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 June 30, 2001
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 (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 July 31, 2001, registrant had outstanding 69,744,072 shares of Common
Stock.
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands, except per share data) 2001 2000
----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks.............................................................. $ 294,679 $ 244,913
Interest-bearing deposits in other banks............................................. 356 454
Federal funds sold................................................................... 36,364 29,378
---------- ----------
Total cash and cash equivalents................................................... 331,399 274,745
---------- ----------
Investment securities:
Available-for-sale at fair value
U.S. Treasury and government agencies -- amortized cost of $1,615,391 (2001) and
$1,600,232 (2000)................................................................. 1,639,236 1,611,177
States and political subdivisions -- amortized cost of $1,349 (2001) and $1,350
(2000)............................................................................ 1,370 1,357
Other investments -- amortized cost of $46,054 (2001) and $49,507 (2000)........... 59,627 64,020
Held-to-maturity at amortized cost
States and political subdivisions -- fair value of $42,131 (2001) and $38,653
(2000)............................................................................ 40,706 37,686
Other investments -- fair value of $13,454 (2001) and $13,068 (2000)............... 13,454 13,068
---------- ----------
Total investment securities....................................................... 1,754,393 1,727,308
---------- ----------
Loans held-for-sale.................................................................. 43,403 6,595
Loans................................................................................ 6,923,139 6,693,294
Less: allowance for loan losses...................................................... (143,605) (138,612)
---------- ----------
Loans, net........................................................................ 6,779,534 6,554,682
---------- ----------
Bank premises and equipment, less accumulated depreciation of
$109,053 (2001) and $103,715 (2000)................................................. 103,386 102,169
Other real estate owned, net......................................................... 66 1,005
Goodwill, net........................................................................ 106,971 105,027
Other assets......................................................................... 161,390 166,499
---------- ----------
Total assets...................................................................... $9,280,542 $8,938,030
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing deposits........................................................ $1,657,547 $1,593,503
Interest-bearing deposits........................................................... 5,471,217 5,203,038
---------- ----------
Total deposits.................................................................... 7,128,764 6,796,541
Short-term borrowings................................................................ 717,328 781,468
Accrued expenses and other liabilities............................................... 112,437 94,173
Long-term debt....................................................................... 84,200 92,547
---------- ----------
Total liabilities................................................................. 8,042,729 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 71,237,313 shares in 2001 and 71,098,750 shares in 2000...................... 142,475 142,198
Capital surplus...................................................................... 218,876 214,454
Retained earnings.................................................................... 853,289 800,781
Accumulated other comprehensive income (loss)........................................ 23,173 15,868
---------- ----------
Total shareholders' equity........................................................ 1,237,813 1,173,301
---------- ----------
Total liabilities and shareholders' equity....................................... $9,280,542 $8,938,030
========== ==========
See notes to consolidated financial statements
Page 3
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED INCOME
For the 6 Months Ended For the 3 Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans........ $ 285,066 $ 256,907 $ 139,639 $ 132,735
----------- ----------- ----------- -----------
Interest and dividends on
investment securities:
Taxable interest income.......... 45,904 46,470 23,002 22,628
Tax-exempt interest income....... 1,002 349 514 202
Dividends........................ 680 682 313 284
Other investment income.......... 1,690 68 840 35
----------- ----------- ----------- -----------
49,276 47,569 24,669 23,149
----------- ----------- ----------- -----------
Other interest income............. 2,573 607 1,865 379
----------- ----------- ----------- -----------
Total interest income.......... 336,915 305,083 166,173 156,263
