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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-5127
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MERCANTILE BANKSHARES CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0898572
--------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Hopkins Plaza, Baltimore, Maryland 21201
------------------------------------ -----
(Address of principal executive (Zip code)
offices)
(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 [_]
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 30, 2001, registrant
had outstanding 71,174,878 shares of Common Stock.
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands, except per share data) 2001 2000
----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks.............................................................. $ 264,929 $ 244,913
Interest-bearing deposits in other banks............................................. 355 454
Federal funds sold................................................................... 52,518 29,378
---------- ----------
Total cash and cash equivalents................................................... 317,802 274,745
---------- ----------
Investment securities:
U.S. Treasury and government agencies
Available-for-sale at fair value................................................... 1,599,585 1,611,177
States and political subdivisions
Held-to-maturity -- fair value of $42,493 (2001) and $38,653 (2000)................ 40,916 37,686
Available-for-sale at fair value................................................... 1,371 1,357
Other investments
Held-to-maturity -- fair value of $13,446 (2001) and $13,068 (2000)................ 13,446 13,068
Available-for-sale at fair value................................................... 62,386 64,020
---------- ----------
Total investment securities....................................................... 1,717,704 1,727,308
---------- ----------
Loans held-for-sale.................................................................. 60,021 6,595
Loans................................................................................ 6,788,018 6,693,294
Less: allowance for loan losses...................................................... (140,797) (138,612)
---------- ----------
Loans, net........................................................................ 6,647,221 6,554,682
---------- ----------
Bank premises and equipment, less accumulated depreciation of
$106,189 (2001) and $103,715 (2000)................................................. 103,284 102,169
Other real estate owned, net......................................................... 656 1,005
Goodwill, net........................................................................ 109,465 105,027
Other assets......................................................................... 163,335 166,499
---------- ----------
Total assets...................................................................... $9,119,488 $8,938,030
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing deposits........................................................ $1,577,009 $1,593,503
Interest-bearing deposits........................................................... 5,422,389 5,203,038
---------- ----------
Total deposits.................................................................... 6,999,398 6,796,541
Short-term borrowings................................................................ 692,060 781,468
Accrued expenses and other liabilities............................................... 120,171 94,173
Long-term debt....................................................................... 92,547 92,547
---------- ----------
Total liabilities................................................................. 7,904,176 7,764,729
---------- ----------
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 71,163,977 shares in 2001 and 71,098,750 shares in 2000...................... 142,328 142,198
Capital surplus...................................................................... 217,053 214,454
Retained earnings.................................................................... 828,602 800,781
Accumulated other comprehensive income (loss)........................................ 27,329 15,868
---------- ----------
Total shareholders' equity........................................................ 1,215,312 1,173,301
---------- ----------
Total liabilities and shareholders' equity....................................... $9,119,488 $8,938,030
========== ==========
See notes to consolidated financial statements
Page 3
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED INCOME
For the 3 Months Ended
March 31,
(Dollars in thousands, except per share data) 2001 2000
----------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans................................ $ 145,427 $ 124,172
----------- -----------
Interest and dividends on investment securities:
Taxable interest income.................................. 22,902 23,842
Tax-exempt interest income............................... 488 147
Dividends................................................ 367 398
Other investment income.................................. 850 33
----------- -----------
24,607 24,420
----------- -----------
Other interest income..................................... 708 228
----------- -----------
Total interest income.................................. 170,742 148,820
----------- -----------
INTEREST EXPENSE
Interest on deposits...................................... 55,145 40,005
Interest on short-term borrowings......................... 9,107 10,768
Interest on long-term debt................................ 1,520 1,404
----------- -----------
Total interest expense................................. 65,772 52,177
----------- -----------
NET INTEREST INCOME....................................... 104,970 96,643
Provision for loan losses................................. 2,951 3,015
