  

 

(815

)

  

 

2

 

Write-downs of investments in private equity funds

  

 

103

 

  

 

898

 

Write-downs of other real estate owned

  

 

 

  

 

2

 

Gains on sales of other real estate owned

  

 

(268

)

  

 

 

Gains on sales of buildings

  

 

(142

)

  

 

(350

)

Net (increase) decrease in assets:

                 

Interest receivable

  

 

238

 

  

 

(1,983

)

Other receivables

  

 

(1,817

)

  

 

297

 

Other assets

  

 

378

 

  

 

1,470

 

Loans held-for-sale

  

 

 

  

 

95,367

 

Net increase (decrease) in liabilities:

                 

Interest payable

  

 

3,189

 

  

 

(3,174

)

Accrued expenses

  

 

(2,654

)

  

 

(7,038

)

Taxes payable

  

 

18,721

 

  

 

13,856

 

    


  


Net cash provided by operating activities

  

 

72,617

 

  

 

152,290

 

    


  


CASH FLOWS FROM INVESTING ACTIVITIES:

                 

Proceeds from maturities of investment securities held-to-maturity

  

 

71

 

  

 

830

 

Proceeds from maturities of investment securities available-for-sale

  

 

245,816

 

  

 

139,653

 

Proceeds from sales of investment securities available-for-sale

  

 

107,995

 

  

 

 

Purchases of investment securities held-to-maturity

  

 

(598

)

  

 

(2,165

)

Purchases of investment securities available-for-sale

  

 

(414,155

)

  

 

(134,031

)

Net increase in customer loans

  

 

(135,778

)

  

 

(36,410

)

Proceeds from sales of other real estate owned

  

 

268

 

  

 

 

Capital expenditures

  

 

(4,603

)

  

 

(2,990

)

Proceeds from sales of buildings

  

 

205

 

  

 

575

 

Acquisition of asset management company

  

 

(24,211

)

  

 

 

Other investing activity

  

 

(810

)

  

 

(8,070

)

    


  


Net cash used in investing activities

  

 

(225,800

)

  

 

(42,608

)

    


  


CASH FLOWS FROM FINANCING ACTIVITIES:

                 

Net increase (decrease) in noninterest-bearing deposits

  

 

34,699

 

  

 

(32,951

)

Net increase in checking plus interest and savings accounts

  

 

41,788

 

  

 

171,145

 

Net increase (decrease) in certificates of deposit

  

 

158,056

 

  

 

(93,901

)

Net decrease in short-term borrowings

  

 

(54,909

)

  

 

(4,183

)

Proceeds from issuance of shares

  

 

1,892

 

  

 

2,518

 

Repurchase of common shares

  

 

(212

)

  

 

 

Dividends paid

  

 

(20,637

)

  

 

(19,507

)

    


  


Net cash provided by financing activities

  

 

160,677

 

  

 

23,121

 

    


  


Net increase (decrease) in cash and cash equivalents

  

 

7,494

 

  

 

132,803

 

Cash and cash equivalents at beginning of period

  

 

545,781

 

  

 

314,347

 

    


  


Cash and cash equivalents at end of period

  

$

553,275

 

  

$

447,150

 

    


  


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 5

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

 

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

 

(Dollars in thousands, except per share data)

  

Total

    

Common Stock

    

Capital Surplus

    

Retained Earnings

      

Accumulated Other Comprehensive Income (Loss)

 
                                                

BALANCE, DECEMBER 31, 2001

  

$

1,230,206

 

  

$

139,551

 

  

$

159,947

 

  

$

904,479

 

    

$

26,229

 

 

Net income

  

 

46,175

 

                    

 

46,175

 

          

Unrealized gains (losses) on securities available-for-sale, net of reclassification adjustment, net of taxes

  

 

(14,337

)

                               

 

(14,337

)

    


                                     

Comprehensive income

  

 

31,838

 

                                     
    


                                     

Cash dividends paid:

                                              

Common stock ($.28 per share)

  

 

(19,507

)

                    

 

(19,507

)

          

Issuance of 28,003 shares for dividend reinvestment and stock purchase plan

  

 

897

 

  

 

56

 

  

 

841

 

                   

Issuance of 5,133 shares for employee stock purchase
dividend reinvestment plan

  

 

219

 

  

 

10

 

  

 

209

 

                   

Issuance of 82,232 shares for employee stock option plan

  

 

1,402

 

  

 

165

 

  

 

1,237

 

                   

Vested stock options

  

 

487

 

           

 

487

 

                   
    


  


  


  


    


BALANCE, MARCH 31, 2002

  

$

1,245,542

 

  

$

139,782

 

  

$

162,721

 

  

$

931,147

 

    

$

11,892

 

    


  


  


  


    


BALANCE, DECEMBER 31, 2002

  

$

1,324,358

 

  

$

137,672

 

  

$

120,577

 

  

$

1,010,248

 

    

$

55,861

 

 

Net income

  

 

48,986

 

                    

 

48,986

 

          

Unrealized gains (losses) on securities available-for-sale, net of reclassification adjustment, net of taxes (Note 7)

  

 

(3,578

)

                               

 

(3,578

)

    


                                     

Comprehensive income

  

 

45,408

 

                                     
    


                                     

Cash dividends paid:

                                              

Common stock ($.30 per share)

  

 

(20,637

)

                    

 

(20,637

)

          

Issuance of 31,759 shares for dividend reinvestment and stock purchase plan

  

 

1,029

 

  

 

64

 

  

 

965

 

                   

Issuance of 5,728 shares for employee stock purchase
dividend reinvestment plan

  

 

207

 

  

 

11

 

  

 

196

 

                   

Issuance of 31,023 shares for employee stock option plan

  

 

656

 

  

 

62

 

  

 

594

 

                   

Issuance of 20,295 shares for restricted stock awards

  

 

750

 

  

 

41

 

  

 

709

 

                   

Deferred compensation—restricted stock awards

  

 

(454

)

                    

 

(454

)

          

Purchase of 5,500 shares under stock repurchase plan

  

 

(212

)

  

 

(11

)

  

 

(201

)

                   

Vested stock options

  

 

1,189

 

           

 

1,189

 

                   
    


  


  


  


    


BALANCE, MARCH 31, 2003

  

$

1,352,294

 

  

$

137,839

 

  

$

124,029

 

  

$

1,038,143

 

    

$

52,283

 

    


  


  


  


    


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 6

 

 

MERCANTILE BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Basis of Presentation

 

The consolidated financial statements, which include the accounts of Mercantile Bankshares Corporation (Bankshares) and all of its affiliates, are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practice within the banking industry. In the opinion of management, the consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim period. These adjustments are of a normal recurring nature and include adjustments to eliminate all significant intercompany transactions. 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. For comparability, certain prior period amounts have been reclassified to conform with current period presentation.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the disclosure of revenues and expenses during the reporting period. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results.