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits.............. 108,938 82,331 53,793 42,326
Interest on short-term
borrowings....................... 16,054 22,831 6,947 12,063
Interest on long-term debt........ 3,045 2,807 1,525 1,403
----------- ----------- ----------- -----------
Total interest expense......... 128,037 107,969 62,265 55,792
----------- ----------- ----------- -----------
NET INTEREST INCOME............... 208,878 197,114 103,908 100,471
Provision for loan losses......... 6,129 8,429 3,178 5,414
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 202,749 188,685 100,730 95,057
----------- ----------- ----------- -----------
NONINTEREST INCOME
Trust Division services........... 34,659 34,254 17,528 17,364
Service charges on deposit
accounts......................... 13,300 11,696 6,880 5,937
Mortgage banking related fees..... 4,861 1,494 3,267 765
Investment securities gains and
(losses)......................... 1,539 69 -- --
Other income...................... 15,114 13,645 8,083 7,412
----------- ----------- ----------- -----------
Total noninterest income....... 69,473 61,158 35,758 31,478
----------- ----------- ----------- -----------
NONINTEREST EXPENSES
Salaries.......................... 60,565 56,663 30,985 28,718
Employee benefits................. 15,136 13,483 7,210 6,325
Net occupancy expense of bank
premises......................... 6,771 5,459 3,336 2,773
Furniture and equipment expenses.. 11,748 11,219 5,744 5,451
Communications and supplies....... 6,573 6,073 3,296 2,961
Amortization of goodwill.......... 4,805 1,916 2,493 958
Other expenses.................... 22,472 23,464 12,342 12,521
----------- ----------- ----------- -----------
Total noninterest expenses..... 128,070 118,277 65,406 59,707
----------- ----------- ----------- -----------
Income before income taxes........ 144,152 131,566 71,082 66,828
Applicable income taxes........... 53,170 47,444 26,458 24,291
----------- ----------- ----------- -----------
NET INCOME........................ $ 90,982 $ 84,122 $ 44,624 $ 42,537
=========== =========== =========== ===========
NET INCOME PER SHARE OF COMMON
STOCK (Note 2):
Basic............................ $ 1.28 $ 1.23 $ .63 $ .63
=========== =========== =========== ===========
Diluted.......................... $ 1.27 $ 1.22 $ 62 $ .62
=========== =========== =========== ===========
See notes to consolidated financial statements
Page 4
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CONSOLIDATED CASH FLOWS
For the 6 Months Ended
Increase (decrease) in cash and cash equivalents June 30,
(Dollars in thousands) 2001 2000
----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 90,982 $ 84,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses............................. 6,129 8,429
Depreciation and amortization......................... 6,151 5,169
Amortization of goodwill.............................. 4,805 1,916
Investment securities (gains) and losses.............. (1,539) (69)
Write-downs of other real estate owned................ 36 9
Gains on sales of other real estate owned............. (267) (162)
Gains on sales of buildings........................... (510) --
Net (increase) decrease in assets:
Interest receivable................................... 2,804 (656)
Other receivables..................................... (2,019) (180)
Other assets.......................................... (356) 649
Loans held-for-sale................................... (36,808) 171
Net increase (decrease) in liabilities:
Interest payable...................................... 2,824 4,151
Accrued expenses...................................... (3,274) (2,866)
Taxes payable......................................... 19,998 6,123
----------- -----------
Net cash provided by operating activities........... 88,956 106,806
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-
to-maturity........................................... 1,579 6,530
Proceeds from maturities of investment securities
available-for-sale.................................... 353,303 284,169
Proceeds from sales of investment securities available-
for-sale.............................................. 1,539 700
Purchases of investment securities held-to-maturity.... (4,986) (9,486)
Purchases of investment securities available-for-sale.. (365,007) (106,545)
Net increase in customer loans......................... (231,379) (402,122)
Proceeds from sales of other real estate owned......... 1,568 1,359
Capital expenditures................................... (7,774) (6,711)
Proceeds from sales of buildings....................... 916 --
Acquisition of commercial mortgage company............. (7,000) --
----------- -----------
Net cash used in investing activities............... (257,241) (232,106)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing
deposits.............................................. 64,044 99,571
Net increase (decrease) in checking plus interest and
savings accounts...................................... 91,427 (58,789)
Net increase in certificates of deposit................ 176,752 158,574
Net increase (decrease) in short-term borrowings....... (64,140) 90,491