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 102,019 93,628
----------- -----------
NONINTEREST INCOME
Trust Division services................................... 17,131 16,890
Service charges on deposit accounts....................... 6,420 5,759
Mortgage banking related fees............................. 1,594 729
Investment securities gains and (losses).................. 1,539 69
Other income.............................................. 7,031 6,233
----------- -----------
Total noninterest income............................... 33,715 29,680
----------- -----------
NONINTEREST EXPENSES
Salaries.................................................. 29,580 27,945
Employee benefits......................................... 7,926 7,158
Net occupancy expense of bank premises.................... 3,435 2,686
Furniture and equipment expenses.......................... 6,004 5,768
Communications and supplies............................... 3,277 3,112
Amortization of goodwill.................................. 2,312 958
Other expenses............................................ 10,130 10,943
----------- -----------
Total noninterest expenses............................. 62,664 58,570
----------- -----------
Income before income taxes................................ 73,070 64,738
Applicable income taxes................................... 26,712 23,153
----------- -----------
NET INCOME................................................ $ 46,358 $ 41,585
=========== ===========
NET INCOME PER SHARE OF COMMON STOCK (Note 2):
Basic.................................................... $ .65 $ .61
=========== ===========
Diluted.................................................. $ .65 $ .60
=========== ===========
See notes to consolidated financial statements
Page 4
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
For the 3 Months Ended
Increase (decrease) in cash and cash equivalents March 31,
(Dollars in thousands) 2001 2000
----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 46,358 $ 41,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses............................. 2,951 3,015
Depreciation and amortization......................... 3,030 2,343
Amortization of goodwill.............................. 2,312 958
Investment securities (gains) and losses.............. (1,539) (69)
Write-downs of other real estate owned................ 22 6
Gains on sales of other real estate owned............. (70) (89)
Net (increase) decrease in assets:
Interest receivable................................... 1,375 (2,145)
Other receivables..................................... (2,244) (361)
Other assets.......................................... (3,152) 462
Loans held-for-sale................................... (53,426) 2,287
Net increase (decrease) in liabilities:
Interest payable...................................... 3,510 3,147
Accrued expenses...................................... (1,971) (862)
Taxes payable......................................... 25,738 22,060
----------- -----------
Net cash provided by operating activities........... 22,894 72,337
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-
to-maturity........................................... 669 6,277
Proceeds from maturities of investment securities
available-for-sale.................................... 153,821 163,252
Proceeds from sales of investment securities available-
for-sale.............................................. 1,539 476
Purchases of investment securities held-to-maturity.... (4,278) (4,695)
Purchases of investment securities available-for-sale.. (121,969) (48,150)
Net increase in customer loans......................... (95,888) (190,545)
Proceeds from sales of other real estate owned......... 795 626
Capital expenditures................................... (4,145) (3,117)
Acquisition of commercial mortgage company............. (7,000) --
----------- -----------
Net cash used in investing activities............... (76,456) (75,876)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing
deposits.............................................. (16,494) 46,718
Net increase in checking plus interest and savings
accounts.............................................. 34,365 18,702
Net increase in certificates of deposit................ 184,986 120,111
Net increase (decrease) in short-term borrowings....... (89,408) (51,283)
Repayment of long-term debt............................ -- (1)
Proceeds from issuance of shares....................... 1,707 2,064
Repurchase of common shares............................ -- (16,993)
Dividends paid......................................... (18,537) (16,289)
----------- -----------
Net cash provided by financing activities........... 96,619 103,029
----------- -----------
Net increase (decrease) in cash and cash equivalents... 43,057 99,490
Cash and cash equivalents at beginning of period....... 274,745 227,356
----------- -----------
Cash and cash equivalents at end of period............. $ 317,802 $ 326,846
=========== ===========
See notes to consolidated financial statements
Page 5
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Accumulated
Other
(Dollars in thousands, Common Capital Retained Comprehensive
except per share data) Total Stock Surplus Earnings Income (Loss)
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1999................... $ 974,040 $137,292 $ 47,798 $ 796,192 $(7,242)
Net income.............. 41,585 41,585
Unrealized gains
(losses) on securities
available-for-sale, net
of reclassification
adjustment, net of
taxes ................. 669 669
----------
Comprehensive income.... 42,254
----------
Cash dividends paid:
Common stock ($.24 per
share)................ (16,289) (16,289)
Issuance of 34,353
shares for dividend
reinvestment and stock
purchase plan.......... 938 68 870
Issuance of 8,864 shares
for employee stock
purchase dividend
reinvestment plan...... 253 18 235
Issuance of 55,805
shares for employee
