Back to GetFilings.com



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, 2003

 

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2 Hopkins Plaza, Baltimore, Maryland


 

21201


(Address of principal executive offices)   (Zip code)

 

(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 ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    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 18, 2003, registrant had outstanding 69,102,971 shares of Common Stock.


Page 2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

MERCANTILE BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)   

June 30,

2003

    December 31,
2002
   

June 30,

2002

 

ASSETS                         
Cash and due from banks    $ 350,833     $ 281,130     $ 275,500  
Interest-bearing deposits in other banks      258       358       358  
Federal funds sold      324,274       264,293       5,511  
Securities purchased under resale agreements      100,000       —         —    
    


 


 


Total cash and cash equivalents

     775,365       545,781       281,369  
    


 


 


 

Investment securities available-for-sale (Note 3)

     2,692,101       2,511,192       2,362,330  
Investment securities held-to-maturity (Note 3)      51,189       53,391       54,013  

 

Loans held-for-sale

     85,740       —         46,466  

 

Loans:

                        

Commercial

     4,460,639       4,317,263       4,171,083  

Construction

     887,237       810,985       751,193  

Residential real estate

     1,092,785       1,066,694       1,079,004  

Consumer

     1,031,760       1,014,905       1,005,328  

Lease financing

     88,510       102,180       128,285  
    


 


 


Total loans

     7,560,931       7,312,027       7,134,893  
Less: allowance for loan losses      (142,261 )     (138,601 )     (135,394 )
    


 


 


Loans, net

     7,418,670       7,173,426       6,999,499  
    


 


 


Bank premises and equipment, less accumulated depreciation of
$124,171 (2003), $119,666 (December 2002) and $114,100 (June 2002)

     104,099       102,428       100,892  
Other real estate owned, net      376       132       63  
Goodwill, net      119,730       102,705       102,705  
Other intangible assets, net (Note 6)      16,107       7,530       8,510  
Other assets      232,924       293,791       203,387  
    


 


 


Total assets

   $ 11,496,301     $ 10,790,376     $ 10,159,234  
    


 


 


LIABILITIES                         
Deposits:                         

Noninterest-bearing deposits

   $ 2,276,408     $ 2,086,745     $ 1,937,270  

Interest-bearing deposits

     6,359,166       6,174,195       5,770,906  
    


 


 


Total deposits

     8,635,574       8,260,940       7,708,176  
Short-term borrowings      816,309       823,385       806,957  
Accrued expenses and other liabilities      90,291       94,479       93,301  
Long-term debt      578,533       287,214       268,713  
    


 


 


Total liabilities

     10,120,707       9,466,018       8,877,147  
    


 


 


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 shares — 69,093,254 (2003), 68,836,092 (December 2002) and 69,763,663 (June 2002); restricted shares — 171,369 (2003), 76,250 (December 2002) and 66,250 (June 2002)

     138,187       137,672       139,527  
Capital surplus      128,714       120,577       157,222  
Retained earnings      1,063,381       1,010,248       954,506  
Accumulated other comprehensive income (loss)      45,312       55,861       30,832  
    


 


 


Total shareholders’ equity

     1,375,594       1,324,358       1,282,087  
    


 


 


Total liabilities and shareholders’ equity

   $ 11,496,301     $ 10,790,376     $ 10,159,234  
    


 


 


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 3

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CONSOLIDATED INCOME

 

    

For the 6 Months

Ended June 30,

  

For the 3 Months

Ended June 30,

(Dollars in thousands, except per share data)    2003    2002    2003    2002
                             

INTEREST INCOME                            
Interest and fees on loans    $ 222,954    $ 233,822    $ 111,962    $ 117,124
    

  

  

  

Interest and dividends on investment securities:                            

Taxable interest income

     53,822      54,991      26,638      27,707

Tax-exempt interest income

     964      959      497      479

Dividends

     428      542      199      259

Other investment income

     2,882      104      2,318      52
    

  

  

  

       58,096      56,596      29,652      28,497
    

  

  

  

Other interest income      2,040      2,667      1,314      1,002
    

  

  

  

Total interest income

     283,090      293,085      142,928      146,623
    

  

  

  

INTEREST EXPENSE                            
Interest on deposits      48,579      63,609      23,450      30,475
Interest on short-term borrowings      3,014      6,240      1,469      2,928
Interest on long-term debt      7,648      5,623      5,286      2,795
    

  

  

  

Total interest expense

     59,241      75,472      30,205      36,198
    

  

  

  

NET INTEREST INCOME      223,849      217,613      112,723      110,425
Provision for loan losses      6,067      8,199      3,051      5,116
    

  

  

  

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      217,782      209,414      109,672      105,309
    

  

  

  

NONINTEREST INCOME                            
Investment and wealth management      36,873      34,355      19,508      17,828
Service charges on deposit accounts      16,371      15,189      8,311      7,726
Mortgage banking related fees      4,895      5,089      2,507      1,915
Investment securities gains and (losses)      7,351      1,049      6,536      1,051
Other income      17,800      15,962      8,575      8,285
    

  

  

  

Total noninterest income

     83,290      71,644      45,437      36,805
    

  

  

  

NONINTEREST EXPENSES                            
Salaries      70,732      66,016      36,317      34,066
Employee benefits      18,747      16,600      9,319      8,069
Net occupancy expense of bank premises      8,315      7,969      4,219      4,064
Furniture and equipment expenses      13,542      12,059      6,743      5,627
Communications and supplies      6,617      6,663      3,181      3,407
Other expenses      28,877      24,814      17,270      12,697
    

  

  

  

Total noninterest expenses

     146,830      134,121      77,049      67,930
    

  

  

  

Income before income taxes      154,242      146,937      78,060      74,184
Applicable income taxes      55,246      53,817      28,050      27,239
    

  

  

  

NET INCOME    $ 98,996    $ 93,120    $ 50,010    $ 46,945
    

  

  

  

NET INCOME PER SHARE OF COMMON STOCK (Note 2):                            

Basic

   $ 1.44    $ 1.33    $ .73    $ .67
    

  

  

  

Diluted

   $ 1.43    $ 1.32    $ .72    $ .67
    

  

  

  

 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 4

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CONSOLIDATED CASH FLOWS

 

Increase (decrease) in cash and cash equivalents    For the 6 Months Ended
June 30,
 
(Dollars in thousands)    2003     2002  

CASH FLOWS FROM OPERATING ACTIVITIES:                 
Net income    $ 98,996     $ 93,120  
Adjustments to reconcile net income to net cash provided by operating activities:                 

Provision for loan losses

     6,067       8,199  

Depreciation and amortization

     6,331       6,399  

Amortization of other intangible assets

     1,409       1,050  

Investment securities (gains) and losses

     (7,351 )     (1,049 )

Write-downs of investments in private equity funds

     188       1,060  

Write-downs of other real estate owned

     —         2  

Gains on sales of other real estate owned

     (268 )     (43 )

Gains on sales of buildings

     (228 )     (350 )
Net (increase) decrease in assets:                 

Interest receivable

     5,036       (663 )

Other receivables

     (7,564 )     (42,050 )

Other assets

     236       2,415  

Loans held-for-sale

     (85,740 )     91,484  
Net increase (decrease) in liabilities:                 

Interest payable

     921       (8,698 )

Accrued expenses

     (2,182 )     (8,844 )

Taxes payable

     (4,094 )     (10,352 )
    


 


Net cash provided by operating activities

     11,757       131,680  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES:                 
Proceeds from maturities of investment securities held-to-maturity      4,603       928  
Proceeds from maturities of investment securities available-for-sale      439,129       286,822  
Proceeds from sales of investment securities available-for-sale      399,958       53,039  
Purchases of investment securities held-to-maturity      (2,401 )     (2,672 )
Purchases of investment securities available-for-sale      (954,481 )     (405,160 )
Net increase in customer loans      (251,555 )     (242,935 )
Proceeds from sales of other real estate owned      268       179  
Capital expenditures      (8,376 )     (6,221 )
Proceeds from sales of buildings      602       575  
Acquisition of asset management and brokerage companies      (28,530 )      
Other investing activity      (1,085 )     (8,766 )
    


 


Net cash used in investing activities

     (401,868 )     (324,211 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES:                 
Net increase in noninterest-bearing deposits      189,663       53,392  
Net increase in checking plus interest and savings accounts      150,951       241,530  
Net increase (decrease) in certificates of deposit      34,020       (34,118 )
Net decrease in short-term borrowings      (7,076 )     (46,321 )
Proceeds from issuance of long-term debt      300,000       —    
Repayment of long-term debt      (8,400 )     (8,300 )
Proceeds from issuance of shares      4,114       4,329  
Repurchase of common shares      (212 )     (10,546 )
Dividends paid      (43,365 )     (40,413 )
    