 

2.    Earnings Per Share

 

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS is computed using the same components as in basic EPS with the denominator adjusted for the dilutive effect of stock options and restricted stock awards. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the quarters ended March 31, 2003 and 2002:

 

    

For the 3 Months Ended March 31, 2003


(In thousands, except per share data)

  

Net

Income

    

Weighted Average Common Shares

  

    EPS    


Basic EPS

  

$48,986

    

68,769

  

$.71 

Dilutive effect of stock options and restricted stock awards

         

     421

    
           
    

Diluted EPS

  

$48,986

    

69,190

  

$.71 

           
    
    

For the 3 Months Ended March 31, 2002


(In thousands, except per share data)

  

Net

Income

    

Weighted Average Common Shares

  

EPS


Basic EPS

  

$46,175

    

69,822

  

$.66

Dilutive effect of stock options

         

     605

    
           
    

Diluted EPS

  

$46,175

    

70,427

  

$.66

           
    

 

Antidilutive options excluded in the computation of diluted earnings per share were 265,505 and none for the three months ended March 31, 2003 and 2002, respectively.

 

Mercantile Bankshares Corporation


Page 7

 

 

3.    Investment Securities

 

The amortized cost and fair value of investment securities at March 31, 2003, December 31, 2002 and March 31, 2002, are shown below:

 

    

March 31, 2003


  

December 31, 2002


  

March 31, 2002


(Dollars in thousands)

  

Amortized Cost

  

Fair

Value

  

Amortized Cost

  

Fair

Value

  

Amortized Cost

  

Fair

Value


Securities available-for-sale

                                         

U.S. Treasury

  

$

1,076,879

  

$

1,117,943

  

$

1,375,703

  

$

1,421,890

  

$

1,518,572

  

$

1,527,181

U.S. Government agencies

  

 

665,629

  

 

693,685

  

 

695,970

  

 

727,627

  

 

509,611

  

 

515,694

States and political subdivisions

  

 

549

  

 

576

  

 

549

  

 

577

  

 

649

  

 

666

Other investments

  

 

815,322

  

 

829,772

  

 

349,488

  

 

361,098

  

 

211,421

  

 

216,262

    

  

  

  

  

  

Total

  

$

2,558,379

  

$

2,641,976

  

$

2,421,710

  

$

2,511,192

  

$

2,240,253

  

$

2,259,803

    

  

  

  

  

  

Securities held-to-maturity

                                         

States and political subdivisions

  

$

38,231

  

$

41,040

  

$

38,299

  

$

41,150

  

$

38,550

  

$

39,847

Other investments

  

 

15,687

  

 

15,687

  

 

15,092

  

 

15,092

  

 

15,054

  

 

15,054

    

  

  

  

  

  

Total

  

$

53,918

  

$

56,727

  

$

53,391

  

$

56,242

  

$

53,604

  

$

54,901

    

  

  

  

  

  

 

4.    Impaired Loans

 

A loan is considered impaired, based on current information and events, if it is probable that Bankshares 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 on 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 Bankshares’ impaired loans are measured by reference to the fair value of the collateral. Accrued interest on impaired loans is reversed and 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) at March 31, 2003 and at the end of December and March, 2002 is shown below. See Form 10-K for more details.

 

(Dollars in thousands)

  

March 31, 2003

    

December 31, 2002

  

March 31,

2002


Impaired loans with a specific valuation allowance

  

$

8,189

    

$

13,751

  

$

53,930

All other impaired loans

  

 

15,865

    

 

16,813

  

 

13,309

    

    

  

Total impaired loans

  

$

24,054

    

$

30,564

  

$

67,239

    

    

  

Specific allowance for loan losses applicable to impaired loans

  

$

4,857

    

$

5,251

  

$

13,361

General allowance for loan losses applicable to other than impaired loans

  

 

135,570

    

 

133,350

  

 

130,144

    

    

  

Total allowance for loan losses

  

$

140,427

    

$

138,601

  

$

143,505

    

    

  

Year-to-date interest income on impaired loans recorded on the cash basis

  

$

97

    

$

563

  

$

35

    

    

  

Year-to-date average recorded investment in impaired loans during the period

  

$

24,054

    

$

53,777

  

$

67,239

    

    

  

Quarter-to-date interest income on impaired loans recorded on the cash basis

  

$

97

    

$

143

  

$

35

    

    

  

Quarter-to-date average recorded investment in impaired loans during the period

  

$

24,054

    

$

44,263

  

$

67,239

    

    

  

 

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.

 

Mercantile Bankshares Corporation


Page 8

 

 

5.    Commitments

 

Various commitments to extend credit (lines of credit) are made in the normal course of banking business. Total unused lines of credit approximated $3,049,900,000, $2,984,302,000 and $2,882,000,000 at March 31, 2003, December 31, 2002 and March 31, 2002, respectively. In addition, letters of credit are issued for the benefit of customers by affiliated banks. Outstanding letters of credit were $243,500,000 at March 31, 2003, $241,142,000 at December 31, 2002 and $210,840,000 at March 31, 2002.

 

Bankshares has committed to invest funds in third-party private equity investments. At March 31, 2003, December 31, 2002 and March 31, 2002, $18,033,000, $15,243,000 and $13,283,000, respectively, remained unfunded.

