Mercantile Bankshares' profit falls 3%

Earnings per share in 3rd quarter dipped 9%, to 63 cents from 69 cents

October 22, 2003|By Paul Adams | Paul Adams,SUN STAFF

Mercantile Bankshares Corp. reported a 3 percent decrease in third-quarter net income as low interest rates, the fallout from a management shake-up in its wealth management division and merger costs related to its acquisition of F&M Bancorp cut into profits.

Net income in the quarter that ended Sept. 30 was $47.2 million, compared with $48.6 million in the third quarter last year. Earnings per diluted share were 63 cents, down 9 percent from the 69 cents reported for the same period last year.

The decline in earnings was roughly in line with the Baltimore company's Sept. 22 forecast, which warned that earnings per share would be about 10 cents lower than in the second quarter. The bank beat that forecast by a penny.

Analysts called it a good quarter, saying Mercantile remains poised to take advantage of an inevitable rise in interest rates and an improved economic picture in the year ahead.

The bank's shares closed down 7 cents at $40.95 a share, having fallen slightly more than $1 before rebounding.

"Considering the economy they've been dealt and the interest rates they've been dealt, the company has managed very successfully, albeit not up to the standards they've set for themselves," said Gerard S. Cassidy, an analyst with RBC Capital Markets in Portland, Maine. "We believe payback for them will come when rates move higher, the economy strengthens and they get the expected cost savings from the F&M Bancorp deal."

The acquisition of F&M added income-producing assets of $2.2 billion, $1.4 billion in loans and total deposits of $1.7 billion to Mercantile's balance sheet. But costs related to the purchase erased $1.5 million, or 2 cents a share, from the bank's third-quarter earnings. The bank expects to incur an additional 3 cents to 5 cents a share in merger expenses in the fourth quarter.

Edward J. Kelly III, Mercantile's chairman and chief executive, said in a conference call yesterday that the merger is ahead of projections.

"We are very much on track to reach the cost-savings targets," he said.

The bank continues to suffer from low interest rates as the difference between what it charges borrowers and the interest it pays to depositors and creditors has shrunk. The bank's net interest margin fell to 4.19 percent in the third quarter from 4.38 percent in the previous quarter.

"Frankly, based on some of the other [earnings] releases I've read recently, it doesn't seem to be out of line with other banks similarly situated," Kelly said.

Pretax severance payments in its investments and wealth management division reduced earnings by $3.6 million. Most of that amount went to buy out the employment contract of Wallace Mathai-Davis, who was ousted as head of the wealth management unit in August.

The bank's net interest income grew 9 percent to $122.2 million, compared with $111.9 million in the third quarter last year. The increase was attributed to a 16 percent increase in average loans and a 25 percent increase in average securities.

In the nine-month period, net income was $146.2 million, an increase of 3 percent from the $141.7 million reported for the comparable period last year. Diluted net income per share for the nine-month period was $2.05, 1 percent more than in the corresponding period last year.

Claire M. Percarpio, an analyst with Janney Montgomery Scott in Philadelphia, said the bank's shares are likely to take a hit in the short term as a result of the lower earnings. But the bank has momentum heading into next year, she said.

"The market reaction, I'm not surprised at," she said, referring to Mercantile shares' initial fall yesterday.

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