 


Net cash provided by financing activities

     619,695       159,553  
    


 


Net increase (decrease) in cash and cash equivalents      229,584       (32,978 )
Cash and cash equivalents at beginning of period      545,781       314,347  
    


 


Cash and cash equivalents at end of period    $ 775,365     $ 281,369  
    


 


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 5

 

MERCANTILE BANKSHARES CORPORATION

STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

 

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

 

(Dollars in thousands, except per share data)    Total     Common
Stock
    Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
 

BALANCE, DECEMBER 31, 2001    $ 1,230,206     $ 139,551     $ 159,947     $ 904,479     $ 26,229  
Net income      93,120                       93,120          

Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes

     4,603                               4,603  
    


                               
Comprehensive income      97,723                                  
    


                               
Cash dividends paid:                                         

Common stock ($.58 per share)

     (40,413 )                     (40,413 )        

Issuance of 53,466 shares for dividend reinvestment and
stock purchase plan

     1,892       107       1,785                  

Issuance of 11,261 shares for employee stock purchase
dividend reinvestment plan

     469       22       447                  
Issuance of 114,976 shares for employee stock option plan      1,968       230       1,738                  

Issuance of 66,250 shares for restricted stock awards

     2,981       133       2,848                  

Deferred compensation — restricted stock awards

     (2,680 )                     (2,680 )        

Purchase of 258,000 shares under stock repurchase plan

     (10,546 )     (516 )     (10,030 )                
Vested stock options      487               487                  
    


 


 


 


 


BALANCE, JUNE 30, 2002    $ 1,282,087     $ 139,527     $ 157,222     $ 954,506     $ 30,832  
    


 


 


 


 


BALANCE, DECEMBER 31, 2002    $ 1,324,358     $ 137,672     $ 120,577     $ 1,010,248     $ 55,861  
Net income      98,996                       98,996          

Unrealized gains (losses) on securities available-for-sale,
net of reclassification adjustment, net of taxes (Note 7)

     (10,549 )                             (10,549 )
    


                               
Comprehensive income      88,447                                  
    


                               
Cash dividends paid:                                         

Common stock ($.63 per share)

     (43,365 )                     (43,365 )        

Issuance of 60,823 shares for dividend reinvestment and
stock purchase plan

     2,119       122       1,997                  

Issuance of 12,249 shares for employee stock purchase
dividend reinvestment plan

     455       25       430                  

Issuance of 89,053 shares for employee stock option plan

     1,540       177       1,363                  

Issuance of 100,537 shares for restricted stock awards

     3,561       202       3,359                  

Deferred compensation — restricted stock awards

     (2,498 )                     (2,498 )        

Purchase of 5,500 shares under stock repurchase plan

     (212 )     (11 )     (201 )                
Vested stock options      1,189               1,189                  
    


 


 


 


 


BALANCE, JUNE 30, 2003    $ 1,375,594     $ 138,187     $ 128,714     $ 1,063,381     $ 45,312  
    


 


 


 


 


 

See notes to consolidated financial statements

 

Mercantile Bankshares Corporation


Page 6

 

MERCANTILE BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Basis of Presentation

 

The consolidated financial statements, which include the accounts of Mercantile Bankshares Corporation (Bankshares) 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 and contingent assets and liabilities at the date of the financial statements, and the disclosure of 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.    Earnings Per Share

 

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS is computed using the same components as in basic EPS with the denominator adjusted for the dilutive effect of stock options and restricted stock awards. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the six months and quarters ended June 30, 2003 and 2002:

 

     For the 6 Months Ended June 30,

     2003

   2002

(In thousands, except per share data)   

Net

Income

   Weighted Average
Common Shares
   EPS    Net
Income
   Weighted Average
Common Shares
   EPS

Basic EPS

     $98,996    68,815    $ 1.44    $93,120    69,807    $ 1.33

Dilutive effect of stock options and restricted stock awards

          438                559       
           
              
      
Diluted EPS    $ 98,996    69,253    $ 1.43    $93,120    70,366    $ 1.32
           
              
      
     For the 3 Months Ended June 30,

     2003

   2002

(In thousands, except per share data)   

Net

Income

   Weighted Average
Common Shares
   EPS    Net
Income
   Weighted Average
Common Shares
   EPS

Basic EPS

     $50,010    68,860      $.73    $46,945    69,793      $.67

Dilutive effect of stock options and restricted stock awards

          458                529       
           
              
      
Diluted EPS      $50,010    69,318      $.72    $46,945    70,322      $.67
           
              
      

 

Antidilutive options and awards excluded in the computation of diluted earnings per share were 238,838 and 108,046 for year-to-date June 30, 2003 and 2002, respectively, and 249,978 and 237,125 for quarter-to-date June 30, 2003 and 2002, respectively.

 

Mercantile Bankshares Corporation


Page 7

 

3.    Investment Securities

 

The amortized cost and fair value of investment securities at June 30, 2003, December 31, 2002 and June 30, 2002, are shown below:

 

     June 30, 2003

   December 31, 2002

   June 30, 2002

(Dollars in thousands)    Amortized
Cost
  

Fair

Value

   Amortized
Cost
  

Fair

Value

   Amortized
Cost
  

Fair

Value


Securities available-for-sale                                          

U.S. Treasury

   $ 950,507    $ 988,831    $ 1,375,703    $ 1,421,890    $ 1,465,056    $ 1,491,036

U.S. Government agencies

     657,177      685,061      695,970      727,627      638,911      655,122

Mortgage-backed securities

     927,625      933,508      341,805      348,323      199,715      200,430

States and political subdivisions

     449      477      549      577      649      673

Other investments

     83,694      84,224      7,683      12,775      7,893      15,069
    

  

  

  

  

  

Total

   $ 2,619,452    $ 2,692,101    $ 2,421,710    $ 2,511,192    $ 2,312,224    $ 2,362,330
    

  

  

  

  

  

Securities held-to-maturity                                          

States and political subdivisions

   $ 36,224    $ 39,239    $ 38,299    $ 41,150    $ 38,552    $ 40,916

Other investments

     14,965      14,965      15,092      15,092      15,461      15,461
    

  

  

  

  

  

Total

   $ 51,189    $ 54,204    $ 53,391    $ 56,242    $ 54,013    $ 56,377
    

  

  

  

  

  

 

4.    Impaired Loans

 

A loan is considered impaired, based on current information and events, if it is probable that Bankshares 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 on 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 Bankshares’ impaired loans are measured by reference to the fair value of the collateral. Accrued interest on impaired loans is reversed and 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) at June 30 and March 31, 2003 and at the end of December 2002, is shown below. See Form 10-K for more details.

 

(Dollars in thousands)    June 30,
2003
   March 31,
2003
   December 31,
2002

Impaired loans with a specific valuation allowance

   $ 18,523    $ 8,189    $ 13,751
All other impaired loans      15,066      15,865      16,813
    

  

  

Total impaired loans

   $ 33,589    $ 24,054    $ 30,564
    

  

  

Specific allowance for loan losses applicable to impaired loans    $ 8,840    $ 4,857    $ 5,251
Allowance for loan losses applicable to other than impaired loans      133,421      135,570      133,350
    

  

  

Total allowance for loan losses

   $ 142,261    $ 140,427    $ 138,601
    

  

  

Year-to-date interest income on impaired loans recorded on the cash basis    $ 155    $ 97    $ 563
    

  

  

Year-to-date average recorded investment in impaired loans during the period    $ 26,438    $ 24,054    $ 53,777
    

  

  

Quarter-to-date interest income on impaired loans recorded on the cash basis    $ 58    $ 97    $ 143
    

  

  

Quarter-to-date average recorded investment in impaired loans during the period    $ 28,822    $ 24,054    $ 44,263
    

  

  

 

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.

 

 

Mercantile Bankshares Corporation


Page 8

 

5.    Commitments

 

Various commitments to extend credit (lines of credit) are made in the normal course of banking business. Total unused lines of credit approximated $2,762,800,000, $2,984,302,000 and $2,865,317,000 at June 30, 2003, December 31, 2002 and June 30, 2002, respectively. The lines of credit commitments are shown here at fair value. These amounts are not recorded on the books of Bankshares. In addition, letters of credit are issued for the benefit of customers by affiliated banks. Outstanding letters of credit were $245,200,000 at June 30, 2003, $241,142,000 at December 31, 2002 and $217,627,000 at June 30, 2002. The fees received for issuing letters of credit are deferred and amortized over the term of the commitment. The letters of credit at June 30, 2003 had a carrying value of $430,000 representing unamortized fees.