 

6.    Intangible Assets

 

The following table discloses the gross carrying amount and accumulated amortization of intangible assets subject to amortization at March 31, 2003 and December 31, 2002:

 

    

March 31, 2003


  

December 31, 2002


(Dollars in thousands)

  

Gross Carrying Amount

  

Accumulated Amortization

    

Net Amount

  

Gross Carrying Amount

  

Accumulated Amortization

    

Net Amount


Deposit intangibles

  

$

13,846

  

$

(6,947

)

  

$

6,899

  

$

13,846

  

$

(6,581

)

  

$

7,265

Mortgage servicing rights

  

 

1,543

  

 

(1,342

)

  

 

201

  

 

1,543

  

 

(1,282

)

  

 

261

Other

  

 

10,820

  

 

(180

)

  

 

10,640

  

 

50

  

 

(46

)

  

 

4

    

  


  

  

  


  

Total

  

$

26,209

  

$

(8,469

)

  

$

17,740

  

$

15,439

  

$

(7,909

)

  

$

7,530

    

  


  

  

  


  

 

Other intangible assets at March 31, 2003, include intangible assets associated with the Boyd Watterson Asset Management LLC acquisition.

 

The aggregate amortization expense was $560,000 for the three months ended March 31, 2003 and $1,972,000 for the year ended December 31, 2002. The estimated aggregate amortization expense for each of the next five years is: 2004 – $3,033,000; 2005 – $3,033,000; 2006 – $3,033,000; 2007 – $2,818,000; 2008 – $1,736,000.

 

7.    Comprehensive Income

 

The following table summarizes the related tax effect of unrealized gains (losses) on securities available-for-sale for the three months ended March 31, 2003 and 2002. The net amount is included in accumulated other comprehensive income (loss) in the Statement of Changes in Consolidated Shareholders’ Equity on Page 5.

 

    

For the 3 Months Ended March 31,


 
    

2003


    

2002


 

(Dollars in thousands)

  

Pretax Amount

    

Tax (Expense) Benefit

  

Net Amount

    

Pretax Amount

    

Tax (Expense) Benefit

    

Net Amount

 

Unrealized gains (losses) on securities available-for-sale:

                                                   

Unrealized holding gains (losses) arising during the period

  

$

(5,073

)

  

$

1,988

  

$

(3,085

)

  

$

(23,270

)

  

$

8,932

 

  

$

(14,338

)

Reclassification adjustment for (gains) losses included in net income

  

 

(815

)

  

 

322

  

 

(493

)

  

 

2

 

  

 

(1

)

  

 

1

 

    


  

  


  


  


  


Total

  

$

(5,888

)

  

$

2,310

  

$

(3,578

)

  

$

(23,268

)

  

$

8,931

 

  

$

(14,337

)

    


  

  


  


  


  


 

8.    Capital Adequacy

 

Bankshares and its bank affiliates are subject to various regulatory capital requirements administered by the federal and state banking agencies. These requirements include maintaining certain capital ratios above minimum levels. These capital ratios include Tier I capital and Total risk-based capital as percents of net risk-weighted assets and Tier I capital as a percent of adjusted average total assets (leverage ratio). The minimum ratios for capital adequacy purposes are 4.00%, 8.00% and 4.00%, for the Tier 1 capital, Total capital and leverage ratios, respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.00%, 10.00% and 5.00%, for its Tier 1 capital, Total capital and leverage ratios, respectively. Management believes that, as of March 31, 2003, Bankshares and its bank affiliates exceeded all capital adequacy requirements to which they are subject and are well capitalized.

 

Mercantile Bankshares Corporation


Page 9

 

 

Capital ratios and the amounts used to calculate them are presented in the following table for Bankshares and Mercantile – Safe Deposit & Trust Company (MSD&T), the lead bank, as of March 31, 2003 and December 31, 2002.

 

    

March 31, 2003


    

December 31, 2002


 

(Dollars in thousands)

  

Bankshares

    

MSD&T

    

Bankshares

    

MSD&T

 

Tier I capital

  

$

1,160,273

 

  

$

414,523

 

  

$

1,151,831

 

  

$

430,375

 

Total risk-based capital

  

 

1,262,271

 

  

 

457,893

 

  

 

1,250,550

 

  

 

473,185

 

Net risk-weighted assets

  

 

7,955,443

 

  

 

3,454,949

 

  

 

7,677,476

 

  

 

3,407,691

 

Adjusted average total assets

  

 

10,306,596

 

  

 

4,106,689

 

  

 

10,281,071

 

  

 

4,246,480

 

                                     

Tier I capital ratio

  

 

14.58

%

  

 

12.00

%

  

 

15.00

%

  

 

12.63

%

Total capital ratio

  

 

15.87

%

  

 

13.25

%

  

 

16.29

%

  

 

13.89

%

Leverage ratio

  

 

11.26

%

  

 

10.09

%

  

 

11.20

%

  

 

10.13

%

 

9.    Segment Reporting

 

Operating segments are defined as components of an enterprise about which separate financial information is available that management relies on for decision making and performance assessment. Bankshares has three reportable segments – its 19 Community Banks, the Banking Division of Mercantile – Safe Deposit & Trust Company (MSD&T) and the Investment and Wealth Management (IWM) Division of MSD&T.

 

The following tables present selected segment information for the three months ended March 31, 2003 and 2002. The components in the “Other” column consist of amounts for the nonbank affiliates and intercompany eliminations. Certain expense amounts such as operations overhead have been reclassified from internal financial reporting in order to provide for full cost absorption. These reclassifications are shown in the “Adjustments” line.

 

    

For the 3 Months Ended March 31, 2003


 

(Dollars in thousands)

  

MSD&T – Banking

    

MSD&T – IWM

    

Total MSD&T

    

Community Banks

    

Other

    

Total

 
                                                       

Net interest income

  

$

35,185

 

  

$

 

  

$

35,185

 

  

$

76,252

 

  

$

(311

)

  

$

111,126

 

Provision for loan losses

  

 

(1,404

)

  

 

 

  

 

(1,404

)

  

 

(1,612

)

  

 

 

  

 

(3,016

)

Noninterest income

  

 

10,444

 

  

 

17,359

 

  

 

27,803

 

  

 

13,296

 

  

 

(3,246

)

  

 

37,853

 

Noninterest expenses

  

 

(21,677

)

  

 

(13,953

)

  

 

(35,630

)

  

 

(38,384

)

  

 

4,233

 

  

 

(69,781

)

Adjustments

  

 

3,760

 

  

 

(808

)

  

 

2,952

 

  

 

(1,611

)

  

 

(1,341

)

  

 

 

    


  


  


  


  


  


Income (loss) before income taxes

  

 

26,308

 

  

 

2,598

 

  

 

28,906

 

  

 

47,941

 

  

 

(665

)

  

 

76,182

 

