Mercantile Bankshares Corp.'s profit inched higher in the third quarter - up 1.5 percent - and was held back by sharply falling interest rates that reduced the amount of money it made on its loans, the company said yesterday.
The state's largest independently owned banking company made $46 million, or 65 cents per diluted share, in the quarter that ended Sept. 30, compared with $45.4 million, or 64 cents per diluted share, a year earlier.
Shares of Baltimore-based Mercantile fell 22 cents yesterday to $36.63. Analysts said Mercantile's results were solid given the economy's weakness and the string of interest-rate cuts.
"I thought the quarter was good," said Christopher W. Marinac, an analyst at SunTrust Robinson Humphrey in Atlanta. "They beat our estimate by two pennies."
Edward J. Kelly III, Mercantile's president and chief executive, was traveling and could not be reached for comment.
As have many banks, Mercantile has been hurt by the Federal Reserve Board's decision to cut short-term interest rates nine times this year. The moves have slashed the federal funds rate to 2.5 percent, matching its lowest level ever set in May 1962.
As a result, Mercantile's net interest margin fell to 4.77 percent in the third quarter from 5.25 percent a year earlier. The net interest margin shows how much a bank makes on loans and investments after interest payments to depositors and creditors.
Net interest income, or profit mainly from loans, fell to $104.6 million in the quarter, compared with $105 million a year earlier. Loans, however, rose 9.8 percent to $6.93 billion, and assets were up 9.4 percent to $9.3 billion. Profit edged higher partly because noninterest income - profit that comes from fees charged to customers - was strong, rising 17.7 percent to $37.7 million in the quarter.
Earnings in the first nine months of the year rose 5.8 percent to $137.1 million, or $1.92 per diluted share, compared with $129.5 million, or $1.87 per diluted share, in the year-earlier period.
Mercantile's credit quality was strong despite the weak economy, analysts said.
Nonperforming loans - loans that are 90 days past due on principal or interest - rose 42 percent to $34 million in the first nine months of the year, compared with a year earlier. But they fell by $4.3 million in the third quarter from the second quarter of the year. Nonperforming loans represent only 0.49 percent of Mercantile's total loans.
Gary B. Townsend, senior analyst at Arlington, Va.-based Friedman, Billings, Ramsey & Co., said Mercantile's profit should improve when the Fed stops cutting interest rates.
"This is the kind of company that you would expect to do extremely well in a rising rate environment," Townsend said. "This is not a fixer-upper."