 

Bankshares’ mortgage banking subsidiary, as a Fannie Mae Delegated Underwriting and Servicing lender, has a loss sharing arrangement with Fannie Mae. The unamortized principal balance of the underlying loans totaled $123,578,000 at June 30, 2003. No carrying value has been established for possible losses since there have been no losses recognized during the six-year history of the arrangement and none are expected as of June 30, 2003.

 

The mortgage subsidiary has also originated and sold loans with recourse. The unamortized amount of principal balance of loans with recourse totaled $2,844,000 at June 30, 2003.

 

Bankshares has committed to invest funds in third-party private equity investments. At June 30, 2003, December 31, 2002 and June 30, 2002, $17,981,000, $15,243,000 and $12,893,000, respectively, remained unfunded.

 

6.    Intangible Assets

 

The following table discloses the gross carrying amount and accumulated amortization of intangible assets subject to amortization at June 30, 2003 and December 31, 2002:

 

     June 30, 2003

   December 31, 2002

(Dollars in thousands)    Gross Carrying
Amount
   Accumulated
Amortization
    Net Amount    Gross Carrying
Amount
   Accumulated
Amortization
    Net Amount

Deposit intangibles    $ 13,846    $ (7,313 )   $ 6,533    $ 13,846    $ (6,581 )   $ 7,265
Mortgage servicing rights      1,341      (1,275 )     66      1,543      (1,282 )     261
Other      10,110      (602 )     9,508      50      (46 )     4
    

  


 

  

  


 

Total

   $ 25,297    $ (9,190 )   $ 16,107    $ 15,439    $ (7,909 )   $ 7,530
    

  


 

  

  


 

 

The aggregate amortization expense was $1,409,000 for the six months ended June 30, 2003 and $1,972,000 for the year ended December 31, 2002. The estimated aggregate amortization expense for each of the next five years is: 2004 – $3,033,000; 2005 – $3,033,000; 2006 – $3,033,000; 2007 – $2,818,000; 2008 – $1,736,000.

 

7.    Comprehensive Income

 

The following table summarizes the related tax effect of unrealized gains (losses) on securities available-for-sale for the six months ended June 30, 2003 and 2002. 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,

 
     2003

    2002

 
(Dollars in thousands)    Pretax
Amount
    Tax
(Expense)
Benefit
   Net
Amount
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net
Amount
 

Unrealized gains (losses) on securities available-for-sale:

                                               

Unrealized holding gains (losses) arising during the period

   $ (9,484 )   $ 3,379    $ (6,105 )   $ 8,337     $ (3,100 )   $ 5,237  

Reclassification adjustment for (gains) losses included in net income

     (7,351 )     2,907      (4,444 )     (1,049 )     415       (634 )
    


 

  


 


 


 


Total    $ (16,835 )   $ 6,286    $ (10,549 )   $ 7,288     $ (2,685 )   $ 4,603  
    


 

  


 


 


 


 

8.    Capital Adequacy

 

Bankshares 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 I capital and Total risk-based capital as percents of net risk-weighted assets and Tier I capital as a percent of adjusted average total assets (leverage ratio). The minimum ratios for capital adequacy purposes are 4.00%, 8.00% and 4.00%, for the Tier I capital, Total capital and leverage ratios, respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.00%, 10.00% and 5.00%, for its Tier I capital, Total capital and leverage ratios,

 

Mercantile Bankshares Corporation


Page 9

 

respectively. Management believes that, as of June 30, 2003, Bankshares and its bank affiliates exceeded all capital adequacy requirements to which they are subject and are well capitalized.

 

Capital ratios and the amounts used to calculate them are presented in the following table for Bankshares and Mercantile – Safe Deposit & Trust Company (MSD&T), the lead bank, as of June 30, 2003 and December 31, 2002.

 

     June 30, 2003

    December 31, 2002

 
(Dollars in thousands)    Bankshares     MSD&T     Bankshares     MSD&T  

Tier I capital

   $ 1,187,499     $ 416,202     $ 1,151,831     $ 430,375  

Total risk-based capital

     1,589,195       460,547       1,250,550       473,185  

Net risk-weighted assets

     8,224,156       3,540,131       7,677,476       3,407,691  

Adjusted average total assets

     10,810,386       4,463,269       10,281,071       4,246,480  
                                  

Tier I capital ratio

     14.44 %     11.76 %     15.00 %     12.63 %

Total capital ratio

     19.32 %     13.01 %     16.29 %     13.89 %

Leverage ratio

     10.98 %     9.33 %     11.20 %     10.13 %

 

9.    Segment Reporting

 

Operating segments are defined as components of an enterprise about which separate financial information is available that management relies on for decision making and performance assessment. Bankshares has three reportable segments – its nineteen Community Banks, the Banking Division of Mercantile – Safe Deposit & Trust Company (MSD&T) and the Investment and Wealth Management (IWM) Division of MSD&T.

 

The following tables present selected segment information for the six months ended June 30, 2003 and 2002. 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, 2003

 
(Dollars in thousands)    MSD&T –
Banking
    MSD&T –
IWM
    Total
MSD&T
    Community
Banks
    Other     Total  
                                                  

Net interest income    $ 71,489     $     $ 71,489     $ 153,503     $ (1,143 )   $ 223,849  
Provision for loan losses      (2,958 )           (2,958 )     (3,109 )           (6,067 )
Noninterest income      21,592       37,164       58,756       31,542       (7,008 )     83,290  
Noninterest expenses      (43,929 )     (30,426 )     (74,355 )     (78,352 )     5,877       (146,830 )
Adjustments      7,763       (1,559 )     6,204       (3,220 )     (2,984 )      
    


 


 


 


 


 


Income (loss) before income taxes      53,957       5,179       59,136       100,364       (5,258 )     154,242  
Income tax (expense) benefit      (19,443 )     (2,072 )     (21,515 )     (34,637 )     906       (55,246 )
    


 


 


 


 


 


Net income (loss)    $ 34,514     $ 3,107     $ 37,621     $ 65,727     $ (4,352 )   $ 98,996  
    


 


 


 


 


 


Average assets                    $ 4,326,291     $ 6,624,800     $ (170,717 )   $ 10,780,374  
Average equity                      454,182       843,198       12,517       1,309,897  
     For the 6 Months Ended June 30, 2002

 
(Dollars in thousands)   

MSD&T –

Banking

   

MSD&T –

IWM

    Total
MSD&T
    Community
Banks
    Other     Total  
                                                  

Net interest income    $ 72,868     $     $ 72,868     $ 145,981     $ (1,236 )   $ 217,613  
Provision for loan losses      (4,665 )           (4,665 )     (3,534 )           (8,199 )
Noninterest income      21,006       34,154       55,160       24,146       (7,662 )     71,644  
Noninterest expenses      (46,283 )     (21,505 )     (67,788 )     (74,112 )     7,779       (134,121 )
Adjustments      8,713       (663 )     8,050       (4,372 )     (3,678 )      
    


 


 


 


 


 


Income (loss) before income taxes      51,639       11,986       63,625       88,109       (4,797 )     146,937  
Income tax (expense) benefit      (18,664 )     (4,795 )     (23,459 )     (30,879 )     521       (53,817 )
    


 


 


 


 


 


Net income (loss)    $ 32,975     $ 7,191     $ 40,166     $ 57,230     $ (4,276 )   $ 93,120  
    


 


 


 


 


 


Average assets                    $ 4,026,306     $ 6,040,205     $ (213,191 )   $ 9,853,320  
Average equity                      430,442       755,304       55,318       1,241,064  

 

 

Mercantile Bankshares Corporation


Page 10

 

10.    Derivative Instruments and Hedging Activities

 

Bankshares maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Derivative instruments that are used as part of the interest rate risk management strategy have been restricted to interest rate swaps. Interest rate swaps generally involve the exchange of fixed-rate and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. Bankshares has entered into interest rate swaps to convert fixed-rate loans made to borrowers to floating-rate loans and convert its nonprepayable fixed-rate debt to floating-rate debt.