stock option plan...... 873 111 762
Purchase of 626,500
shares under stock
repurchase plan........ (16,993) (1,253) (15,740)
Vested stock options.... 333 333
Transfer to capital
surplus................ -- 100,000 (100,000)
---------- -------- -------- --------- -------
BALANCE, MARCH 31,
2000................... $ 985,409 $136,236 $134,258 $ 721,488 $(6,573)
========== ======== ======== ========= =======
BALANCE, DECEMBER 31,
2000................... $1,173,301 $142,198 $214,454 $ 800,781 $15,868
Net income.............. 46,358 46,358
Unrealized gains
(losses) on securities
available-for-sale, net
of reclassification
adjustment, net of
taxes (Note 5)......... 11,461 11,461
----------
Comprehensive income.... 57,819
----------
Cash dividends paid:
Common stock ($.26 per
share)................ (18,537) (18,537)
Issuance of 28,487
shares for dividend
reinvestment and stock
purchase plan.......... 1,004 57 947
Issuance of 5,522 shares
for employee stock
purchase dividend
reinvestment plan...... 217 11 206
Issuance of 31,218
shares for employee
stock option plan...... 486 62 424
Vested stock options.... 1,022 1,022
---------- -------- -------- --------- -------
BALANCE, MARCH 31,
2001................... $1,215,312 $142,328 $217,053 $ 828,602 $27,329
========== ======== ======== ========= =======
See notes to consolidated financial statements
Page 6
MERCANTILE BANKSHARES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) The consolidated financial statements, which include the accounts of the
Corporation 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, the disclosure of contingent assets and
liabilities at the date of the financial statements, and 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) Basic and diluted earnings per share (EPS) amounts are computed in
accordance with the provisions of Statement of Financial Accounting Standard
No. 128, Earnings per Share. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares which were 71,119,635 and 68,491,371 for the first quarter of 2001
and 2000, respectively. Diluted EPS is computed using the same components as
in basic EPS with the denominator adjusted for the dilutive effect of stock
options. The adjusted weighted average shares were 71,770,573 and 68,912,338
for the three months ended March 31, 2001 and 2000, respectively.
3) Under the provisions of Statements of Financial Accounting Standards No. 114
and 118, Accounting by Creditors for Impairment of a Loan, a loan is
considered impaired, based upon current information and events, if it is
probable that the Corporation 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 upon 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 the Corporation's impaired loans are measured by reference to
the fair value of the collateral. Interest income on impaired loans 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) as of March 31, 2001 and December 31, 2000 is
shown below.
March 31, December 31,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------
Impaired loans with a valuation allowance............ $ 2,726 $ 3,828
Impaired loans with no valuation allowance........... 26,878 23,165
-------- --------
Total impaired loans................................ $ 29,604 $ 26,993
======== ========
Allowance for loan losses applicable to impaired
loans............................................... $ 1,175 $ 1,375
Allowance for loan losses applicable to other than
impaired loans...................................... 139,622 137,237
-------- --------
Total allowance for loan losses..................... $140,797 $138,612
======== ========
Year-to-date interest income on impaired loans
recorded on the cash basis.......................... $ 52 $ 676
======== ========
Year-to-date average recorded investment in impaired
loans during the period............................. $ 29,604 $ 20,156
======== ========
Quarter-to-date interest income on impaired loans
recorded on the cash basis.......................... $ 52 $ 482
======== ========
Quarter-to-date average recorded investment in
impaired loans during the period.................... $ 29,604 $ 22,013
======== ========
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.
4) Various commitments to extend credit (lines of credit) are made in the nor-
mal course of banking business. At March 31, 2001, total unused lines of
credit approximated $2,790,650,000. In addition, letters of credit are is-
sued for the benefit of customers by affiliated banks. Outstanding letters
of credit were $185,540,000 at March 31, 2001.
Page 7
5) The provisions of Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, established standards for disclosing
comprehensive income in financial statements. The following table
summarizes the related tax effect of unrealized gains (losses) on
securities available-for-sale for the three months ended March 31, 2001 and
2000. 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,
2001 2000
-------------------------- -----------------------
Tax Tax
Pretax (Expense) Net Pretax (Expense) Net
(Dollars in thousands) Amount Benefit Amount Amount Benefit Amount
------------------------------------------------------------------------------
Unrealized gains (losses)
on securities available-
for-sale:
Unrealized holding gains
(losses) arising during
the period............... $20,178 $(7,787) $12,391 $897 $(186) $711
Reclassification
adjustment for (gains)
losses included in net
income................... (1,539) 609 (930) (69) 27 (42)
------- ------- ------- ---- ----- ----
Total..................... $18,639 $(7,178) $11,461 $828 $(159) $669
======= ======= ======= ==== ===== ====
6) Under the provisions of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information,
Mercantile Bankshares Corporation has two reportable segments -- its twenty
Community Banks and Mercantile - Safe Deposit & Trust Company (MSD&T) which
consists of the Banking Division and the Trust Division.
