Mercantile Bankshares Corp. reported yesterday a modest drop in first-quarter earnings, with slow loan growth and low interest rates putting the squeeze on the bank's profits.
Baltimore-based Mercantile said first-quarter net income was $46.18 million, a 0.4 percent decline from the $46.36 million earned during the first three months of 2001.
Fully diluted net income per share for this year's first quarter was 66 cents, an increase of 1.5 percent from the 65 cents reported last year and a penny ahead of the consensus estimate for the bank, according to Zacks Investment Research.
Since the factors that hampered first-quarter financial results were already widely known, investors should look past these results and watch to see whether Mercantile can engineer a profit rebound with some new strategies, said Collyn Bement Gilbert, an analyst who covers the bank for Ryan, Beck & Co. in Bala Cynwyd, Pa.
"Near-term earnings may remain under pressure," Gilbert said. "But at the end of the day, the company's fantastic reputation, strong balance sheet and [new] strategies ... will make this a company investors will want to own shares in."
Total assets reached $9.99 billion as of March 31, a 9.5 percent jump from the $9.12 billion recorded a year earlier.
Loan growth for the quarter was a slow 2.3 percent, reflecting the U.S. economy's downturn. Low interest rates also held down profits by crimping net interest income, the bank said.
Many economists expect interest rates to increase this year as the economy improves. Both trends should benefit Mercantile: Rising rates would boost its net interest income, while a bustling economy would induce consumers and companies to take out more loans.
Analysts were a bit troubled yesterday by a big jump in non-performing assets: They rocketed by $18.46 million, or 56 percent, to $51.559 million from Dec. 31 to March 31.
Two factors kept that big increase from sparking more worry, however.
The first was that almost half the increase - $9 million - was related to "adverse developments" in the bank's leasing business. Leasing assets accounted for 38 percent of Mercantile's nonperforming loans as of March 31 - but only 3 percent of the bank's total loan assets.
The second mitigating factor is that the bank is continuing with a previously announced plan to scale back its involvement in the leasing area.
So long as the company carries through on that promise, investors should focus more on a bank plan to overhaul its wealth-management business, said Gilbert, the Ryan, Beck analyst.
During the first quarter, revenue from wealth-management services dropped 3.5 percent to $16.53 million.
Mercantile President and Chief Executive Officer Edward J. "Ned" Kelly III has said the wealth-management makeover is key to Mercantile's future profits. Gilbert agrees.
"Ned Kelly is very good, and is clearly very focused," Gilbert said. "We'll see, over the next 12 to 18 months, how he executes this whole new business strategy."