 

The fair value of derivative instruments recorded in other assets was $18,303,000 (notional $203,157,000) and $11,424,000 (notional $203,190,000) at June 30, 2003 and December 31, 2002, respectively. The fair value of derivative instruments recorded in other liabilities was $2,512,000 (notional $100,000,000) and $0 at June 30, 2003 and December 31, 2002, respectively. For the six months ended June 30, 2003, Bankshares recognized a net gain of $42,000, included in interest and fees on loans, which represented the ineffective portion of the fair-value hedge of fixed-rate loans made to borrowers. For the year ended December 31, 2002, Bankshares recognized a net loss of $40,000. The fair-value hedges of nonrepayable fixed-rate debt was 100% effective for the reported periods.

 

11.    Stock-based Compensation Expense

 

Bankshares has several stock-based compensation programs for its directors, management and employees. These programs include the use of stock options, restricted stock awards and phantom stock. The compensation costs associated with Bankshares’ Omnibus Stock Plans and the granting of restricted stock awards are included in salaries expense. The costs associated with Bankshares’ deferred directors’ compensation plan is included in professional fees as part of other expenses on the income statement. These amounts are summarized in the table below:

 

    

For the 6 Months

Ended June 30,


     For the 3 Months
Ended June 30,


 
     2003    2002      2003    2002  

Option related expense

   $ 865    $ 712      $ 406    $ 408  

Restricted stock award expense

     922      299        604      299  
    

  


  

  


Sub-total included in salaries expense

     1,787      1,011        1,010      707  
    

  


  

  


Directors’ deferred compensation expense

     314      (191 )      989      (290 )
    

  


  

  


Total stock-based compensation expense

   $ 2,101    $ 820      $ 1,999    $ 417  
    

  


  

  


 

12.    Acquisitions and Merger Related Expenses

 

In March and April 2003, Bankshares acquired, in separate transactions, Boyd Watterson Asset Management, LLC, an investment management firm and Peremel & Company, a directed and discount brokerage company. In the aggregate, the companies were purchased for approximately $29 million in cash. The Boyd Watterson acquisition has a potential additional contingent purchase payment of up to $8.6 million. The contingent payment will be recorded when amounts are resolved and become payable three years from the acquisition date. Bankshares finalized and recorded approximately $10.1 million of identified intangibles, mostly client relationships, as a result of these acquisitions. These intangibles are being amortized on a straight line basis over a range of 3 to 8 years. Goodwill recorded on these transactions totaled approximately $17.0 million at June 30, 2003.

 

On July 8, 2003, the Board of Governors of the Federal Reserve System approved the application by Bankshares to merge with F&M Bancorp. The Federal Reserve Board also approved the application by F&M Bancorp’s bank subsidiary, Farmers & Mechanics Bank, to merge with Fredericktown Bank & Trust Company, a Bankshares subsidiary. The merger between Bankshares and F&M Bancorp is subject to approval by state regulators and the shareholders of F&M Bancorp. The shareholders meeting to approve the F&M Bancorp transaction will occur on August 6, 2003. Provided that state bank regulators and shareholders approve the transaction, it is expected that the merger closing for the holding companies will occur on August 12, 2003.

 

For the six months ended June 30, 2003, merger related expenses totaled $825,000 which was all paid for professional services rendered in connection with the acquisition of F&M Bancorp and is included in other expenses. There were no such expenses in the prior year. The comparable costs for the second quarter 2003 were $775,000.

 

Mercantile Bankshares Corporation


Page 11

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

MERCANTILE BANKSHARES CORPORATION

 

Consolidated Financial Results

 

Net income for the quarter ended June 30, 2003 was $50,010,000, a 6.5% increase from net income of $46,945,000 for the same period in 2002. For the quarter ended June 30, 2003, diluted net income per share was $.72, an increase of 7.5% over the $.67 reported for the second quarter last year. The increase in earnings per share was favorably impacted by a decline in weighted average shares outstanding from 70,322,000 for the quarter ended June 30, 2002, to 69,318,000 for the quarter ended June 30, 2003.

 

For the first six months of 2003, net income was $98,996,000, an increase of 6.3% over the $93,120,000 reported for the comparable period in 2002. Diluted net income per share for the first half of 2003 was $1.43, an 8.3% increase over the $1.32 reported for the same period last year.

 

For the six months ended June 30, 2003 return on average assets was 1.85%, return on average equity was 15.24% and average equity to average assets was 12.15%. Comparable performance ratios for the first half of 2002 were 1.91% for return on average assets, 15.13% for return on average equity and 12.60% for average equity to average assets. Management believes that reporting several key measures based on tangible equity (equity less goodwill) is important, as this is the basis for measuring the adequacy of capital for regulatory purposes. For the six months ended June 30, 2003 the ratio of average tangible equity to average tangible assets was 11.22% as compared to 11.67% for the same period last year. The return on average tangible equity for the six months ended June 30, 2003 and 2002 was 16.68% and 16.50%, respectively. (See page 17 for a reconciliation of non-GAAP measures.)

 

Net Interest Income and Net Interest Margin

 

Net interest income for the quarter ended June 30, 2003 increased 2.1% to $112,723,000 from $110,425,000 for the second quarter last year. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The Rate/Volume Analysis on page 20 presents further details supporting this discussion. The growth in net interest income was attributable to the growth in average earning assets, particularly investment securities. Average investment securities increased 12.0% to $2,637,699,000 compared to $2,354,177,000 in the prior year, and increased 2.4% since last quarter. Average total loans increased 6.9% to $7,513,576,000 compared to the prior year and 2.1% (8.4% annualized) from the first quarter 2003 average. While the growth in the average loan portfolio shows signs of improvement, the local economy remains anemic. The one exception has been construction, especially residential, which is reflected in the 23.9% growth in the average construction loan portfolio. Average commercial loans grew 6.4% over the prior year’s average, while consumer and residential real estate loans were up slightly.

 

On a year-over-year basis, the net interest margin declined by 36 basis points (bp) from 4.74% to 4.38%. Eighteen basis points of this decline is attributable to the reduced benefit derived from noninterest-bearing funding sources, such as demand deposits and capital. The positive effect of these funds declined from 62 bp in 2002 to 44 bp in 2003. The net interest spread, the differential between the yield on earning assets and the expense rate paid on interest bearing liabilities, declined 18 bp from the second quarter 2002 and 17 bp from the first quarter this year. Until this quarter, the net interest spread had steadily improved since falling to a low of 3.71% during the second quarter 2001. The decline in the net interest spread is primarily attributable to the issuance of $300 million of subordinated debt on April 15, 2003. Because a substantial portion of the proceeds from the debt issuance will be used to fund various aspects of the acquisition of F&M Bancorp, which is expected to occur in mid-August 2003, the funds are temporarily being invested in short-term liquid assets. The impact on net interest spread resulted from a reduction in net interest income coupled with an increase in average earning assets. The average outstanding balance during the quarter for the debt and temporary investments was $251,580,000. The interest income produced by the temporary investments was $743,000 while the interest expense on the debt was $2,919,000, resulting in a reduction in net interest income of $2,176,000. Partially offsetting this impact was the increased income from other investments, which increased by $1,754,000 from the first 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, which has been occurring since the first quarter 2001. Prior to the close of the second quarter 2003, the Federal Reserve reduced short-term interest rates by 25 bp. Management’s ability to offset the effect of this and any further reductions in short-term interest rates by the Federal Reserve may be limited by, among other factors, the growth in

 

Mercantile Bankshares Corporation


Page 12

 

loans, deposits and competitive factors influencing the pricing of these products. Management expects to see continued pressure on the net interest margin until such time as the Federal Reserve reverses course and begins increasing short-term interest rates. See the Analysis of Interest Rates and Interest Differentials on pages 18 and 19 for further details.

 

The tax-equivalent yield on the loan portfolio declined from 6.75% last year to 6.04% in the current quarter. The lower yield more than offset the growth in the loan portfolio, resulting in a $5.2 million reduction in interest income. The yield on total loans in the first quarter 2003 was 6.18%. The drop in yields since the first quarter 2003 were more dramatic in the consumer and residential real estate loan portfolios. The yields on the residential real estate loans and consumer loans declined 26 bp and 19 bp, respectively. In comparison the yields on the commercial and construction portfolios each declined by 10 bp.

 

The yield on the investment securities portfolio was 4.56% for the quarter, down 35 bp from the 4.91% yield reported for the second quarter last year. Portfolio growth and increased income from other investments, offset the lower yields in some segments of the portfolio to produce a $1.2 million increase in income from investment securities. Income from other investments was $2,318,00 for the current quarter. The yield on the investment portfolio in the first quarter was 4.53%. The $1,754,000 increase in income from other investments enhanced the overall portfolio yield by 27 bp between quarters.