The following tables present selected segment information for the three
months ended March 31, 2001 and 2000. 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.
2001 MSD&T MSD&T Total Community
(Dollars in thousands) Banking Trust MSD&T Banks Other Total
------------------------------------------------------------------------------------------
Net interest income..... $ 34,851 $ -- $ 34,851 $ 70,163 $ (44) $ 104,970
Provision for loan
losses................. (2,283) -- (2,283) (668) -- (2,951)
Noninterest income...... 7,637 17,107 24,744 10,898 (1,927) 33,715
Noninterest expenses.... (18,749) (10,024) (28,773) (36,131) 2,240 (62,664)
Adjustments............. 3,081 (442) 2,639 (5,331) 2,692 --
-------- ------- ---------- ---------- --------- ----------
Income (loss) before
income taxes........... 24,537 6,641 31,178 38,931 2,961 73,070
Income tax (expense)
benefit................ (8,868) (2,657) (11,525) (14,474) (713) (26,712)
-------- ------- ---------- ---------- --------- ----------
Net income (loss)....... $ 15,669 $ 3,984 $ 19,653 $ 24,457 $ 2,248 $ 46,358
======== ======= ========== ========== ========= ==========
Average assets.......... $3,357,914 $5,684,078 $(121,700) $8,920,292
Average equity.......... 372,839 688,013 119,537 1,180,389
2000 MSD&T MSD&T Total Community
(Dollars in thousands) Banking Trust MSD&T Banks Other Total
------------------------------------------------------------------------------------------
Net interest income..... $ 33,648 $ -- $ 33,648 $ 63,621 $ (626) $ 96,643
Provision for loan
losses................. (1,636) -- (1,636) (1,379) -- (3,015)
Noninterest income...... 5,798 17,048 22,846 9,508 (2,674) 29,680
Noninterest expenses.... (18,155) (9,710) (27,865) (32,359) 1,654 (58,570)
Adjustments............. 2,761 (586) 2,175 (3,295) 1,120 --
-------- ------- ---------- ---------- --------- ----------
Income (loss) before
income taxes........... 22,416 6,752 29,168 36,096 (526) 64,738
Income tax (expense)
benefit................ (8,052) (2,690) (10,742) (13,078) 667 (23,153)
-------- ------- ---------- ---------- --------- ----------
Net income (loss)....... $ 14,364 $ 4,062 $ 18,426 $ 23,018 $ 141 $ 41,585
======== ======= ========== ========== ========= ==========
Average assets.......... $3,020,000 $5,026,724 $(130,190) $7,916,534
Average equity.......... 351,380 616,034 29,950 997,364
7) The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, on
January 1, 2001. The Corporation has not found it necessary to extensively
use
Page 8
derivative instruments and only one swap agreement, with a notional amount of
approximately $3,300,000, was outstanding at March 31, 2001. The swap is
considered a fair value hedge under SFAS No. 133. The transition adjustment
and the adjustment to record the change in fair value of the derivative
associated with the swap, as required by SFAS No. 133, did not have a
material effect on the Corporation's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MERCANTILE BANKSHARES CORPORATION
Consolidated Financial Results
Mercantile Bankshares Corporation reported net income of $46,358,000 for the
quarter ended March 31, 2001, an increase of 11.5% over net income of
$41,585,000 for the same period in 2000. Diluted net income per share was $.65
for the quarter ended March 31, 2001, an increase of 8.3% from the $.60
reported for the first quarter last year. Cash net income, which excludes
amortization of goodwill, was $48,670,000 for the quarter ended March 31,
2001, an increase of 14.4% over $42,543,000 for the same period last year.
Diluted cash net income per share was $.68 for the first quarter 2001 as
compared to $.62 for the same period last year, an increase of 9.7%. The
results for this year's first quarter include Union National Bank and The Bank
of Fruitland which were merged during the prior year's third and fourth
quarters, respectively.