Repayment of long-term debt............................ (8,347) (136)
Proceeds from issuance of shares....................... 3,677 3,387
Repurchase of common shares............................ -- (20,395)
Dividends paid......................................... (38,474) (33,973)
----------- -----------
Net cash provided by financing activities........... 224,939 238,730
----------- -----------
Net increase (decrease) in cash and cash equivalents... 56,654 113,430
Cash and cash equivalents at beginning of period....... 274,745 227,356
----------- -----------
Cash and cash equivalents at end of period............. $ 331,399 $ 340,786
=========== ===========
See notes to consolidated financial statements
Page 5
MERCANTILE BANKSHARES CORPORATION
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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.............. 84,122 84,122
Unrealized gains
(losses) on securities
available-for-sale,
net of reclassification
adjustment, net of
taxes ................. 2,840 2,840
----------
Comprehensive income.... 86,962
----------
Cash dividends paid:
Common stock ($.50 per
share)................ (33,973) (33,973)
Issuance of 68,454
shares for dividend
reinvestment and stock
purchase plan.......... 1,906 137 1,769
Issuance of 17,240
shares for employee
stock purchase dividend
reinvestment plan...... 508 34 474
Issuance of 62,640
shares for employee
stock option plan...... 973 125 848
Purchase of 741,000
shares under stock
repurchase plan........ (20,395) (1,482) (18,913)
Vested stock options.... 333 333
Transfer to capital
surplus................ -- 100,000 (100,000)
---------- -------- -------- --------- --------
BALANCE, JUNE 30, 2000.. $1,010,354 $136,106 $132,309 $ 746,341 $ (4,402)
========== ======== ======== ========= ========
BALANCE, DECEMBER 31,
2000................... $1,173,301 $142,198 $214,454 $ 800,781 $15,868
Net income.............. 90,982 90,982
Unrealized gains (loss-
es) on securities
available-for-sale,
net of reclassification
adjustment, net of
taxes (Note 5)......... 7,305 7,305
----------
Comprehensive income.... 98,287
----------
Cash dividends paid:
Common stock ($.54 per
share)................ (38,474) (38,474)
Issuance of 56,316
shares for dividend
reinvestment and stock
purchase plan.......... 2,041 113 1,928
Issuance of 12,108
shares for employee
stock purchase dividend
reinvestment plan...... 465 24 441
Issuance of 70,139
shares for employee
stock option plan...... 1,171 140 1,031
Vested stock options.... 1,022 1,022
---------- -------- -------- --------- --------
BALANCE, JUNE 30, 2001.. $1,237,813 $142,475 $218,876 $853,289 $23,173
========== ======== ======== ========= ========
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 71,152,871 and 68,263,855 for the first half 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 71,786,484 and 68,732,600
for the six months ended June 30, 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 June 30, 2001 and December 31, 2000 is
shown below.
June 30, December 31,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------
Impaired loans with a valuation allowance............. $ 2,472 $ 3,828
Impaired loans with no valuation allowance............ 33,173 23,165
-------- --------
Total impaired loans................................. $ 35,645 $ 26,993
======== ========
Allowance for loan losses applicable to impaired
loans................................................ $ 1,211 $ 1,375
Allowance for loan losses applicable to other than
impaired loans....................................... 142,394 137,237
-------- --------
Total allowance for loan losses...................... $143,605 $138,612
======== ========
Year-to-date interest income on impaired loans
recorded on the cash basis........................... $ 138 $ 676
======== ========
Year-to-date average recorded investment in impaired
loans during the period.............................. $ 31,115 $ 20,156
======== ========
Quarter-to-date interest income on impaired loans
recorded on the cash basis........................... $ 86 $ 482
======== ========
Quarter-to-date average recorded investment in
impaired loans during the period..................... $ 32,625 $ 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 June 30, 2001, total unused lines of
credit approximated $2,667,430,000. In addition, letters of credit are is-
sued for the benefit of customers by affiliated banks. Outstanding letters
of credit were $188,980,000 at June 30, 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 six months ended June 30, 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 6 Months Ended June 30,
---------------------------------------------------
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.............. $13,513 $(5,278) $8,235 $4,520 $(1,638) $2,882
Reclassification
adjustment for (gains)
losses included in net
income.................. (1,539) 609 (930) (69) 27 (42)
------- ------- ------ ------ ------- ------
Total.................... $11,974 $(4,669) $7,305 $4,451 $(1,611) $2,840
======= ======= ====== ====== ======= ======
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 six months
ended June 30, 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.