 

Reflective of lower interest rates, total interest expense declined by $6.0 million from the second quarter 2002. The rate paid on total interest-bearing funds decreased 55 bp from 2.15% a year ago to 1.60% for the quarter ended June 30, 2003. The rate paid on average interest-bearing deposits was 1.50%, a decrease of 17 bp from 1.67% for the quarter ended March 31, 2003 and down 66 bp from the second quarter last year. The rate paid on short-term borrowings decreased by 68 bp from the prior year and 4 bp from the first quarter. The rate on long-term debt increased by 6 bp over the same quarter last year and 55 bp from the prior quarter. These increases are attributable to the $300 million subordinated debt issued during the quarter. Prior to quarter end, $100 million of the debt was swapped to a floating rate. In the current interest rate environment this action will reduce the interest cost on that portion of the debt. It will also provide a better interest sensitivity match as the funds are deployed within the affiliated banks.

 

Noninterest Income

 

    

For the 6 Months Ended June 30,

2003 vs. 2002


    

For the 3 Months Ended June 30,

2003 vs. 2002


Noninterest Income

(Dollars in thousands)

  

Increase/

(Decrease)

Amount

    %     

Increase/

(Decrease)

Amount

   %

Investment and wealth management

   $ 2,518     7.3      $ 1,680    9.4

Service charges on deposit accounts

     1,182     7.8        585    7.6

Mortgage banking related fees

     (194 )   (3.8 )      592    30.9

Investments securities gains and (losses)

     6,302     600.8        5,485    521.9

Other income

     1,838     11.5        290    3.5
    


        

    

Total noninterest income

   $ 11,646     16.3      $ 8,632    23.5
    


        

    

 

Noninterest income increased 23.5% to $45,437,000 for the second quarter 2003 versus the comparable period in 2002. Excluding the investment securities gain realized in the second quarter of both years, the growth rate was 8.8% year-over-year. Investment security gains were $6,536,000 for the second quarter 2003, up over five fold from $1,051,000 from the same quarter last year. $5,000,000 of the current quarters gains came from the sale of equity securities and the balance related to the continued restructuring of the bond portfolios. Investment and wealth management revenues increased 9.4% to $19,508,000 for the quarter ended June 30, 2003. Revenues for the second quarter 2003 benefited $2,193,000 from the inclusion of Boyd Watterson Asset Management, LLC and Peremel & Company, which affiliated with Mercantile on March 1, and April 1, 2003, respectively. Service charges on deposit accounts increased 7.6% to $8,311,000 for the current quarter compared to the prior year. Business checking, overdraft and ATM fees are the major contributors to this growth. Mortgage banking fees increased 30.9% to $2,507,000 for the quarter. It was during the second quarter 2002 that Mercantile Mortgage entered into a joint venture to outsource its residential mortgage origination business resulting in a temporary drop-off of fees. Included in other income for the second quarter of 2003 is income from bank-owned life insurance of $439,000. The $50 million investment made in the third quarter 2002, is targeted to partially fund the cost of various employee benefit programs.

 

Mercantile Bankshares Corporation


Page 13

 

For the first six months, excluding investment securities gains, noninterest income increased $5,344,000, or 7.6%. This was due to a 7.3% or $2,518,000 increase in Investment and Wealth Management fees, a 7.8% or $1,182,000 increase in service charges on deposit accounts and a 11.5% or $1,838,000 increase in other income. The aforementioned acquisitions increased Investment and Wealth Management revenues $2,817,000. The improvement in other income is due to reduced writedowns in private equity fund investments.

 

Noninterest Expenses

 

    

For the 6 Months Ended June 30,

2003 vs. 2002


     For the 3 Months Ended June 30,
2003 vs. 2002


 

Noninterest Expenses

(Dollars in thousands)

  

Increase/

(Decrease)

Amount

    %     

Increase/

(Decrease)

Amount

    %  

Salaries

   $ 4,716     7.1      $ 2,251     6.6  

Employee benefits

     2,147     12.9        1,250     15.5  

Net occupancy expense of bank premises

     346     4.3        155     3.8  

Furniture and equipment expenses

     1,483     12.3        1,116     19.8  

Communications and supplies

     (46 )   (.7 )      (226 )   (6.6 )

Other expenses

     4,063     16.4        4,573     36.0  
    


        


     

Total noninterest expenses

   $ 12,709     9.5      $ 9,119     13.4  
    


        


     

 

Noninterest expenses for the quarter ended June 30, 2003, increased 13.4% to $77,049,000 from $67,930,000 for the second quarter of 2002. The principal contributor to the year-over-year increase in salaries, is due to the acquisitions in the Investment and Wealth Management business, which accounted for $1,012,000 of the increase. Employee stock based compensation expense, included in salaries, was $1,010,000 for the quarter as compared to $707,000 last year. Employee benefits expense increased due to rising pension and medical costs. Pension and 401k expenses increased to $3,211,000 in the quarter as compared to $2,427,000 last year. The increase in furniture and equipment expenses is related to software maintenance and rental expenses. These expenses were $2,696,000 for the quarter as compared to $1,444,000 last year, an increase of $1,252,000. The major drivers of this increase are the technology investments that have been made in the Investment and Wealth Management area and increased costs for the main banking operating systems due to normal growth. Furniture and equipment expenses were relatively unchanged from the first quarter 2003. Other expenses increased 36.0% to $17,270,000 in the second quarter 2003 as compared to the same period last year. The largest contributor to this increase was professional fees. During the current quarter, $775,000 of merger related professional fees were incurred. There were no such expenses in the prior year and only $50,000 in the first quarter 2003. The other significant change was in the Directors’ Deferred Compensation plan expense which was $989,000 for the current quarter as compared to a credit of $290,000 last year, an increase of $1,279,000. The change was even more dramatic, an increase of $1,664,000, when compared to this year’s first quarter, which reflected a credit of $675,000. The cost of this plan fluctuates with changes in the market value of Mercantile’s common stock. Amortization of identifiable intangibles related to the Investment and Wealth Management acquisitions increased $422,000 over the prior year and $291,000 over the first quarter. Advertising and promotional expenses increased $279,000 over the second quarter last year and $782,000 over this year’s first quarter. Finally, minority interest expense which is related to the mortgage banking business, increased $423,000 over the prior year and $541,000 over the first quarter. These five expense categories represented an increase in other expense over the prior year of $3,178,000 or almost 70% of the total increase. The increase from the first quarter 2003 was $3,999,000 for the same categories. Noninterest expenses for the first six months of 2003 increased $12,709,000, or 9.5%. The increase in expenses for this period is attributable to the factors noted above, especially the increase in other expenses.

 

As a result of the increased level of expenses, the adjusted efficiency ratio, a key measure of expense management, was 48.47% for the six months ended June 30, 2003 versus 46.05% for the comparable period last year. This ratio compares favorably to Bankshares’ peer group average for both periods. Management excludes gains and losses from sales of investment securities when computing the efficiency ratio because of the uncertainty as to timing and amount of gain or loss to be recognized. (See page 17 for a reconciliation of non-GAAP measures.)

 

Analysis of Financial Condition

 

At June 30, 2003, total assets increased 13.2% to $11,496,301,000 compared to $10,159,234,000 one year earlier. Compared to the year ended December 31, 2002 total assets increased 6.5% from $10,790,376,000. Total loans increased 6.0% to $7,560,931,000 at June 30, 2003, compared to $7,134,893,000 at June 30, 2002.

 

Mercantile Bankshares Corporation


Page 14

 

Total deposits at June 30, 2003, were $8,635,574,000, an increase of 12.0% from $7,708,176,000 at the end of the second quarter 2002, and a 4.5% increase from December 31, 2002. Interest-bearing deposits were $6,359,166,000, an increase of 10.2% from June 30, 2002, and a 3.0% increase from the end of last year. Interest-bearing deposits were 73.6% of total deposits at June 30, 2003, which represented a decrease from the 74.9% at June 30, 2002 and 74.7% at December 31, 2002. Noninterest-bearing deposits were 25.1% of deposits at June, 2002, 25.3% at the end of 2002 and 26.4% for the current quarter. Noninterest-bearing deposits increased 17.5% to $2,276,408,000 as of June 30, 2003, compared to $1,937,270,000 at June 30, 2002, and increased 9.1% compared to $2,086,745,000 at December 31, 2002. Most of the growth in average deposits has occurred in what Management regards as core deposits from customers in the local markets. In addition, a significant portion of time deposits, $100,000 and over, comes from the local market. The affiliate banking structure positions Bankshares to not only compete with the large national and regional competition in the gathering of these funds, but more importantly the local community banks. Given its asset sensitivity, Management believes the company is positioned to retain these key deposits in a rising interest rate scenario. However, should the company experience an outflow of deposits, a reversal of recent trends, the investment portfolio should provide adequate liquidity to fund such outflow.