Return on average assets for the quarter was 2.11%, return on average tangible
equity was 18.34% and average tangible equity to average assets was 12.21%.
These key performance measures reflect Mercantile's continuing profitability
and financial strength, and were equal to or improved from the results for the
same period last year at 2.11% for the return on average assets, and 17.99%
and 12.09%, for return on average tangible equity and average tangible equity
to average assets, respectively.
Net Interest Income and Net Interest Margin
Net interest income for the quarter ended March 31, 2001 increased 8.6% to
$104,970,000 from $96,643,000 the prior year. The growth in net interest
income is attributable to the continuing strong growth in average earning
assets, which increased 12.7%, compared to March 31, 2000. Average loans
increased 16.8% over the same period in the prior year, to $6,753,493,000 for
the quarter ended March 31, 2001. The previously mentioned bank acquisitions
accounted for approximately 30% of this growth. Funding for the increase in
earning assets came from a 14.9% growth in average total deposits, with the
recent acquisitions accounting for approximately 40% of this growth.
Offsetting the positive growth was a decline in the net interest margin to
5.09% from the 5.24% reported in the fourth quarter 2000 and from 5.22% in the
first quarter 2000. This decline was attributed to the 150 basis point
reduction in the discount rate by the Federal Reserve during the first quarter
2001. The company is asset sensitive, with assets repricing more quickly with
changes in interest rates than liabilities. This means that the net interest
margin generally expands when interest rates rise, as they did during the
course of last year, and contracts when rates fall. See the Analysis of
Interest Rates and Interest Differentials on page 11.
Noninterest Income
Noninterest income increased 13.6% to $33,715,000 for the first quarter 2001.
Included in this increase was a gain of $1,541,000 from the sale of some
equity securities held in the available-for-sale portfolio. Excluding the
investment securities gain, the growth rate was 8.7% for the same period.
Trust Division revenues grew 1.4% to $17,131,000 for the quarter ended March
31, 2001. Since trust revenues are primarily based on the market value of
assets administered, the decline in the stock market values over the past year
contributed to slower revenue growth. Mortgage banking revenues more than
doubled to $1,594,000. Revenues benefited from increased volume in residential
loan originations as a result of declining interest rates. On March 1, 2001,
additional commercial mortgage origination and servicing capacity was provided
by an affiliation between Mercantile Mortgage Corporation and the former
commercial financing subsidiary of Columbia National Incorporated. This
affiliation added a commercial real estate loan servicing portfolio of nearly
$5 billion, of which $1 billion is servicing owned.
Noninterest Expenses
Noninterest expenses for the quarter ended March 31, 2001, increased 7.0% to
$62,664,000 from $58,570,000 for the first quarter of 2000. The key measure of
expense management is the efficiency ratio, which improved to 45.1% this year
from 46.0% in the prior year. The increase in salaries and employee benefits
is a result of increased staff from acquisitions and a general increase in
costs for the health and welfare benefit plans. The increase in net occupancy
expenses is also attributable to the acquisitions. Other expenses decreased
7.4% as a result of reduced expense for the deferred compensation plan for
directors. The cost of this plan fluctuates with the market value of
Mercantile's stock. Amortization of goodwill, which
Page 9
increased by 141.3%, includes accelerated amortization of $250,000 as a result
of the prepayment of investment securities acquired in the Union National Bank
acquisition. Noninterest expense, excluding goodwill, was $60,352,000 for the
first quarter 2001, an increase of 4.8% from $57,612,000 for the prior year.
Analysis of Financial Condition
At March 31, 2001, total assets increased 2.0% to $9,119,488,000 compared to
$8,938,030,000 at December 31, 2000. Comparing March 31, 2001 to the same
period in the prior year reflects an increase of 13.0%. The recent
acquisitions accounted for approximately 40% of this growth. Total earning
assets increased 1.9% to $8,618,616,000 at March 31, 2001 from $8,457,029,000
at December 31, 2000. Loans at March 31, 2001 were $6,788,018,000, an increase
of 1.4% from the $6,693,294,000 level at December 31, 2000.
Total deposits increased 3.0% to $6,999,398,000 as of March 31, 2001 from
$6,796,541,000 at December 31, 2000. Interest-bearing deposits were
$5,422,389,000, an increase of 4.2% from December 31, 2000. Interest-bearing
deposits were 77.5% of total deposits at March 31, 2001, which represented an
increase from the 76.6% at December 31, 2000. Noninterest-bearing deposits
declined 1.0% to $1,577,009,000 as of March 31, 2001, compared to
$1,593,503,000 at December 31, 2000.