For the 6 Months Ended June 30,
-----------------------------------------------------------------
2001 (Dollars in MSD&T MSD&T Total Community
thousands) Banking Trust MSD&T Banks Other Total
-------------------------------------------------------------------------------------------
Net interest income..... $ 67,081 $ -- $ 67,081 $ 141,953 $ (156) $ 208,878
Provision for loan
losses................. (3,513) -- (3,513) (2,616) -- (6,129)
Noninterest income...... 17,112 34,523 51,635 22,747 (4,909) 69,473
Noninterest expenses.... (38,913) (20,044) (58,957) (71,952) 2,839 (128,070)
Adjustments............. 6,319 (953) 5,366 (10,374) 5,008 --
-------- -------- ---------- ---------- --------- ----------
Income (loss) before
income taxes........... 48,086 13,526 61,612 79,758 2,782 144,152
Income tax (expense)
benefit................ (17,367) (5,430) (22,797) (29,652) (721) (53,170)
-------- -------- ---------- ---------- --------- ----------
Net income (loss)....... $ 30,719 $ 8,096 $ 38,815 $ 50,106 $ 2,061 $ 90,982
======== ======== ========== ========== ========= ==========
Average assets.......... $3,446,123 $5,750,049 $(146,639) $9,049,533
Average equity.......... 375,207 693,709 126,550 1,195,466
For the 6 Months Ended June 30,
-----------------------------------------------------------------
2000 (Dollars in MSD&T MSD&T Total Community
thousands) Banking Trust MSD&T Banks Other Total
-------------------------------------------------------------------------------------------
Net interest income..... $ 68,010 $ -- $ 68,010 $ 129,362 $ (258) $ 197,114
Provision for loan
losses................. (3,873) -- (3,873) (4,556) -- (8,429)
Noninterest income...... 12,288 34,248 46,536 20,044 (5,422) 61,158
Noninterest expenses.... (35,910) (19,567) (55,477) (65,491) 2,691 (118,277)
Adjustments............. 6,941 (1,199) 5,742 (5,802) 60 --
-------- -------- ---------- ---------- --------- ----------
Income (loss) before
income taxes........... 47,456 13,482 60,938 73,557 (2,929) 131,566
Income tax (expense)
benefit................ (17,115) (5,393) (22,508) (26,659) 1,723 (47,444)
-------- -------- ---------- ---------- --------- ----------
Net income (loss)....... $ 30,341 $ 8,089 $ 38,430 $ 46,898 $ (1,206) $ 84,122
======== ======== ========== ========== ========= ==========
Average assets.......... $3,063,937 $5,067,882 $(130,412) $8,001,407
Average equity.......... 353,262 620,492 29,995 1,003,749
Page 8
7) The Corporation 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 1 capital and Total
risk-based capital as percents of net risk-weighted assets and Tier 1
capital as a percent of adjusted average total assets (leverage ratio).
Management believes that, as of June 30, 2001, the Corporation and its bank
affiliates exceeded all capital adequacy requirements to which they are
subject.
Capital ratios and the amounts used to calculate them are presented in the
following table for Mercantile Bankshares Corporation (MBC) and Mercantile -
Safe Deposit & Trust Company (MSD&T), as of June 30, 2001 and 2000.
