UNITED STATES


SECURITIES AND
EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---

FORM 10-Q





(MARK ONE)





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly Period Ended September 30, 2002





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  ̈





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 October 31, 2002, registrant had outstanding 68,839,527 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)

September 30, 2002


December 31,2001


September 30, 2001ASSETSCash and due from banks

$
333,824


$
290,177


$
275,485Interest-bearing deposits in other banks


358



357



356Federal funds sold


272,134



23,813



122,216Total cash and cash equivalents


606,316



314,347



398,057Investment securities available-for-sale (Note 3)


2,411,941



2,288,694



1,872,726Investment securities held-to-maturity (Note 3)


52,454



52,269



52,558Loans held-for-sale


94



137,950



30,273Loans:Commercial


4,213,108



4,048,018



3,996,177Construction


790,318



652,486



676,050Residential real estate


1,067,868



1,060,519



1,060,857Consumer


1,009,040



991,341



1,010,712Lease financing


120,456



153,882



156,343Total loans


7,200,790



6,906,246



6,900,139Less: allowance for loan losses


(136,587
)


(141,463
)


(141,003
)Loans, net


7,064,203



6,764,783



6,759,136Bank premises and equipment, less accumulated depreciation of $116,687 (2002), $113,806 (December 2001) and $110,961 (September 2001)


102,223



101,295



101,762Other real estate owned, net


123



181



195Goodwill, net


102,705



102,705



104,838Other intangible assets, net


7,999



9,319



7,296Other assets


234,816



157,243



141,163Total assets

$
10,582,874


$
9,928,786


$
9,468,004LIABILITIESDeposits:Noninterest-bearing deposits

$
2,040,521


$
1,883,878


$
1,789,489Interest-bearing deposits


6,004,976



5,563,494



5,458,235Total deposits


8,045,497



7,447,372



7,247,724Short-term borrowings


811,840



853,278



773,260Accrued expenses and other liabilities


105,803



128,493



138,676Long-term debt


289,313



269,437



84,200Total liabilities


9,252,453



8,698,580



8,243,860SHAREHOLDERS EQUITYPreferred stock, no par value; authorized 2,000,000 shares; issued and outstanding  NoneCommon stock, $2 par value; authorized 130,000,000 shares; issued
shares 69,612,217 (2002), 69,775,710 (December 2001) and 69,816,937 (September 2001); restricted shares  67,215 (2002) and None (December and September 2001)


139,224



139,551



139,634Capital surplus


150,592



159,947



161,820Retained earnings


982,408



904,479



879,802Accumulated other comprehensive income (loss)


58,197



26,229



42,888Total shareholders equity


1,330,421



1,230,206



1,224,144Total liabilities and shareholders equity

$
10,582,874


$
9,928,786


$
9,468,004





See notes to consolidated financial statements








Mercantile Bankshares Corporation




---



Page 3




MERCANTILE BANKSHARES CORPORATION


STATEMENT
OF CONSOLIDATED INCOME





For the 9 Months Ended September 30,


For the 3 Months EndedSeptember 30,(Dollars in thousands, except per share data)

2002

2001


2002


2001INTEREST INCOMEInterest and fees on loans

$
352,220

$
418,998


$
118,398


$
134,835Interest and dividends on investment securities:Taxable interest income


73,902


68,890



24,695



22,986Tax-exempt interest income


1,429


1,506



470



504Dividends


800


984



258



304Other investment income


8,732


2,494



2,844



80484,863


73,874



28,267



24,598Other interest income


4,039


5,087



1,372



1,611Total interest income


441,122


497,959



148,037



161,044INTEREST EXPENSEInterest on deposits


94,268


158,241



30,659



49,303Interest on short-term borrowings


9,074


21,816



2,834



5,762Interest on long-term debt


8,253


4,425



2,630



1,380Total interest expense


111,595


184,482



36,123



56,445NET INTEREST INCOME


329,527


313,477



111,914



104,599Provision for loan losses


11,443


9,230



3,244



3,101NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES


318,084


304,247



108,670



101,498NONINTEREST INCOMEInvestment and wealth management


51,521


51,888



17,166



17,229Service charges on deposit accounts


23,161


20,457



7,972



7,157Mortgage banking related fees


7,395


7,967



2,306



3,106Investment securities gains and (losses)


846


3,135



(203
)


1,596Other income


24,107


23,763



8,145



8,649Total noninterest income


107,030


107,210



35,386



37,737NONINTEREST EXPENSESSalaries


97,283


91,391



32,278



31,101Employee benefits


25,076


22,293



8,476



7,157Stock-based compensation expense


997


(353
)