Income tax (expense) benefit

  

 

(9,476

)

  

 

(1,039

)

  

 

(10,515

)

  

 

(16,599

)

  

 

(82

)

  

 

(27,196

)

    


  


  


  


  


  


Net income (loss)

  

$

16,832

 

  

$

1,559

 

  

$

18,391

 

  

$

31,342

 

  

$

(747

)

  

$

48,986

 

    


  


  


  


  


  


Average assets

                    

$

4,145,799

 

  

$

6,539,154

 

  

$

(160,744

)

  

$

10,524,209

 

Average equity

                    

 

451,004

 

  

 

834,837

 

  

 

9,499

 

  

 

1,295,340

 

 

    

For the 3 Months Ended March 31, 2002


 

(Dollars in thousands)

  

MSD&T – Banking

    

MSD&T – IWM

    

Total MSD&T

    

Community Banks

    

Other

    

Total

 
                                                       

Net interest income

  

$

36,134

 

  

$

 

  

$

36,134

 

  

$

71,676

 

  

$

(622

)

  

$

107,188

 

Provision for loan losses

  

 

(1,330

)

  

 

 

  

 

(1,330

)

  

 

(1,753

)

  

 

 

  

 

(3,083

)

Noninterest income

  

 

10,840

 

  

 

16,404

 

  

 

27,244

 

  

 

11,784

 

  

 

(4,189

)

  

 

34,839

 

Noninterest expenses

  

 

(22,629

)

  

 

(10,688

)

  

 

(33,317

)

  

 

(36,366

)

  

 

3,492

 

  

 

(66,191

)

Adjustments

  

 

3,728

 

  

 

(507

)

  

 

3,221

 

  

 

(2,363

)

  

 

(858

)

  

 

 

    


  


  


  


  


  


Income (loss) before income taxes

  

 

26,743

 

  

 

5,209

 

  

 

31,952

 

  

 

42,978

 

  

 

(2,177

)

  

 

72,753

 

Income tax (expense) benefit

  

 

(9,652

)

  

 

(2,084

)

  

 

(11,736

)

  

 

(15,012

)

  

 

170

 

  

 

(26,578

)

    


  


  


  


  


  


Net income (loss)

  

$

17,091

 

  

$

3,125

 

  

$

20,216

 

  

$

27,966

 

  

$

(2,007

)

  

$

46,175

 

    


  


  


  


  


  


Average assets

                    

$

4,038,930

 

  

$

5,916,577

 

  

$

(180,520

)

  

$

9,774,987

 

Average equity

                    

 

423,346

 

  

 

707,524

 

  

 

97,518

 

  

 

1,228,388

 

 

Mercantile Bankshares Corporation


Page 10

 

 

10.    Derivative Instruments and Hedging Activities

 

Bankshares maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Derivative instruments that are used as part of the interest rate risk management strategy have been restricted to interest rate swaps. Interest rate swaps generally involve the exchange of fixed-rate and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. Bankshares has entered into interest rate swaps to convert fixed-rate loans made to borrowers to floating-rate loans and convert its nonprepayable fixed-rate debt to floating-rate debt.

 

The fair value of derivative instruments recorded in other assets was $14,797,000 and $11,424,000 at March 31, 2003 and December 31, 2002, respectively. For the quarter ended March 31, 2003, Bankshares recognized a net gain of $29,000, included in interest and fees on loans, which represented the ineffective portion of the fair-value hedge of fixed-rate loans made to borrowers. For the year ended December 31, 2002, Bankshares recognized a net loss of $40,000. The fair-value hedge of the nonrepayable fixed-rate debt was 100% effective for the reported periods.

 

 

 

Mercantile Bankshares Corporation


Page 11

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

MERCANTILE BANKSHARES CORPORATION

 

Consolidated Financial Results

 

Net income for the quarter ended March 31, 2003 was $48,986,000, a 6.1% increase over net income of $46,175,000 for the same period in 2002. For the quarter ended March 31, 2003, diluted net income per share was $.71, an increase of 7.6% from the $.66 reported for the first quarter last year. The increase in earnings per share was favorably impacted by a decline in weighted average shares outstanding from 70,427,000 for the quarter ended March 31, 2002, to 69,190,000 for the quarter ended March 31, 2003.

 

Return on average assets for the first quarter of 2003 was 1.89%, return on average tangible equity was 16.72% and average tangible equity to average assets was 11.41%. Comparable performance ratios for the first quarter 2002 were 1.92% for return on average assets, 16.64% for return on average tangible equity and 11.64% for average tangible equity to average assets.

 

Net Interest Income and Net Interest Margin

 

Net interest income for the quarter ended March 31, 2003 increased 3.7% to $111,126,000 from $107,188,000 for the first quarter last year. The growth in net interest income was attributable to growth in average earning assets, particularly investment securities. Average investment securities increased 12.8% to $2,576,730,000 compared to $2,284,655,000 in the prior year, and increased 5.5% since last quarter. Average total loans increased 6.2% to $7,359,645,000 compared to the prior year and 1.8% (7.2% annualized) from the fourth quarter 2002 average. While the growth in the average loan portfolio shows signs of improvement, the local economy remains anemic. The one exception has been construction, especially residential, which is reflected in the 22.8% growth in the average construction loan portfolio. Average commercial loans grew 5.8% over the prior year’s average, while consumer and residential real estate loans were up slightly.

 

After two straight quarters of decline, the net interest margin increased 2 basis points (bp) to 4.57% from the 4.55% reported in the fourth quarter 2002. On a year-over-year basis, however, the net interest margin declined by 15 bp. This decline is attributable to the reduced benefit derived from noninterest-bearing funding sources, such as demand deposits and capital. The positive effect of these funds declined 20 bp from 66 bp in 2002 to 46 bp in 2003. The net interest spread, the differential between the yield on earning assets and the expense rate paid on interest-bearing liabilities, increased 8 bp from the fourth quarter 2002 and 5 bp from the first quarter last year. At 4.11%, the net interest spread had steadily improved since falling to a low of 3.71% during the second quarter 2001. The improvement this quarter from the fourth quarter is primarily attributable to a more effective allocation of earning assets. Approximately $200 million in lower yielding federal funds sold was shifted into higher yielding loans and investment securities. The company is asset sensitive, with assets repricing more quickly than liabilities in response to changes in interest rates. As a result, Mercantile’s net interest margin tends to compress and growth in net interest income tends to slow in a falling interest rate environment, as occurred during the last two years. The actions referenced above reduced the negative effect of the Federal Reserve’s 50 bp reduction in short term interest rates during the fourth quarter last year. Management’s ability to offset the effect of any further reductions in short-term interest rates by the Federal Reserve may be limited by, among other factors, the growth in loans, deposits and competitive factors influencing the pricing of these products. See the Analysis of Interest Rates and Interest Differentials on page 16 for further details.