June 30, 2001 June 30, 2000
---------------------- ----------------------
(Dollars in thousands) MBC MSD&T MBC MSD&T
------------------------------------------------------------------------
Tier 1 capital.......... $1,100,313 $ 370,167 $ 965,982 $ 353,255
Total risk-based
capital................ 1,193,434 409,302 1,047,864 386,853
Net risk-weighted
assets................. 6,963,215 2,976,720 6,093,751 2,680,198
Adjusted average total
assets................. 9,063,027 3,524,604 8,037,508 3,082,625
Tier 1 capital ratio.... 15.80% 12.44% 15.85% 13.18%
Total capital ratio..... 17.14% 13.75% 17.20% 14.43%
Leverage ratio.......... 12.14% 10.50% 12.02% 11.46%
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MERCANTILE BANKSHARES CORPORATION
Consolidated Financial Results
Mercantile Bankshares Corporation reported that, for the quarter ended June
30, 2001, net income was $44,624,000, a 4.9% increase over net income of
$42,537,000 for the same period in 2000. Diluted net income per share was $.62
for the second quarter 2001, unchanged from the second quarter last year.
Weighted average shares used in the calculation were 71,802,000 for this
quarter, an increase of 4.7% over the 68,556,000 reported for the same quarter
last year. The number of shares for 2001 included 3,361,000 shares issued for
the two bank acquisitions completed in the second half of 2000. Diluted cash
net income per share, which excludes amortization of goodwill in the
calculation, was $.66 for the second quarter 2001 as compared to $.63 for the
same period in 2000.
For the first six months of 2001, net income was $90,982,000, an increase of
8.2% over the $84,122,000 reported for the comparable period in 2000. Diluted
net income per share for the first half of 2001 was $1.27, a 4.1% increase
over the $1.22 for the same period last year. Diluted cash net income per
share was $1.33 for the first half of 2001, an increase of 6.4% over the $1.25
reported for the same period last year.
Net Interest Income and Net Interest Margin
Net interest income for the quarter ended June 30, 2001, increased 3.4% to
$103,908,000 from $100,471,000 the prior year. The growth in net interest
income was attributable to the continuing strong growth in average earning
assets. Average loans increased 13.9% from prior year to $6,855,353,000. The
banks acquired in 2000 accounted for approximately 30% of this growth. Funding
for the increase in earning assets came from a 16.5% growth in average total
deposits, with the recent acquisitions accounting for approximately 35% of
this growth. Offsetting the positive growth in earning assets was a decline in
the net interest margin to 4.84% from 5.32% in the second quarter of 2000.
This decline was attributable to the 275 basis point reduction in short-term
interest rates by the Federal Reserve during the first half of 2001, with a
reduction of 125 basis points occurring in the second quarter. 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.
Net interest income for the first six months of 2001 increased to $208,878,000
or 6.0% over the $197,114,000 for last year. The growth in net interest income
was attributable to strong average loan growth of 15.3% which was funded by
average deposit growth of 15.7%. Net interest margin declined to 4.96%, from
5.27% for the first half of last year, which partially offset the positive
impact from loan growth. See the Analysis of Interest Rates and Interest
Differentials on page 12 for further detail.
Page 9
Noninterest Income
For the second quarter 2001, noninterest income increased 13.6% from last
year. Trust Division revenues improved slightly compared to the second quarter
of 2000. Mortgage banking revenues more than tripled from that reported for
the second quarter last year. Revenues benefited from increased volume in
residential and multifamily loan originations and this was the first full
quarter to include results of the commercial real estate financing subsidiary
acquired in March 2001. Included in other income were gains of $510,000 from
sales of bank-owned buildings.
Noninterest income for the first half of 2001 was $69,473,000, a 13.6%
increase over the $61,158,000 for the comparable period in 2000. Included in
this increase was a $1,541,000 gain from the sale of equity securities held in
the available-for-sale portfolio. Excluding the investment securities gain,
the growth rate was 11.2% for the same period. The largest increase in
noninterest income came from mortgage banking revenues which more than doubled
to $4,861,000.