177



185Net occupancy expense of bank premises


12,214


10,497



4,245



3,726Furniture and equipment expenses


18,062


17,500



6,003



5,752Communications and supplies


10,014


9,852



3,351



3,279Goodwill amortization





6,939







2,134Other expenses


39,112


36,538



14,107



13,253Total noninterest expenses


202,758


194,657



68,637



66,587Income before income taxes


222,356


216,800



75,419



72,648Applicable income taxes


80,621


79,739



26,804



26,569NET INCOME

$
141,735

$
137,061


$
48,615


$
46,079NET INCOME PER SHARE OF COMMON STOCK (Note 2):Basic

$
2.03

$
1.93


$
.70


$
.66Diluted

$
2.02

$
1.92


$
.69


$
.65





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 9 Months Ended September 30,(Dollars in thousands)

2002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
141,735


$
137,061Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses


11,443



9,230Depreciation and amortization


9,679



9,267Amortization of goodwill






6,939Amortization of other intangible assets


1,561



1,265Investment securities (gains) and losses


(846
)


(3,135
)Write-downs of investments in private equity funds


2,494



619Write-downs of other real estate owned


2



36Gains on sales of other real estate owned


(51
)


(267
)Gains on sales of buildings


(456
)


(510
)Net (increase) decrease in assets:Interest receivable


(2,170
)


2,337Other receivables


(2,999
)


(69
)Other assets


(16,397
)


(527
)Loans held-for-sale


137,856



(23,678
)Net increase (decrease) in liabilities:Interest payable


(3,520
)


290Accrued expenses


(5,262
)


(608
)Taxes payable


(588
)


45,522Net cash provided by operating activities


272,481



183,772CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities of investment securities held-to-maturity


2,667



3,181Proceeds from maturities of investment securities available-for-sale


419,357



447,892Proceeds from sales of investment securities available-for-sale


79,253



3,135Purchases of investment securities held-to-maturity


(2,852
)


(4,986
)Purchases of investment securities available-for-sale


(570,227
)


(599,974
)Net increase in customer loans


(310,983
)


(214,211
)Proceeds from sales of other real estate owned


227



1,568Capital expenditures


(11,126
)


(9,266
)Proceeds from sales of buildings


975



916Acquisition of commercial mortgage company






(7,000
)Purchase of bank-owned life insurance


(50,000
)


Other investing activity


(11,654
)


(2,083
)Net cash used in investing activities


(454,363
)


(380,828
)CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in noninterest-bearing deposits


156,643



195,986Net increase in checking plus interest and savings accounts


398,525



131,876Net increase in certificates of deposit


42,957



123,321Net decrease in short-term borrowings


(41,438
)


(8,208
)Repayment of long-term debt


(8,300
)


(8,347
)Proceeds from issuance of shares


6,566



5,733Repurchase of common shares


(19,754
)


(61,953
)Dividends paid


(61,348
)


(58,040
)Net cash provided by financing activities


473,851



320,368Net increase (decrease) in cash and cash equivalents


291,969



123,312Cash and cash equivalents at beginning of period


314,347



274,745Cash and cash equivalents at end of period

$
606,316


$
398,057








See notes to consolidated financial statements





Mercantile Bankshares Corporation




---



Page 5




MERCANTILE BANKSHARES CORPORATION


STATEMENT
OF CHANGES IN CONSOLIDATED SHAREHOLDERS EQUITY





FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001





(Dollars in thousands, except per share data)

Total


Common Stock


Capital Surplus


Retained Earnings


Accumulated Other Comprehensive Income (Loss)BALANCE, DECEMBER 31, 2000

$
1,173,301


$
142,198


$
214,454


$
800,781


$
15,868Net income


137,061











137,061Unrealized gains (losses) on securities available-for-sale, net of reclassification adjustment, net of
taxes


27,020















27,020Comprehensive income


164,081Cash dividends paid:Common stock ($.82 per share)


(58,040
)










(58,040
)Issuance of 84,817 shares for dividend reinvestment and stock purchase plan


3,128



169



2,959Issuance of 17,546 shares for employee stock purchase dividend reinvestment plan


684



35



649Issuance of 115,824 shares for employee stock option plan


1,921



232



1,689Purchase of 1,500,000 shares under stock repurchase plan


(61,953
)


(3,000
)


(58,953
)Vested stock options


1,022







1,022BALANCE, SEPTEMBER 30, 2001

$
1,224,144


$
139,634


$
161,820


$
879,802


$
42,888BALANCE, DECEMBER 31, 2001

$
1,230,206


$
139,551


$
159,947


$
904,479


$
26,229Net income


141,735











141,735Unrealized gains (losses) on securities available-for-sale, net of reclassification adjustment, net of taxes
(Note 7)