 

The tax-equivalent yield on the loan portfolio declined from 6.90% last year to 6.18% in the current quarter. The lower yield more than offset the growth in the loan portfolio, resulting in a reduction in interest income.

 

Reflective of lower interest rates, total interest expense was reduced by $10,238,000. The rate paid on total interest-bearing funds decreased 73 bp from 2.37% a year ago to 1.64% for the quarter ended March 31, 2003. Average deposits were $8,069,338,000 in the current quarter, a $829,868,000, or 11.5% increase from a year ago. The rate paid on average interest- bearing deposits was 1.67%, a decrease of 20 bp from 1.87% at December 31, 2002. The rate paid on short-term borrowings and long-term debt decreased by 25 bp and 13 bp, respectively.

 

Mercantile Bankshares Corporation


Page 12

 

 

On April 15, 2003, Mercantile issued $300 million in 10-year subordinated notes at an interest rate of 4 5/8%. The notes will be our unsecured obligations and will not be guaranteed by any of our subsidiaries. The notes will rank junior in right of payment to our senior indebtedness and secured indebtedness and will be structurally subordinated to creditors of our subsidiaries.

 

Issuance of the notes is expected to reduce net interest income by approximately $2 million and net income by $0.02 per share for the second quarter of 2003. We will use the net proceeds from the sale of the notes for general corporate purposes. Our general corporate purposes may include acquisitions of other companies or their assets, including our acquisition of F&M Bancorp, repurchasing shares of our common stock, and extending credit to or funding investments in our subsidiaries. The precise amounts and timing of our use of the net proceeds will depend upon our and our subsidiaries’ funding requirements and the availability of other funds.

 

Noninterest Income

 

 

      

For the 3 Months Ended March 31, 2003 vs. 2002


 

Noninterest Income

(Dollars in thousands)

    

Increase/(Decrease)

 
    

Amount

      

%

 

Investment and wealth management

    

$

838

 

    

5.1

 

Service charges on deposit accounts

    

 

597

 

    

8.0

 

Mortgage banking related fees

    

 

(786

)

    

(24.8

)

Investments securities gains and (losses)

    

 

817

 

    

 —

 

Other income

    

 

1,548

 

    

20.2

 

      


        

Total noninterest income

    

$

3,014

 

    

8.7

 

      


        

 

Noninterest income increased 8.7% to $37,853,000 for the first quarter 2003 versus the comparable period in 2002. Excluding the $815,000 investment securities gains realized in the first quarter of 2003 in connection with an ongoing repositioning of the securities portfolio, the growth rate was 6.3% year-over-year. Investment and wealth management revenues increased 5.1% to $17,365,000 for the quarter ended March 31, 2003. Revenues for the first quarter 2003 benefited $624,000 from the inclusion of Boyd Watterson Asset Management LLC, which affiliated with Mercantile on March 1, 2003. Other income for the first quarter of 2003 reflected income from bank-owned life insurance of $429,000 and lower write-downs of investments in third-party equity funds. Such write-downs were $103,000 and $898,000 for the first quarters of 2003 and 2002, respectively.

 

Noninterest Expenses

 

      

For the 3 Months Ended March 31, 2003 vs. 2002


 

Noninterest Expenses

(Dollars in thousands)

    

Increase/(Decrease)

 
    

Amount

      

%

 

Salaries

    

$

1,992

 

    

6.3

 

Employee benefits

    

 

897

 

    

10.5

 

Stock-based compensation expense

    

 

(301

)

    

(74.7

)

Net occupancy expense of bank premises

    

 

191

 

    

4.9

 

Furniture and equipment expenses

    

 

367

 

    

5.7

 

Communications and supplies

    

 

180

 

    

5.5

 

Other expenses

    

 

264

 

    

2.2

 

      


        

Total noninterest expenses

    

$

3,590

 

    

5.4

 

      


        

 

Noninterest expenses for the quarter ended March 31, 2003, increased 5.4% to $69,781,000 from $66,191,000 for the first quarter of 2002. The principal contributors to the year-over-year increase were salaries, due to the reorganization of the Investment and Wealth Management business, and higher incentive compensation expenses. Employee benefits expense increased due to rising pension costs, which was offset primarily by a $500,000 rebate due to favorable experience in medical claims expense. The decrease in stock-based compensation expense was due to declines in the value of the deferred compensation plan for directors, which fluctuates with the value of Mercantile’s stock.

 

Mercantile Bankshares Corporation


Page 13

 

 

The efficiency ratio, a key measure of expense management, was 46.7% for the first quarter of 2003 versus 46.2% for the comparable period in 2002.

 

Analysis of Financial Condition

 

At March 31, 2003, total assets increased 10.3% to $11,018,621,000 compared to $9,988,341,000 one year earlier. Total assets at December 31, 2002 were $10,790,376,000. Total loans increased 7.3% to $7,446,553,000 at March 31, 2003, compared to $6,941,615,000 at March 31, 2002. Loans increased 1.8% compared to last quarter end from $7,312,027,000.

 

Total deposits at March 31, 2003, were $8,495,483,000, an increase of 13.4% from $7,491,665,000 at the end of the first quarter 2002, and a 2.8% increase from December 31, 2002. The growth from a year earlier is consistent with what we are seeing across the industry. Interest-bearing deposits were $6,374,039,000, an increase of 13.0% from March 31, 2002, and a 3.2% increase from last quarter. Interest-bearing deposits were 75.0% of total deposits at March 31, 2003, which is relatively unchanged from the last quarter end and a year ago. Noninterest-bearing deposits increased 14.6% to $2,121,444,000 as of March 31, 2003, compared to $1,850,927,000 at March 31, 2002 and $2,086,745,000 at December 31, 2002.