Noninterest Expenses
Noninterest expenses for the quarter ended June 30, 2001, increased 9.5% to
$65,406,000 from $59,707,000 for the second quarter of 2000. The key measure
of expense management is the efficiency ratio which was 46.5%. The increase in
salaries was a result of increased staff from acquisitions. Employee benefits
increased from the prior year due to a general increase in costs for health
and welfare benefit plans. Net occupancy expense increased compared to last
year's second quarter, which was also attributable to acquisitions. Other
expenses declined 1.4% from prior year. Amortization of goodwill, which
increased by 160.2% over prior year, included accelerated amortization of
$361,000 as a result of the prepayment of investment securities owned by a
recently acquired bank.
Noninterest expenses for the first six months of 2001 increased 8.3% to
$128,070,000 from $118,277,000 for the same period last year. Contributing to
the increase in year-to-date noninterest expenses were increases in salaries,
employee benefits and net occupancy expense. Other expenses decreased 4.2%
primarily 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 expense for the first half of 2001 increased
150.8% and included accelerated amortization of $612,000 from prepayment of
investment securities.
Analysis of Financial Condition
At June 30, 2001, total assets increased 3.8% to $9,280,542,000 compared to
$8,938,030,000 at December 31, 2000. Comparing June 30, 2001 to the same
period in the prior year reflected an increase of 12.6%. The recent
acquisitions accounted for approximately 40% of this growth. Loans at June 30,
2001 were $6,923,139,000, an increase of 3.4% from the $6,693,294,000 level at
December 31, 2000.
Total deposits increased 4.9% to $7,128,764,000 as of June 30, 2001 from
$6,796,541,000 at year-end 2000. Interest-bearing deposits were
$5,471,217,000, an increase of 5.2% from December 31, 2000. Interest-bearing
deposits at June 30, 2001 were 76.7% of total deposits, relatively unchanged
from December 31, 2000. Noninterest-bearing deposits increased 4.0% to
$1,657,547,000 as of June 30, 2001, compared to $1,593,503,000 at the end of
2000.
Total shareholders' equity increased 5.5% to $1,237,813,000 at June 30, 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. Effective with the June 2001 Board meeting,
the quarterly per share dividend rate was increased 7.7% to $.28 from $.26.
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 six months ended June 30, 2001,
nonperforming assets increased $7,034,000 to $38,404,000. Nonperforming loans,
one of the components of
Page 10
nonperforming assets, increased $7,973,000 while other real estate owned, the
other component, decreased $939,000. A substantial portion of the increase in
nonperforming loans related to the lease financing subsidiary of Mercantile -
Safe Deposit & Trust Company. Nonperforming assets as a percent of period-end
loans and other real estate owned was .55% at June 30, 2001 and .47% at the
end of last year.
The table below presents a comparison of nonperforming assets at June 30, 2001
and December 31, 2000.
Nonperforming Assets June 30, December 31,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------
Nonaccrual loans (1)..................................... $38,338 $30,365
Renegotiated loans (1)................................... -- --
Loans contractually past due 90 days or more and still
accruing interest....................................... -- --
------- -------
Total nonperforming loans............................. 38,338 30,365
Other real estate owned.................................. 66 1,005
------- -------
Total nonperforming assets............................ $38,404 $31,370
======= =======
Nonperforming assets as a percent of period-end loans and
other real estate owned................................. .55% .47%
======= =======
(1) Aggregate gross interest income of $1,882,000 and $3,276,000 for the first
half 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
$424,000 and $1,126,000 for the first six months of 2001 and the year
2000, respectively.
Note: The Corporation was monitoring loans estimated to aggregate $4,288,000
at June 30, 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.
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
half of 2001 was $6,129,000 and $8,429,000 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 $1,136,000 for the first six months of 2001
compared to net recoveries of $82,000 for the same period in 2000. The
allowance for loan losses to period-end loans at June 30, 2001 was 2.07%, the
same as at the end of the first half of last year.