Total shareholders' equity increased 3.6% to $1,215,312,000 at March 31,
2001, from $1,173,301,000 at December 31, 2000. The Corporation, having
purchased no shares this quarter, still has authorization to repurchase up to
2.5 million shares under prior authorizations. 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, 2001,
nonperforming assets increased $2,053,000 to $33,423,000. Nonperforming loans,
one of the components of nonperforming assets, increased $2,402,000 while
other real estate owned, the other component, decreased $349,000.
Nonperforming assets as a percent of period-end loans and other real estate
owned was .49% at March 31, 2001 and .47% at the end of last year.
The table below presents a comparison of nonperforming assets at March 31,
2001 and December 31, 2000.
Nonperforming Assets March 31, December 31,
(Dollars in thousands) 2001 2000
------------------------------------------------------------------------------
Nonaccrual loans (1)................................... $32,767 $30,365
Renegotiated loans (1)................................. -- --
Loans contractually past due 90 days or more and still
accruing interest..................................... -- --
------- -------
Total nonperforming loans........................... 32,767 30,365
Other real estate owned................................ 656 1,005
------- -------
Total nonperforming assets.......................... $33,423 $31,370
======= =======
Nonperforming assets as a percent of period-end loans
and other real estate owned........................... .49% .47%
======= =======
(1) Aggregate gross interest income of $768,000 and $3,276,000 for the first
quarter of 2001 and the year 2000, 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 and $1,126,000 for the first three months of 2001 and the year
2000, respectively.
Note: The Corporation was monitoring loans estimated to aggregate $4,122,000
at March 31, 2001 and $3,778,000 at December 31, 2000, not classified as
nonaccrual or renegotiated loans. These loans had characteristics which
indicated they might result in such classification in the future.
Page 10
Allowance and Provision for Loan Losses
Each Mercantile Bankshares Corporation (MBC) affiliate is required to maintain
an allowance for loan losses adequate to absorb inherent losses in the loan
portfolio. Management at each affiliate, along with MBC 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 2001 was $2,951,000 and $3,015,000 for the same period last year.
Loans deemed to be 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 $766,000 for the first three months of 2001
compared to net recoveries of $177,000 for the same period in 2000. The
allowance for loan losses to period-end loans was 2.07% at March 31, 2001 and
2.05% at the end of the first quarter last year.
The following table presents a summary of the activity in the Allowance for
Loan Losses for the three months ended March 31, 2001 and 2000:
For the 3 Months Ended
Allowance for Loan Losses March 31,
(Dollars in thousands) 2001 2000
--------------------------------------------------------------------------------
Allowance balance -- beginning...................... $ 138,612 $ 117,997
Charge-offs:
Commercial......................................... (879) (56)
Real estate -- construction........................ -- (11)
Real estate -- mortgage............................ (18) (254)
Consumer........................................... (690) (773)
----------- -----------
Total............................................. (1,587) (1,094)
----------- -----------
Recoveries:
Commercial......................................... 354 516
Real estate -- construction........................ -- 174
Real estate -- mortgage............................ 138 94
Consumer........................................... 329 487
----------- -----------
Total............................................. 821 1,271
----------- -----------
Net (charge-offs)/recoveries........................ (766) 177
Provision for loan losses........................... 2,951 3,015
----------- -----------
Allowance balance -- ending......................... $ 140,797 $ 121,189
=========== ===========
Average loans....................................... $ 6,753,493 $ 5,783,962
=========== ===========
Net (charge-offs)/recoveries -- annualized as a
percent of average loans........................... (.05)% .01%
=========== ===========
Period-end loans.................................... $ 6,788,018 $ 5,902,512
=========== ===========
Allowance for loan losses as a percent of period-end
loans.............................................. 2.07% 2.05%
=========== ===========
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, 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.
Page 11
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 2001 and 2000.