 

Shareholders’ equity at June 30, 2003, was $1,375,594,000, an increase of 7.3% from $1,282,087,000 at June 30, 2002 and an increase of 3.9% from $1,324,358,000 at December 31, 2002. Mercantile repurchased 5,500 shares year to date, and has authorization enabling it to repurchase up to 1.5 million additional shares. There were no shares repurchases during the quarter. Management will assess whether or not to resume the share repurchase program after the close of the F&M Bancorp merger. Historically, shares repurchased have been open market purchases. For more details see the Statement of Changes in Consolidated Shareholders’ Equity on page 5. Effective at the June 2003 Board meeting, the quarterly dividend rate was increased 10.0% to $.33 from $.30 per share. Since the share repurchase program began in the mid-1990’s, Management has generally targeted 40% of net income for cash dividends to shareholders and 30% of net income for potential share repurchases. For the six months ended June 30, 2003 and 2002 the cash dividend payout ratio was 43.75% and 43.61%, respectively.

 

Asset Quality

 

Nonperforming Assets

 

Nonperforming assets consist of nonaccrual loans, renegotiated loans and other real estate owned (ie., 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 June 30, 2003, nonperforming assets increased $10,695,000 to $38,144,000. Nonperforming loans, were $37,768,000 at June 30, 2003 and increased $10,513,000. Other real estate owned, the other component of nonperforming assets increased $182,000 to $376,000. Nonperforming assets as a percent of period-end loans and other real estate owned was .50% at June 30, 2003, .37% at March 31, 2003 and .64% at June 30, 2002, respectively. This increase in nonperforming loans was related to a customer in the construction equipment business moving from monitored to nonaccrual status. The loans to this customer totaled approximately $11,285,000.

 

The level of “monitored” loans, or loans with characteristics suggesting that they could be classified as nonperforming in the near future, remained relatively unchanged. At June 30, 2003 monitored loans were $34,517,000 compared to $34,917,000 at March 31, 2003. The customer, involved in the construction equipment business moved from the monitored category but was replaced by another customer at the lead bank. Although this customer is current, its business is largely dependent on the demand for air pollution control systems. It’s business has been negatively impacted by the reduced capital investment in this area. The largest component of monitored loans continues to be the two commercial aircraft-related loans added to this category during the fourth quarter of 2002. These two loans are performing and current with a balance of approximately $19,400,000 at June 30, 2003, but remain in the monitored category because of continuing pressure on the airline industry overall. The amount of loans past due 30-89 days improved from $54,899,000 at March 31, 2003 to $28,816,000 at June 30, 2003. As noted above, there continue to be mixed signals on credit quality. In general, credit quality indicators remain stable at the community banks with greater fluctuations occurring at the lead bank.

 

Mercantile Bankshares Corporation


Page 15

 

The table below presents a comparison of nonperforming assets at June 30 and March 31, 2003 and at the end of December 2002.

 

Nonperforming Assets
(Dollars in thousands)
   June 30,
2003
    March 31,
2003
    December 31,
2002
 

Nonaccrual loans (1)                         

Commercial

   $ 30,717     $ 19,993     $ 25,260  

Construction

     1,178       1,383       1,365  

Residential real estate

     4,001       2,967       2,479  

Consumer

     178       234       261  

Lease financing

     1,694       2,678       4,006  
    


 


 


Total nonaccrual loans

     37,768       27,255       33,371  
Renegotiated loans (1)                   
Loans contractually past due 90 days or more and still accruing interest                   
    


 


 


Total nonperforming loans

     37,768       27,255       33,371  
Other real estate owned      376       194       132  
    


 


 


Total nonperforming assets

   $ 38,144     $ 27,449     $ 33,503  
    


 


 


Nonperforming assets as a percent of period-end loans and other real estate owned      .50 %     .37 %     .46 %
    


 


 


 

(1)   Aggregate gross interest income of $1,498,000, $548,000 and $2,790,000 for the first half of 2003, the first quarter of 2003 and the year 2002, 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 $648,000, $55,000 and $641,000 for the first six months of 2003, the first three months of 2003 and the year 2002, respectively.

 

Note: The Corporation was monitoring loans estimated to aggregate $34,517,000 at June 30, 2003, $34,917,000 at March 31, 2003 and $24,850,000 at December 31, 2002, 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 Bankshares affiliate is required to maintain an allowance for loan losses adequate to absorb losses inherent in the loan portfolio. Management at each affiliate, along with Bankshares 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 second quarter of 2003 was $3,051,000, a 40.4% decrease over $5,116,000 for the same period last year and 1.2% greater than last quarter. The provision for the first six months of 2003 was $6,067,000, a decrease of 26.0% over last year’s provision of $8,199,000. The provision increased last year as credit quality issues were identified and addressed within the leasing business. Nonperforming assets in the leasing business have declined from $10,073,000 at June 30, 2002 to $4,672,000 at June 30, 2003. Loans deemed 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 $1,217,000 for the second quarter of 2003 compared to $13,227,000 for the same period in 2002. Net charge-offs for the first half of 2003 were $2,407,000 compared to $14,268,000 last year. The allowance for loans as a percent of period-end loans was 1.88% at June 30, 2003 and 1.90% at the end of the second quarter last year.

 

 

Mercantile Bankshares Corporation


Page 16

 

The following table presents a summary of the activity in the Allowance for Loan Losses for the six months and quarters ended June 30, 2003 and 2002:

 

     For the 6 Months Ended

    For the 3 Months Ended

 
Allowance for Loan Losses
(Dollars in thousands)
               June 30,                 June 30,  
   2003     2002     2003     2002  
                                  

Allowance balance — beginning    $ 138,601     $ 141,463     $ 140,427     $ 143,505  
Charge-offs:                                 

Commercial

     (1,061 )     (9,386 )     (614 )     (8,556 )

Construction

                        

Residential real estate

     (50 )     (110 )     (50 )     (76 )

Consumer

     (1,573 )     (1,532 )     (722 )     (784 )

Lease financing

     (1,188 )     (4,800 )     (547 )     (4,800 )
    


 


 


 


Total

     (3,872 )     (15,828 )     (1,933 )     (14,216 )
    


 


 


 


Recoveries:                                 

Commercial

     526       517       304       384  

Construction

     135       137             131  

Residential real estate

     39       58       35       32  

Consumer

     765       848       377       442  

Lease financing

                        
    


 


 


 


Total

     1,465       1,560       716       989  
    


 


 


 


Net charge-offs      (2,407 )     (14,268 )     (1,217 )     (13,227 )
Provision for loan losses      6,067       8,199       3,051       5,116  
    


 


 


 


Allowance balance — ending    $ 142,261     $ 135,394     $ 142,261     $ 135,394  
    


 


 


 


Average loans    $ 7,437,036     $ 6,980,040     $ 7,513,576     $ 7,029,501  
    


 


 


 


Net charge-offs (annualized) as a percent of average loans      .07 %        .41 %     .06 %     .75 %
    


 


 


 


Period-end loans    $ 7,560,931     $ 7,134,893                  
    


 


               
Allowance for loan losses as a percent of period-end loans      1.88 %     1.90 %                
    


 


               

 

Mercantile Bankshares Corporation


Page 17

 

Reconciliation of Non-GAAP Measures

 

     For the 6 Months Ended     For the 3 Months Ended  
     June 30,

    June 30,

 
     2003     2002     2003     2002  
     (Dollars in thousands)

 

(1)    The net interest margin and efficiency ratios are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax-favored status of income from certain loans and investments. Management believes this measure to be the preferred industry measurement of net interest income and provides a relevant comparison between taxable and non-taxable investments

Net interest income

   $ 223,849     $ 217,613     $ 112,723     $ 110,425  

Taxable-equivalent adjustment

     3,122       3,039       1,574       1,532  
    


 


 


 


Net interest income—taxable equivalent

   $ 226,971     $ 220,652     $ 114,297     $ 111,957  
    


 


 


 


(2)    Bankshares presents a return on average equity and a return on average tangible equity. Management excludes goodwill from its calculation of average tangible assets and average tangible equity. This adjustment allows management to review the core operating results and core capital position of the Company. This is consistent with the treatment by bank regulatory agencies which exclude goodwill from their calculation of risk-based capital ratios.