Page 11
The following table presents a summary of the activity in the Allowance for
Loan Losses:
For the 6 Months Ended For the 3 Months Ended
June 30, June 30,
Allowance for Loan Losses ------------------------- -----------------------
(Dollars in thousands) 2001 2000 2001 2000
-------------------------------------------------------------------------------
Allowance balance --
beginning............... $ 138,612 $ 117,997 $ 140,797 $ 121,189
Charge-offs:
Commercial............... (293) (137) (67) (81)
Real estate --
construction........... -- (11) -- --
Real estate -- mortgage.. (79) (465) (61) (211)
Consumer................. (1,525) (1,273) (835) (500)
Lease financing.......... (653) -- -- --
----------- ----------- ---------- ----------
Total................... (2,550) (1,886) (963) (792)
----------- ----------- ---------- ----------
Recoveries:
Commercial............... 435 684 81 168
Real estate --
construction........... 29 175 29 1
Real estate -- mortgage.. 172 306 34 212
Consumer................. 778 803 449 316
Lease financing.......... -- -- -- --
----------- ----------- ---------- ----------
Total................... 1,414 1,968 593 697
----------- ----------- ---------- ----------
Net (charge-
offs)/recoveries......... (1,136) 82 (370) (95)
Provision for loan
losses................... 6,129 8,429 3,178 5,414
----------- ----------- ---------- ----------
Allowance balance --
ending.................. $ 143,605 $ 126,508 $ 143,605 $ 126,508
=========== =========== ========== ==========
Average loans............. $ 6,804,704 $ 5,901,988 $6,855,353 $6,020,014
=========== =========== ========== ==========
Net (charge-
offs)/recoveries --
annualized as a percent
of average loans......... (.03)% --% (.02)% (.01)%
=========== =========== ========== ==========
Period-end loans.......... $ 6,923,139 $ 6,113,470
=========== ===========
Allowance for loan losses
as a percent of period-
end loans................ 2.07% 2.07%
=========== ===========
Recent FASB Pronouncements
On July 20, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations, with
limited exceptions for combinations initiated prior to July 1, 2001.
Additionally, it further clarifies the criteria for recognition of intangible
assets separately from goodwill. This Statement is effective for business
combinations completed after June 30, 2001.
SFAS No. 142 discontinues the amortization of goodwill and intangible assets
with indefinite lives. Instead these assets will be subject to at least an
annual impairment review, and more frequently if certain impairment indicators
are in evidence.
Mercantile Bankshares will adopt SFAS No. 142 on January 1, 2002. Based on
current amortization schedules, application of the nonamortization provisions
of the Statement is expected to result in additional net income of $7.8
million for the year ended December 31, 2002. The first of the required
impairment tests of goodwill will be performed during 2002. The impact, if
any, of these impairment tests on the 2002 financial statements has not yet
been assessed.