 

Shareholders’ equity at March 31, 2003, was $1,352,294,000, an increase of 8.6% from $1,245,542,000 for the prior year. Mercantile repurchased 5,500 shares during the three months ended March 31, 2003, and has authorization enabling it to repurchase up to 1.5 million additional shares. Management expects share repurchases will resume after the close of its proposed acquisition of F&M Bancorp. For more details, see the Statement of Changes in Consolidated Shareholders’ Equity on page 5.

 

Asset Quality

 

Nonperforming Assets

 

Nonperforming assets consist of nonaccrual loans, renegotiated loans and other real estate owned (i.e., real estate acquired in foreclosure or in lieu of foreclosure). With respect to nonaccrual 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 nonaccrual status sooner than this standard if, in management’s judgement, such action is warranted. During the three months ended March 31, 2003, nonperforming assets decreased $6,054,000 to $27,449,000.

 

Nonperforming loans, one of the components of nonperforming assets, decreased $6,116,000 while other real estate owned, the other component increased $62,000. Nonperforming assets as a percent of period-end loans and other real estate owned was .37% at March 31, 2003 and .46% at December 31, 2002, respectively. The leasing company’s portfolio accounted for 9.8% of nonperforming loans at March 31, 2003, but only 1.3% of the outstanding portfolio of loans and leases. As a result of credit quality concerns about the leasing portfolio, management previously announced it was narrowing the focus of the leasing business and discontinuing certain activities. Excluding the leasing portfolio, nonperforming loans are .33% of period-end loans.

 

The level of “monitored” loans, or loans with characteristics suggesting that they could be classified as nonperforming in the near future, increased by $10,067,000 during the quarter. At March 31, 2003, monitored loans were $34,917,000 compared to $24,850,000 at December 31, 2002. The increase is attributable to one longstanding commercial loan customer at the lead bank. The customer, which is involved in the construction equipment business, has two asset-based loans totaling approximately $11,800,000. The largest component of monitored loans continues to be the two commercial aircraft-related loans added to this category during the fourth quarter of 2002. These two loans are performing and current with a balance of approximately $19,800,000 at March 31, 2003, but remain in the monitored category because of continuing pressure on the airline industry overall. The amount of loans past due 30-89 days improved from $104,162,000 at December 31, 2002 to $54,899,000 at March 31, 2003.

 

Mercantile Bankshares Corporation


Page 14

 

 

The table below presents a comparison of nonperforming assets at March 31, 2003 and at the end of December and March 2002.

 

Nonperforming Assets
(Dollars in thousands)

  

March 31,
2003

      

December 31,
2002

    

March 31, 2002

 

Nonaccrual loans (1)

                            

Commercial

  

$

19,993

 

    

$

25,260

 

  

$

36,799

 

Construction

  

 

1,383

 

    

 

1,365

 

  

 

1,913

 

Residential real estate

  

 

2,967

 

    

 

2,479

 

  

 

2,982

 

Consumer

  

 

234

 

    

 

261

 

  

 

283

 

Lease financing

  

 

2,678

 

    

 

4,006

 

  

 

9,403

 

    


    


  


Total nonaccrual loans

  

 

27,255

 

    

 

33,371

 

  

 

51,380

 

Renegotiated loans (1)

  

 

 

    

 

 

  

 

 

Loans contractually past due 90 days or more and still accruing interest

  

 

 

    

 

 

  

 

 

    


    


  


Total nonperforming loans

  

 

27,255

 

    

 

33,371

 

  

 

51,380

 

Other real estate owned

  

 

194

 

    

 

132

 

  

 

179

 

    


    


  


Total nonperforming assets

  

$

27,449

 

    

$

33,503

 

  

$

51,559

 

    


    


  


Nonperforming assets as a percent of period-end loans and other real estate owned

  

 

.37

%

    

 

.46

%

  

 

.74

%

    


    


  


 

(1)   Aggregate gross interest income of $548,000, $2,790,000 and $968,000 for the first quarter of 2003, the year 2002 and first quarter 2002, respectively, on nonaccrual 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 nonaccrual and renegotiated loans that was recorded totalled $55,000, $641,000 and $263,000 for the first three months of 2003, the year 2002 and first quarter 2002, respectively.

 

Note: The Corporation was monitoring loans estimated to aggregate $34,917,000 at March 31, 2003, $24,850,000 at December 31, 2002 and $30,294,000 at March 31, 2002, not classified as nonaccrual or renegotiated loans. These loans had characteristics which indicated they might result in such classification in the future.

 

Allowance and Provision for Loan Losses

 

Each Bankshares affiliate is required to maintain an allowance for loan losses adequate to absorb losses inherent in the loan portfolio. Management at each affiliate, along with Bankshares management, maintains a regular overview to assure that adequacy. On a periodic basis, significant credit exposures, nonperforming loans, impaired loans, historical losses by loan type and various statistical measurements of asset quality are examined to assure the adequacy of the allowance for loan losses.

 

The allowance for loan losses has been established through provisions for loan losses charged against income. The provision for loan losses for the first quarter of 2003 was $3,016,000 and $3,083,000 for the same period last year. Loans deemed uncollectible are charged against the allowance for loan losses and any subsequent recoveries are credited to the allowance. Intensive collection efforts continue after charge-off in order to maximize recovery amounts. Net charge-offs were $1,190,000 for the first three months of 2003 compared to $1,041,000 for the same period in 2002. The allowance for loans as a percent of period-end loans was 1.89% at March 31, 2003 and 2.07% at the end of the first quarter last year.

