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Mercantile lowers 3Q earnings outlook

Pressure from low interest rates combined with merger expenses and a shake-up in its wealth management division will cut into Mercantile Bankshares Corp.'s bottom line in the current quarter, the bank said yesterday.

Mercantile, the state's largest independent banking company, said the eroded interest margins and added expenses - which includes a seven-figure severance package paid to the ousted head of its wealth management unit - would drag earnings per share down by 10 cents or more from the previous quarter.

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The lowered forecast surprised some analysts, who were expecting earnings to come in just below second-quarter earnings of 72 cents per share. The Baltimore bank said it expects third-quarter earnings to be 60 cents to 62 cents per share - well below the average analyst estimate of 70 cents.

"We were a little surprised," said Henry J. Coffey Jr., an analyst with Ferris, Baker Watts Inc. "But I think it's fair to say that as long as they deliver a basic level of earnings in '03 ... then I would argue that '04 is going to be a 'show me' year for the bank."

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Mercantile's shares fell $1.22, or about 3 percent, to $40.10 in trading yesterday.

In explaining the lower expectations, the bank said the sale of securities boosted its second-quarter earnings by 6 cents per share because of one-time gains. Those gains won't be duplicated in the current quarter.

At the same time, the bank's margins continue to be squeezed by low interest rates. When rates are low, the difference between what the bank charges on loans and the interest rate it pays to depositors shrinks. The bank said its net interest margin is expected to fall to 4.20 percent in the third quarter, down from 4.38 percent in the previous quarter.

"I was a little bit surprised by the magnitude of the expected margin compression," said Matthew C. Peake, an analyst with Davenport & Co. in Richmond, Va. "It's how they are positioning themselves for next year that's more important at this point."

Expenses related to Mercantile's acquisition of F&M; Bancorp will drag earnings down by another 2 cents to 3 cents per share in the third quarter, the bank reported. The bank expects those expenses to continue into the fourth quarter, trimming earnings by another 3 cents to 5 cents per share. Analysts called those expenses part of the normal cost of doing business.

Severance expenses in the bank's wealth management division will result in a hit of 2 cents to 3 cents per share. The majority of those expenses relate to the ouster of Wallace Mathai-Davis, whose sudden departure in August led to a leadership shake-up in the division.

Edward J. Kelly III, Mercantile's chief executive, hired Mathai-Davis to help raise the profile of the company's wealth management operations, which had languished for years.

"It's a big number and it's surprisingly large, you could say that," said Gary B. Townsend, an analyst with Friedman, Billings, Ramsey & Co. Inc., referring to the severance costs.

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Analysts said the wealth management division should begin to show improvement over the next one to two years.


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