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 12
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 six 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............ $2,374,650 $101,330 8.61% $2,144,884 $ 98,110 9.20%
Real estate........... 3,609,728 151,120 8.44 3,041,383 130,334 8.62
Consumer.............. 820,326 35,156 8.64 715,721 30,583 8.59
---------- -------- ---------- --------
Total loans......... 6,804,704 287,606 8.52 5,901,988 259,027 8.83
---------- -------- ---------- --------
Federal funds sold...... 108,011 2,488 4.65 19,251 603 6.30
Securities purchased
under resale
agreements............. 4,420 75 3.42 -- -- --
Securities:**
Taxable securities
U.S. Treasury
securities.......... 1,345,980 37,449 5.61 1,605,162 44,762 5.61
U.S. Agency
securities.......... 253,343 8,455 6.73 52,580 1,708 6.53
Other stocks and
bonds............... 61,694 2,459 8.04 20,049 841 8.44
Tax-exempt securities
States and political
subdivisions........ 40,333 1,657 8.28 14,111 577 8.22
---------- -------- ---------- --------
Total securities.... 1,701,350 50,020 5.93 1,691,902 47,888 5.69
---------- -------- ---------- --------
Interest-bearing
deposits in other
banks................. 375 10 5.30 152 4 4.77
---------- -------- ---------- --------
Total earning
assets............. 8,618,860 340,199 7.96 7,613,293 307,522 8.12
-------- --------
Cash and due from
banks.................. 209,544 223,477
Bank premises and
equipment, net......... 103,534 95,868
Other assets............ 258,873 189,606
Less: allowance for loan
losses................. (141,278) (120,837)
---------- ----------
Total assets........ $9,049,533 $8,001,407
========== ==========
Interest-bearing
liabilities
Deposits:
Savings deposits...... $2,392,081 22,675 1.91 $2,346,077 23,694 2.03
Time deposits $100,000
and over............. 1,152,557 34,176 5.98 790,228 22,762 5.79
Other time deposits... 1,831,913 52,087 5.73 1,451,397 35,875 4.97
---------- -------- ---------- --------
Total interest-
bearing deposits... 5,376,551 108,938 4.09 4,587,702 82,331 3.61
Short-term
borrowings........... 731,376 16,054 4.43 840,761 22,831 5.46
Long-term debt........ 92,449 3,045 6.64 82,648 2,807 6.83
---------- -------- ---------- --------
Total interest-
bearing funds...... 6,200,376 128,037 4.16 5,511,111 107,969 3.94
-------- --------
Noninterest-bearing
deposits............... 1,542,951 1,390,946
Other liabilities and
accrued expenses....... 110,740 95,601
---------- ----------
Total liabilities... 7,854,067 6,997,658
Shareholders' equity.... 1,195,466 1,003,749
---------- ----------
Total liabilities
and shareholders'
equity............. $9,049,533 $8,001,407
========== ==========
Net interest income..... $212,162 $199,553
======== ========
Net interest rate
spread................. 3.80% 4.18%
Effect of noninterest-
bearing funds.......... 1.16 1.09
---- ----
Net interest margin on
earning assets......... 4.96% 5.27%
==== ====
Taxable-equivalent
adjustment included in:
Loan income........... $ 2,540 $ 2,120
Investment securities
income............... 744 319
-------- --------
Total............... $ 3,284 $ 2,439
======== ========
*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 13
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 June 30, 2001.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Matters voted upon and voted at the Annual Meeting of Shareholders held
April 25, 2001.
Results of voting for Election of Directors:
FOR WITHHELD
--- ---------
Cynthia A. Archer 58,476,325 856,165
Richard O. Berndt 57,896,389 1,436,101
William R. Brody 58,658,999 673,491
Edward J. Kelly, III 57,956,598 1,375,892
Morton B. Plant 58,666,589 665,901
James L. Shea 57,858,373 1,474,117
Names of other Directors continuing in office:
H. Furlong Baldwin
George L. Bunting, Jr.
Darrell D. Friedman
Freeman A. Hrabowski, III
Mary Junck
Robert A. Kinsley
Christian H. Poindexter
Donald J. Shepard
Results of voting on Ratification of Appointment of Auditors
(PricewaterhouseCoopers LLP):
FOR AGAINST ABSTAINED
--- ------- ---------
58,949,403 192,979 190,108
There were no broker nonvotes on these matters.
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K filed, dated June 20, 2001, Item 5. Other Events and
Regulation FD Disclosure.
Page 14
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
August 8, 2001 Principal Executive Officer
/s/ Edward J. Kelly, III
_________________________________________
By: Edward J. Kelly, III
President and
Chief Executive Officer
August 8, 2001 Principal Financial Officer
/s/ Terry L. Troupe
_________________________________________
By: Terry L. Troupe
Chief Financial Officer
August 8, 2001 Chief Accounting Officer
/s/ Diana E. Nelson
_________________________________________
By: Diana E. Nelson
Controller and Chief Accounting Officer