 

Mercantile Bankshares Corporation


Page 15

 

 

The following table presents a summary of the activity in the Allowance for Loan Losses for the three months ended March 31, 2003 and 2002:

 

    

For the 3 Months Ended

 

Allowance for Loan Losses
(Dollars in thousands)

  

              March 31,


 
  

2003

    

2002

 
                   

Allowance balance — beginning

  

$

138,601

 

  

$

141,463

 

Charge-offs:

                 

Commercial

  

 

(447

)

  

 

(830

)

Construction

  

 

 

  

 

 

Residential real estate

  

 

 

  

 

(34

)

Consumer

  

 

(851

)

  

 

(748

)

Lease financing

  

 

(641

)

  

 

 

    


  


Total

  

 

(1,939

)

  

 

(1,612

)

    


  


Recoveries:

                 

Commercial

  

 

222

 

  

 

133

 

Construction

  

 

135

 

  

 

6

 

Residential real estate

  

 

4

 

  

 

26

 

Consumer

  

 

388

 

  

 

406

 

Lease financing

  

 

 

  

 

 

    


  


Total

  

 

749

 

  

 

571

 

    


  


Net charge-offs

  

 

(1,190

)

  

 

(1,041

)

Provision for loan losses

  

 

3,016

 

  

 

3,083

 

    


  


Allowance balance — ending

  

$

140,427

 

  

$

143,505

 

    


  


Average loans

  

$

7,359,645

 

  

$

6,930,031

 

    


  


Net charge-offs (annualized) as a percent of average loans

  

 

.07

%

  

 

.06

%

    


  


Period-end loans

  

$

7,446,553

 

  

$

6,941,615

 

    


  


Allowance for loan losses as a percent of period-end loans

  

 

1.89

%

  

 

2.07

%

    


  


 

Cautionary Statement

 

This report contains 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 report, and the underlying management assumptions. Such statements in this report include identification of trends, loan growth, comments on adequacy of the allowance for loan losses, credit quality, changes in leasing activities, effects of asset sensitivity and interest rate changes, and information concerning market risk referenced in Item 3. Forward-looking statements are based on current expectations and assessments of potential developments affecting market conditions, interest rates and other economic conditions, and results may ultimately vary from the statements made in this report.

 

Mercantile Bankshares Corporation


Page 16

 

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 three months of 2003 and 2002.

    

2003


    

2002


 

(Dollars in thousands)

  

Average
Balance

    

Income*/
Expense

  

Yield*/
Rate

    

Average
Balance

    

Income*/
Expense

  

Yield*/
Rate

 
                                               

Earning assets

                                             

Loans:**

                                             

Commercial

  

$

4,449,636

 

  

$

66,059

  

6.02

%

  

$

4,204,530

 

  

$

69,654

  

6.72

%

Construction

  

 

823,547

 

  

 

11,386

  

5.61

 

  

 

670,636

 

  

 

10,449

  

6.32

 

Residential real estate

  

 

1,077,721

 

  

 

18,313

  

6.89

 

  

 

1,071,028

 

  

 

19,957

  

7.56

 

Consumer

  

 

1,008,741

 

  

 

16,449

  

6.61

 

  

 

983,837

 

  

 

17,798

  

7.34

 

    


  

         


  

      

Total loans

  

 

7,359,645

 

  

 

112,207

  

6.18

 

  

 

6,930,031

 

  

 

117,858

  

6.90

 

    


  

         


  

      

Federal funds sold, et al

  

 

56,500

 

  

 

723

  

5.19

 

  

 

120,257

 

  

 

1,661

  

5.60

 

Securities:***

                                             

Taxable securities

                                             

U.S. Treasury securities

  

 

1,241,058

 

  

 

13,027

  

4.26

 

  

 

1,515,836

 

  

 

17,939

  

4.80

 

U.S. Agency securities

  

 

686,987

 

  

 

8,168

  

4.82

 

  

 

502,687

 

  

 

6,404

  

5.17

 

Other stocks and bonds

  

 

609,891

 

  

 

6,810

  

4.53

 

  

 

227,092

 

  

 

3,310

  

5.91

 

Tax-exempt securities

                                             

States and political subdivisions

  

 

38,794

 

  

 

772

  

8.07

 

  

 

39,040

 

  

 

793

  

8.24

 

    


  

         


  

      

Total securities

  

 

2,576,730

 

  

 

28,777

  

4.53

 

  

 

2,284,655

 

  

 

28,446

  

5.05

 

    


  

         


  

      

Interest-bearing deposits in other banks

  

 

358

 

  

 

3

  

3.89

 

  

 

357

 

  

 

4

  

4.59

 

    


  

         


  

      

Total earning assets

  

 

9,993,233

 

  

 

141,710

  

5.75

 

  

 

9,335,300

 

  

 

147,969

  

6.43

 

             

                  

      

Cash and due from banks

  

 

225,975

 

                

 

215,065

 

             

Bank premises and equipment, net

  

 

103,706

 

                

 

101,520

 

             

Other assets

  

 

341,538

 

                

 

266,286

 

             

Less: allowance for loan losses

  

 

(140,243

)

                

 

(143,184

)

             
    


                


             

Total assets

  

$

10,524,209

 

                

$

9,774,987

 

             
    


                


             

Interest-bearing liabilities

                                             

Deposits:

                                             

Savings

  

$

1,029,033

 

  

 

1,370

  

.54

 

  

$

909,849

 

  

 

2,181

  

.97

 

Checking plus interest

  

 

953,243

 

  

 

558

  

.24

 

  

 

834,903

 

  

 

731

  

.36

 

Money market

  

 

1,185,071

 

  

 

2,637

  

.90

 

  

 

1,003,517

 

  

 

3,583

  

1.45

 

Certificates of deposit $100,000 and over

  

 

1,223,688

 

  

 

7,968

  

2.64

 

  

 

1,000,156

 

  

 

9,061

  

3.67

 

Other time deposits

  

 

1,716,941

 

  

 

12,596

  

2.98

 

  

 

1,783,770

 

  

 

17,578

  

4.00

 

    


  

         


  

      

Total interest-bearing deposits

  

 

6,107,976

 

  

 

25,129

  

1.67

 

  

 

5,532,195

 

  

 

33,134

  

2.43

 

Short-term borrowings

  

 

779,200

 

  

 

1,545

  

.80

 

  

 

909,217

 

  

 

3,312

  

1.48

 

Long-term debt

  

 

275,838

 

  

 

2,362

  

3.47

 

  

 

283,333

 

  

 

2,828

  

4.05

 

    


  

         


  

      

Total interest-bearing funds

  

 

7,163,014

 

  

 

29,036

  

1.64

 

  

 

6,724,745

 

  

 

39,274

  

2.37

 

    


  

         


  

      

Noninterest-bearing deposits

  

 

1,961,362

 

                

 

1,707,275

 

             

Other liabilities and accrued expenses

  

 

104,493

 

                

 

114,579

 

             
    


                


             

Total liabilities

  

 

9,228,869

 

                

 

8,546,599

 

             

Shareholders’ equity

  

 

1,295,340

 

                

 

1,228,388

 

             
    


                


             

Total liabilities and shareholders’ equity

  

$

10,524,209

 

                

$

9,774,987

 

             
    


                


             

Net interest income

           

$

112,674

                  

$

108,695

      
             

                  

      

Net interest rate spread

                  

    4.11

%

                  

4.06

%

Effect of noninterest-bearing funds

                  

.46

 

                  

.66

 

                    

                  

Net interest margin on earning assets

                  

    4.57

%

                  

4.72

%

                    

                  

Tax-equivalent adjustment included in:

                                             

Loan income

           

$

1,215 

                  

$

1,160

      

Investment securities income

           

 

333

                  

 

347

      
             

                  

      

Total

           

$

1,548 

                  

$

1,507

      
             

                  

      

    * Presented on a tax-equivalent basis using the statutory federal corporate income tax rate of 35%.