Return on average equity

     15.24 %     15.13 %     15.15 %     15.02 %

Impact of excluding average goodwill

     1.44       1.37       1.48       1.34  
    


 


 


 


Return on average tangible equity

     16.68 %     16.50 %     16.63 %     16.36 %
    


 


 


 


Average equity to average assets

     12.15 %     12.60 %     12.00 %     12.62 %

Impact of excluding average goodwill

     (.93 )     (.93 )     (.95 )     (.91 )
    


 


 


 


Average tangible equity to average tangible assets

     11.22 %     11.67 %     11.05 %     11.71 %
    


 


 


 


(3)    The efficiency ratio is measured by dividing noninterest expenses by the sum of net interest income on a FTE basis and non-interest income. Management excludes gains and losses from sales of investment securities when computing the efficiency ratio because of the uncertainty as to timing and amount of gain or loss to be recognized.

Efficiency ratio

     47.32 %     45.89 %     48.24 %     45.66 %

Impact of excluding securities gains and losses

     1.15       .16       2.05       .33  
    


 


 


 


Adjusted efficiency ratio

     48.47 %     46.05 %     50.29 %     45.99 %
    


 


 


 


 

Cautionary Statement

 

This report contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles (“GAAP”). Bankshares’ management uses these non-GAAP measures in their analysis of the Company’s performance. These measures typically adjust GAAP performance measures to exclude goodwill and the amortization of goodwill related to the consummation of mergers. These non-GAAP measures may also exclude other significant gains, losses or expenses that are unusual in nature and not expected to recur. Since these items and their impact on Bankshares’ performance are difficult to predict, management believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is essential to a proper understanding of the operating results and financial position of Bankshares core businesses. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

 

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, credit quality, changes in leasing activities, 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.

 

 

Mercantile Bankshares Corporation


Page 18

 

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 2003 and 2002.

 

     For the 6 Months Ended
June 30, 2003


   

For the 6 Months Ended

June 30, 2002


 
(Dollars in thousands)    Average
Balance
    Income*/
Expense
   Yield*/
Rate
    Average
Balance
    Income*/
Expense
   Yield*/
Rate
 
                                            

Earning assets                                           

Loans:**

                                          

Commercial

   $ 4,488,776     $ 132,840    5.97 %   $ 4,229,246     $ 139,360    6.64 %

Construction

     847,382       23,341    5.55       686,773       21,437    6.29  

Residential real estate

     1,083,780       36,339    6.76       1,073,307       39,721    7.46  

Consumer

     1,017,098       32,870    6.52       990,714       35,649    7.26  
    


 

        


 

      

Total loans

     7,437,036       225,390    6.11       6,980,040       236,167    6.82  
    


 

        


 

      

Federal funds sold, et al

     185,883       2,034    2.21       107,174       2,659    5.00  

Securities:***

                                          

Taxable securities

                                          

U.S. Treasury and government agencies

     1,834,196       39,958    4.39       2,054,370       49,207    4.83  

Mortgage-backed securities

     636,760       13,864    4.39       203,241       5,784    5.74  

Other stocks and bonds

     98,328       3,365    6.90       22,915       713    6.27  

Tax-exempt securities

                                          

States and political subdivisions

     38,099       1,595    8.44       39,083       1,586    8.18  
    


 

        


 

      

Total securities

     2,607,383       58,782    4.55       2,319,609       57,290    4.98  
    


 

        


 

      

Interest-bearing deposits in other banks

     348       6    3.70       358       8    4.39  
    


 

        


 

      

Total earning assets

     10,230,650       286,212    5.64       9,407,181       296,124    6.35  
    


 

        


 

      
Cash and due from banks      234,901                    219,429               
Bank premises and equipment, net      104,268                    101,348               
Other assets      351,801                    269,514               
Less: allowance for loan losses      (141,246 )                  (144,152 )             
    


              


            

Total assets

   $ 10,780,374                  $ 9,853,320               
    


              


            
Interest-bearing liabilities                                           

Deposits:

                                          

Savings

   $ 1,054,033       2,743    .52     $ 935,762       4,402    .95  

Checking plus interest

     973,366       1,105    .23       846,349       1,480    1.35  

Money market

     1,193,102       5,059    .86       1,026,650       7,178    1.41  

Certificates of deposit $100,000 and over

     1,250,819       15,503    2.50       1,016,025       17,266    3.43  

Other time deposits

     1,712,535       24,169    2.85       1,771,203       33,283    3.79  
    


 

        


 

      

Total interest-bearing deposits

     6,183,855       48,579    1.58       5,595,989       63,609    2.29  

Short-term borrowings

     775,526       3,014    .78       861,272       6,240    1.46  

Long-term debt

     402,225       7,648    3.83       283,332       5,623    4.00  
    


 

        


 

      

Total interest-bearing funds

     7,361,606       59,241    1.62       6,740,593       75,472    2.26  
    


 

        


 

      
Noninterest-bearing deposits      2,008,346                    1,762,945               
Other liabilities and accrued expenses      100,525                    108,718               
    


              


            

Total liabilities

     9,470,477                    8,612,256               
Shareholders’ equity      1,309,897                    1,241,064               
    


              


            

Total liabilities and shareholders’ equity

   $ 10,780,374                  $ 9,853,320               
    


              


            
Net interest income            $ 226,971                  $ 220,652       
            

                

      
Net interest rate spread                   4.02 %                  4.09 %
Effect of noninterest-bearing funds                   .45                    .64  
                   

                

Net interest margin on earning assets                   4.47 %                  4.73 %
                   

                

Taxable-equivalent adjustment included in:                                           

Loan income

           $ 2,436                  $ 2,345       

Investment securities income

             686                    694       
            

                

      

Total

           $ 3,122                  $ 3,039       
            

                

      

    * Presented on a tax-equivalent basis using the statutory federal corporate income tax rate of 35%. (See page 17 for a reconciliation of non-GAAP measures.)

  ** Nonaccrual loans are included in average loans.

*** Balances reported at amortized cost; excludes pretax unrealized gains (losses) on securities available-for-sale.

 

Mercantile Bankshares Corporation


Page 19

 

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 for the second quarters of 2003 and 2002.

 

     For the 3 Months Ended
June 30, 200
3


   

For the 3 Months Ended

June 30, 2002


 
(Dollars in thousands)    Average
Balance
    Income*/
Expense
   Yield*/
Rate
    Average
Balance
    Income*/
Expense
   Yield*/
Rate
 
                                            

Earning assets                                           

Loans:**

                                          

Commercial

   $ 4,527,486     $ 66,781    5.92 %   $ 4,253,691     $ 69,706    6.57 %

Construction

     870,955       11,955    5.51       702,733       10,988    6.27  

Residential real estate

     1,089,772       18,026    6.63       1,075,562       19,764    7.37  

Consumer

     1,025,363       16,421    6.42       997,515       17,851    7.18  
    


 

        


 

      

Total loans

     7,513,576       113,183    6.04       7,029,501       118,309    6.75  
    


 

        


 

      

Federal funds sold, et al

     313,844       1,311    1.68       94,263       998    4.25  

Securities:***

                                          

Taxable securities

                                          

U.S. Treasury and government agencies

     1,741,380       18,763    4.32       2,089,822       24,864    4.77  

Mortgage-backed securities

     760,630       7,875    4.15       201,442       2,843    5.66  

Other stocks & bonds

     98,277       2,544    10.38       23,788       344    5.80  

Tax-exempt securities

                                          

States & political subdivisions

     37,412       823    8.82       39,125       793    8.13  
    


 

        


 

      

Total securities

     2,637,699       30,005    4.56       2,354,177       28,844    4.91  
    


 

        


 

      

Interest-bearing deposits in other banks

     338       3    3.50       358       4    4.20  
    


 

        


 

      

Total earning assets

     10,465,457       144,502    5.54       9,478,299       148,155    6.27  
    


 

        


 

      
Cash and due from banks      243,728                    223,744               
Bank premises and equipment      104,825                    101,179               
Other assets      361,951                    272,707               
Less: allowance for loan losses      (142,237 )                  (145,109 )             
    


              


            

Total assets

   $ 11,033,724                  $ 9,930,820               
    


              


