Mercantile's earnings rose 4% in 4th quarter

With interest rates low, bank is cautious about '04

January 29, 2004|By Paul Adams | Paul Adams,SUN STAFF

Mercantile Bankshares Corp., Maryland's largest independent bank, reported a 4 percent rise in fourth-quarter profit yesterday but was cautious about the year ahead as it continued to struggle with low interest rates.

Net income in the three months that ended Dec. 31 was $50.6 million, up from $48.5 million in the fourth quarter of 2002.

The bank's earnings per share fell 10 percent to 63 cents, largely because of expenses related to its $558.1 million acquisition of F&M Bancorp of Frederick in August. Mercantile issued 10.4 million new shares as part of the deal, which added $1.7 billion in deposits and earning assets of $2.2 billion.

For the year, Mercantile earned net income of $196.8 million, an increase of 4 percent over the $190.2 million reported for 2002. Income per share last year was $2.68, a 2 percent decrease from the $2.72 reported for 2002.

Mercantile's shares fell 93 cents, 2 percent, to $44 in trading yesterday.

"The progress with the F&M merger seems to be going all right, but earnings have sort of stalled," said Ross A. Demmerle, an industry analyst with J.J.B. Hilliard, W.L. Lyons in Louisville, Ky.

The bank's profit on loans has been "crushed" by the Federal Reserve's low interest-rate policy, Demmerle said, but that could turn around if the Fed raises rates this year in response to strong economic growth. That would mean higher costs for borrowers but improved profits for most banks.

Mercantile's net interest margin - the difference between what it charges borrowers and the interest it pays to depositors - ended the year at 4.28 percent, down from 4.55 percent at the end of 2002.

"What is clear is that the compression of margin in 2003 hurt us and continues to hurt us," said Edward J. "Ned" Kelly, Mercantile's chairman, president and chief executive.

When one-time charges related to the merger and other expenses are taken into consideration, the bank's results are in line with analysts' expectations of 68 cents a share, according to Thomson Financial. Kelly said the bank has largely achieved the projected $26.5 million in cost savings it expected to gain from the purchase of F&M.

The bank has closed 18 of the 21 branches it expected to close after the deal was completed and has laid off 242 people as part of cost-savings measures.

For the quarter, Mercantile had merger-related costs of $2.8 million, or 4 cents a share, and other unusual expenses that cost an additional 3 cents a share. Kelly said the bank doesn't expect additional merger expenses to be more than 1 cent a share this year.

Kelly said Mercantile is unlikely to buy any other competitors for a while. Recent deals involving smaller banks have commanded premium prices, prompting the bank to back off making any deals in the short-term.

"I think all of us have been stunned by some of the prices that have been paid," he told analysts in a conference call yesterday.

Compared with the fourth quarter of 2002, revenue in Mercantile's wealth management division rose 27 percent, to $21.5 million, as a result of strong sales and a rising stock market. The results included revenue from Boyd Watterson Asset Management LLC and Peremel & Co. Inc., two small wealth management companies that Mercantile bought last spring.

The bank has made expanding its money management business with wealthy clients a key component of growth plans, but analysts said the effort could take years to produce significant results.

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