2001 2000
---------------------------- ----------------------------
Average Income*/ Yield*/ Average Income*/ Yield*/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------
Earning assets
Loans:
Commercial............ $2,376,990 $ 52,973 9.04% $2,094,958 $ 46,796 8.98%
Real estate........... 3,550,430 75,848 8.66 2,992,315 63,636 8.55
Consumer.............. 826,073 17,914 8.79 696,689 14,798 8.54
---------- -------- ---------- --------
Total loans......... 6,753,493 146,735 8.81 5,783,962 125,230 8.71
---------- -------- ---------- --------
Federal funds sold...... 48,359 703 5.90 16,497 226 5.51
Securities**:
Taxable securities
U.S. Treasury
securities.......... 1,398,306 19,467 5.65 1,656,290 23,104 5.61
U.S. Agency
securities.......... 191,005 3,435 7.29 46,678 738 6.36
Other stocks and
bonds............... 62,552 1,266 8.21 22,834 477 8.40
Tax-exempt securities
States and political
subdivisions........ 38,907 807 8.41 12,046 243 8.11
---------- -------- ---------- --------
Total securities.... 1,690,770 24,975 5.99 1,737,848 24,562 5.68
---------- -------- ---------- --------
Interest-bearing
deposits in other
banks................. 394 5 5.26 152 2 4.49
---------- -------- ---------- --------
Total earning
assets............. 8,493,016 172,418 8.23 7,538,459 150,020 8.00
-------- --------
Cash and due from
banks.................. 205,809 214,136
Bank premises and
equipment, net......... 103,033 95,506
Other assets............ 258,655 187,374
Less: allowance for loan
losses................. (140,221) (118,941)
---------- ----------
Total assets........ $8,920,292 $7,916,534
========== ==========
Interest-bearing
liabilities
Deposits:
Savings deposits...... $2,350,680 11,726 2.02 $2,352,664 11,821 2.02
Certificates of
deposit $100,000 and
over................. 1,099,294 16,891 6.23 767,959 10,459 5.48
Other time deposits... 1,854,208 26,528 5.80 1,440,931 17,725 4.95
---------- -------- ---------- --------
Total interest-
bearing deposits... 5,304,182 55,145 4.22 4,561,554 40,005 3.53
Short-term
borrowings........... 739,113 9,107 5.00 828,419 10,768 5.23
Long-term debt........ 92,547 1,520 6.66 82,682 1,404 6.83
---------- -------- ---------- --------
Total interest-
bearing funds...... 6,135,842 65,772 4.35 5,472,655 52,177 3.83
-------- --------
Noninterest-bearing
deposits............... 1,497,464 1,356,820
Other liabilities and
accrued expenses....... 106,597 89,695
---------- ----------
Total liabilities... 7,739,903 6,919,170
Shareholders' equity.... 1,180,389 997,364
---------- ----------
Total liabilities
and shareholders'
equity............. $8,920,292 $7,916,534
========== ==========
Net interest income..... $106,646 $ 97,843
======== ========
Net interest rate
spread................. 3.88% 4.17%
Effect of noninterest-
bearing funds.......... 1.21 1.05
---- ----
Net interest margin on
earning assets......... 5.09% 5.22%
==== ====
Taxable-equivalent
adjustment included in:
Loan income........... $ 1,308 $ 1,058
Investment securities
income............... 368 142
-------- --------
Total............... $ 1,676 $ 1,200
======== ========
*Presented on a tax-equivalent basis using the statutory federal corporate
income tax rate of 35%.
**Balances reported at amortized cost; excludes pretax unrealized gains
(losses) on securities available-for-sale.
Page 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information responsive to this Item as of December 31, 2000 appears under the
captions "Asset/Liability and Liquidity Management", "Interest Rate
Sensitivity Analysis" and "Earnings Simulation Model Projections" on pages
20-22 of the registrant's 2000 Annual Report to Shareholders, filed as Exhibit
13 to registrant's Annual Report on Form 10-K for the year ended December 31,
2000. There was no material change in such information as of March 31, 2001.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K filed, dated February 13, 2001, Item 5. Other Events.
Page 13
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
May 9, 2001 Principal Executive Officer
/s/ Edward J. Kelly, III
_________________________________________
By: Edward J. Kelly, III
President and
Chief Executive Officer
May 9, 2001 Principal Financial Officer
/s/ Terry L. Troupe
_________________________________________
By: Terry L. Troupe
Chief Financial Officer
May 9, 2001 Chief Accounting Officer
/s/ Diana E. Nelson
_________________________________________
By: Diana E. Nelson
Controller and Chief Accounting Officer