  ** Nonaccrual loans are included in average loans.

*** Balances reported at amortized cost; excludes pretax unrealized gains (losses) on securities available-for-sale.

 

Mercantile Bankshares Corporation


Page 17

 

 

MERCANTILE BANKSHARES CORPORATION

 

RATE/VOLUME ANALYSIS

 

A rate/volume analysis, which demonstrates changes in interest income and expense for significant assets and liabilities, appears below:

 

    

For the 3 Months

Ended March 31,

2003 vs. 2002

Due to variances in


 

(Dollars in thousands)

  

Rates

    

Volumes

    

Total

 

Interest earned on:

                          

Loans:

                          

Commercial (1)

  

$

(7,656

)

  

$

4,061

 

  

$

(3,595

)

Construction (2)

  

 

(1,445

)

  

 

2,382

 

  

 

937

 

Residential real estate

  

 

(1,769

)

  

 

125

 

  

 

(1,644

)

Consumer

  

 

(1,800

)

  

 

451

 

  

 

(1,349

)

    


  


  


Total loans

  

 

(12,670

)

  

 

7,019

 

  

 

(5,651

)

Taxable securities (3)

  

 

(3,248

)

  

 

3,600

 

  

 

352

 

Tax-exempt securities (3)

  

 

(16

)

  

 

(5

)

  

 

(21

)

Federal funds sold, et al

  

 

(57

)

  

 

(881

)

  

 

(938

)

Interest-bearing deposits in other banks

  

 

(1

)

  

 

 

  

 

(1

)

    


  


  


Total interest income

  

 

(15,992

)

  

 

9,733

 

  

 

(6,259

)

    


  


  


Interest paid on:

                          

Savings deposits

  

 

(1,097

)

  

 

286

 

  

 

(811

)

Checking plus interest deposits

  

 

(277

)

  

 

104

 

  

 

(173

)

Money market accounts

  

 

(1,594

)

  

 

648

 

  

 

(946

)

Certificates of deposit $100,000 and over

  

 

(3,118

)

  

 

2,025

 

  

 

(1,093

)

Other time deposits

  

 

(4,323

)

  

 

(659

)

  

 

(4,982

)

Short-term borrowings

  

 

(1,293

)

  

 

(474

)

  

 

(1,767

)

Long-term debt

  

 

(391

)

  

 

(75

)

  

 

(466

)

    


  


  


Total interest expense

  

 

(12,093

)

  

 

1,855

 

  

 

(10,238

)

    


  


  


Net interest earned

  

$

(3,899

)

  

$

7,878

 

  

$

3,979

 

    


  


  


 

(1)   Year-to-date tax-equivalent adjustments of $876,000 and $905,000 for 2003 and 2002, respectively, are included in the commercial loan rate variances.
(2)   Year-to-date tax-equivalent adjustments of $339,000 and $255,000 for 2003 and 2002, respectively, are included in the construction loan rate variances.
(3)   Year-to-date tax-equivalent adjustments of $333,000 and $347,000 for 2003 and 2002, respectively, are included in the investment securities rate variances.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Information responsive to this Item as of December 31, 2002 appears under the captions “Risk Management”, “Interest Rate Sensitivity Analysis” and “Earnings Simulation Model Projections” on pages 24-27 of the registrant‘s 2002 Annual Report to Shareholders, filed as Exhibit 13 to registrant‘s Annual Report on Form 10-K for the year ended December 31, 2002. There was no material change in such information as of March 31, 2003.

 

Item 4. Controls and Procedures

 

Within the ninety days prior to the filing of this report, the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design

 

Mercantile Bankshares Corporation


Page 18

 

and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors subsequent to the date of the evaluation that could significantly affect those controls.

 

PART II. OTHER INFORMATION

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

99.1

  

Certification of Chief Executive Officer

99.2

  

Certification of Chief Financial Officer

 

(b) Reports on Form 8-K

Form 8-K filed, dated January 22, 2003, Item 5.

Form 8-K filed, dated January 28, 2003, Item 5.

Form 8-K filed, dated February 5, 2003, Item 5.

Form 8-K filed, dated February 25, 2003, Item 5.

Form 8-K filed, dated March 12, 2003, Item 5.

Form 8-K filed, dated March 13, 2003, Item 5.

 

Mercantile Bankshares Corporation


Page 19

 

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

 

 

April 23, 2003

 

     

Principal Executive Officer

 

       

 

/s/ Edward J. Kelly, III  


       

By: Edward J. Kelly, III

Chairman of the Board, President and

Chief Executive Officer

 

         

 

April 23, 2003

 

     

Principal Financial Officer

 

       

 

/s/ Terry L. Troupe  


       

By: Terry L. Troupe

Chief Financial Officer

 

         

 

April 23, 2003

 

     

Chief Accounting Officer

 

       

 

/s/ William T. Skinner, Jr.


       

By: William T. Skinner, Jr,

Controller

 

 

 

 

Mercantile Bankshares Corporation


Page 20

 

 

I, Edward J. Kelly, III, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Mercantile Bankshares Corporation;

 

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 14 and 15d-14) for the registrant and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.   The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.

 

/s/     EDWARD J. KELLY, III        


Edward J. Kelly, III

Chairman of the Board,

President and Chief Executive Officer

 

Mercantile Bankshares Corporation


Page 21

 

 

I, Terry L. Troupe, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Mercantile Bankshares Corporation;

 

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 14 and 15d-14) for the registrant and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.   The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.

 

/s/    TERRY L. TROUPE        


Terry L. Troupe

Chief Financial Officer and Treasurer

 

 

Mercantile Bankshares Corporation