            
Interest-bearing liabilities                                           

Deposits:

                                          

Savings

   $ 1,078,760       1,373    .51     $ 961,386       2,221    .93  

Checking plus interest

     993,268       547    .22       857,669       749    .35  

Money market

     1,201,044       2,422    .81       1,049,529       3,595    1.37  

Certificates of deposit $100,000 and over

     1,277,652       7,535    2.37       1,031,720       8,205    3.19  

Other time deposits

     1,708,177       11,573    2.72       1,758,774       15,705    3.58  
    


 

        


 

      

Total interest-bearing deposits

     6,258,901       23,450    1.50       5,659,078       30,475    2.16  

Short-term borrowings

     771,892       1,469    .76       813,881       2,928    1.44  

Long-term debt

     527,223       5,286    4.02       283,331       2,795    3.96  
    


 

        


 

      

Total interest-bearing funds

     7,558,016       30,205    1.60       6,756,290       36,198    2.15  
    


 

        


 

      
Noninterest-bearing deposits      2,054,813                    1,818,004               
Other liabilities and accrued expenses      96,602                    102,926               
    


              


            

Total liabilities

     9,709,431                    8,677,220               
Shareholders’ equity      1,324,293                    1,253,600               
    


              


            

Total liabilities & shareholders’ equity

   $ 11,033,724                  $ 9,930,820               
    


              


            
Net interest income            $ 114,297                  $ 111,957       
            

                

      
Net interest spread                   3.94 %                  4.12 %
Effect of noninterest-bearing funds                   .44                    .62  
                   

                

Net interest margin on earning assets                   4.38 %                  4.74 %
                   

                

Taxable-equivalent adjustment included in:                                           

Loan income

           $ 1,221                  $ 1,185       

Investment securities income

             353                    347       
            

                

      

Total

           $ 1,574                  $ 1,532       
            

                

      

    * Presented on a tax-equivalent basis using the statutory federal corporate income tax rate of 35%. (See page 17 for a reconciliation of non-GAAP measures.)

  ** Nonaccrual loans are included in average loans.

*** Balances reported at amortized cost; excludes pretax unrealized gains (losses) on securities available-for-sale.

 

Mercantile Bankshares Corporation


Page 20

 

MERCANTILE BANKSHARES CORPORATION

 

RATE/VOLUME ANALYSIS

 

A rate/volume analysis, which demonstrates changes in interest income and expense for significant assets and liabilities, appears below:

 

    

For the 6 Months

Ended June 30,

2003 vs. 2002

Due to variances in


   

For the 3 Months

Ended June 30,

2003 vs. 2002

Due to variances in


 
(Dollars in thousands)    Rates     Volumes     Total     Rates     Volumes     Total  

Interest earned on:

                                                

Loans:

                                                

Commercial (1)

   $ (15,072 )   $ 8,552     $ (6,520 )   $ (7,412 )   $ 4,487     $ (2,925 )

Construction (2)

     (3,109 )     5,013       1,904       (1,663 )     2,630       967  

Residential real estate

     (3,770 )     388       (3,382 )     (1,999 )     261       (1,738 )

Consumer

     (3,728 )     949       (2,779 )     (1,928 )     498       (1,430 )
    


 


 


 


 


 


Total loans

     (25,679 )     14,902       (10,777 )     (13,002 )     7,876       (5,126 )

Taxable securities (3)

     (5,570 )     7,053       1,483       (2,325 )     3,456       1,131  

Tax-exempt securities (3)

     49       (40 )     9       65       (35 )     30  

Federal funds sold, et al

     (2,578 )     1,953       (625 )     (2,012 )     2,325       313  

Interest-bearing deposits in other banks

     (2 )           (2 )     (1 )           (1 )
    


 


 


 


 


 


Total interest income

     (33,780 )     23,868       (9,912 )     (17,275 )     13,622       (3,653 )
    


 


 


 


 


 


Interest paid on:

                                                

Savings deposits

     (2,215 )     556       (1,659 )     (1,119 )     271       (848 )

Checking plus interest deposits

     (597 )     222       (375 )     (320 )     118       (202 )

Money market accounts

     (3,283 )     1,164       (2,119 )     (1,692 )     519       (1,173 )

Certificates of deposit $100,000 and over

     (5,753 )     3,990       (1,763 )     (2,626 )     1,956       (670 )

Other time deposits

     (8,012 )     (1,102 )     (9,114 )     (3,680 )     (452 )     (4,132 )

Short-term borrowings

     (2,605 )     (621 )     (3,226 )     (1,308 )     (151 )     (1,459 )

Long-term debt

     (335 )     2,360       2,025       85       2,406       2,491  
    


 


 


 


 


 


Total interest expense

     (22,800 )     6,569       (16,231 )     (10,660 )     4,667       (5,993 )
    


 


 


 


 


 


Net interest earned

   $ (10,980 )   $ 17,299     $ 6,319     $ (6,615 )   $ 8,955     $ 2,340  
    


 


 


 


 


 


 

(1)   Year-to-date tax-equivalent adjustments of $1,756,000 and $1,821,000 for 2003 and 2002, respectively, and quarter-to-date tax-equivalent adjustments of $880,000 and $916,000 for 2003 and 2002, respectively, are included in the commercial loan rate variances.
(2)   Year-to-date tax-equivalent adjustments of $680,000 and $524,000 for 2003 and 2002, respectively, and quarter-to-date tax-equivalent adjustments of $341,000 and $269,000 for 2003 and 2002, respectively, are included in the construction loan rate variances.
(3)   Year-to-date tax-equivalent adjustments of $686,000 and $694,000 for 2003 and 2002, respectively, and quarter-to-date tax-equivalent adjustments of $353,000 and $347,000 for 2003 and 2002, respectively, are included in the investment securities rate variances.

 

Mercantile Bankshares Corporation


Page 21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Information responsive to this Item as of December 31, 2002 appears under the captions “Risk Management”, “Interest Rate Sensitivity Analysis” and “Earnings Simulation Model Projections” on pages 24-27 of the registrant’s 2002 Annual Report to Shareholders, filed as Exhibit 13 to registrant’s Annual Report on Form 10-K for the year ended December 31, 2002. There was no material change in such information as of June 30, 2003.

 

Item 4. Controls and Procedures

 

Within the ninety days prior to the filing of this report, the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors subsequent to the date of the evaluation that could significantly affect those controls.

 

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 30, 2003.

 

Results of voting for Election of Directors:

 

   

FOR


 

WITHHELD


George L. Bunting, Jr.

  53,540,522      338,810

Darrell D. Friedman

  53,486,965      392,367

Robert A. Kinsley

  53,539,258      340,074

Christian H. Poindexter

  53,424,552      454,780

James L. Shea

  52,198,122   1,681,210

 

Names of other Directors continuing in office:

 

Cynthia A. Archer

Richard O. Berndt

William R. Brody, M.D.

Freeman A. Hrabowski, III

Edward J. Kelly, III

Wallace Mathai-Davis

Morton B. Plant

Clayton S. Rose

Donald J. Shepard

 

Results of voting on Ratification of Appointment of Auditors (PricewaterhouseCoopers LLP):

 

FOR


 

AGAINST


 

ABSTAINED


52,489,604   1,234,958   154,770

 

There were no broker nonvotes on these matters.

 

Mercantile Bankshares Corporation


Page 22

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

31   

Section 302 Certification of Chief Executive Officer

31   

Section 302 Certification of Chief Financial Officer

32   

Section 906 Certification of Chief Executive Officer

32   

Section 906 Certification of Chief Financial Officer

 

(b) Reports on Form 8-K

Form 8-K filed, dated April 8, 2003, Item 5.

Form 8-K filed, dated April 23, 2003, Item 9.

Form 8-K filed, dated April 24, 2003, Item 5.

Form 8-K filed, dated April 30, 2003, Item 5.

 

Mercantile Bankshares Corporation


Page 23

 

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

 

July 25, 2003

Principal Executive Officer

 

/s/ Edward J. Kelly, III

                                                                                                                                      

By: Edward J. Kelly, III

Chairman of the Board,

President and

Chief Executive Officer

 

July 25, 2003

Principal Financial Officer

 

/s/ Terry L. Troupe

                                                                                                                                      

By: Terry L. Troupe

Chief Financial Officer

 

July 25, 2003

Chief Accounting Officer

 

/s/ William T. Skinner, Jr.

                                                                                                                                      

By: William T. Skinner, Jr.

Controller

 

Mercantile Bankshares Corporation