31,968















31,968Comprehensive income


173,703Cash dividends paid:Common stock ($.88 per share)


(61,348
)










(61,348
)Issuance of 80,889 shares for dividend reinvestment and stock purchase plan


2,889



162



2,727Issuance of 16,981 shares for employee stock purchase dividend reinvestment plan


684



34



650Issuance of 175,922 shares for employee stock option plan


2,993



352



2,641Issuance of 67,215 shares for restricted stock awards


3,019



134



2,885Deferred compensationrestricted stock awards


(2,458
)










(2,458
)Purchase of 504,500 shares under stock repurchase plan


(19,754
)


(1,009
)


(18,745
)Vested stock options


487







487BALANCE, SEPTEMBER 30, 2002

$
1,330,421


$
139,224


$
150,592


$
982,408


$
58,197





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 nine months and quarters ended September 30, 2002
and 2001:





For the 9 Months Ended September 30,2002

2001(In thousands, except per share data)

Net Income

Weighted Average Common Shares

EPS

Net Income

Weighted Average Common Shares

EPSBasic EPS

$
141,735

69,750

$
2.03

$
137,061

70,844

$
1.93Dilutive effect of stock options and restricted stock awards




530







632Diluted EPS

$
141,735

70,280

$
2.02

$
137,061

71,476

$
1.92For the 3 Months Ended September 30,2002

2001(In thousands, except per share data)

Net Income

Weighted Average Common Shares

EPS

Net Income

Weighted Average Common Shares

EPSBasic EPS

$
48,615

69,637


$.70

$
46,079

70,237


$.66Dilutive effect of stock options and restricted stock awards




474







626Diluted EPS

$
48,615

70,111


$.69

$
46,079

70,863


$.65





Mercantile Bankshares Corporation




---



Page 7




3.    Investment Securities





The amortized cost and fair value of investment securities at September 30, 2002, December 31, 2001 and September 30, 2001, are shown below:





September 30, 2002

December 31, 2001

September 30, 2001(Dollars in thousands)

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Amortized Cost

Fair ValueSecurities available-for-saleU.S. Treasury and government agencies

$
2,115,091

$
2,197,283

$
2,029,682

$
2,066,990

$
1,758,252

$
1,815,263States and political subdivisions


549


579


649


667


1,149


1,180Other investments


202,700


214,079


215,545


221,037


43,771


56,283Total

$
2,318,340

$
2,411,941

$
2,245,876

$
2,288,694

$
1,803,172

$
1,872,726Securities held-to-maturityStates and political subdivisions

$
36,993

$
40,071

$
38,815

$
40,172

$
39,104

$
41,073Other investments


15,461


15,461


13,454


13,454


13,454


13,454Total

$
52,454

$
55,532

$
52,269

$
53,626

$
52,558

$
54,527





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 September 30 and June 30, 2002 and at the end of December
2001, is shown below. See Form 10-K for more details.





(Dollars in thousands)

September 30, 2002

June 30, 2002

December 31, 2001Impaired loans with a specific valuation allowance

$
14,678

$
20,000

$
47,963All other impaired loans


22,257


22,314


6,379Total impaired loans

$
36,935

$
42,314

$
54,342Specific allowance for loan losses applicable to impaired loans

$
6,494

$
5,209

$
10,484General allowance for loan losses


130,093


130,185


130,979Total allowance for loan losses

$
136,587

$
135,394

$
141,463Year-to-date interest income on impaired loans recorded on the cash basis

$
420

$
274

$
510Year-to-date average recorded investment in impaired loans during the period

$
56,948

$
61,008

$
33,095Quarter-to-date interest income on impaired loans recorded on the cash basis

$
146

$
239

$
253Quarter-to-date average recorded investment in impaired loans during the period

$
48,829

$
54,777

$
37,827





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.





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 $2,888,425,000, $3,055,291,000 and $2,803,080,000 at September 30, 2002,
December 31, 2001 and





Mercantile Bankshares Corporation




---



Page 8




September 30, 2001, respectively. In addition, letters of credit are issued for the benefit of customers by affiliated banks. Outstanding letters of credit were $232,921,000 at September 30,
2002, $197,546,000 at December 31, 2001 and $194,510,000 at September 30, 2001.





6.    Intangible Assets





The following table discloses the gross carrying amount and accumulated amortization of intangible assets subject to amortization at September 30,
2002 and December 31, 2001:





September 30, 2002

December 31, 2001(Dollars in thousands)

Gross Carrying Amount

Accumulated Amortization


Net Amount

Gross Carrying Amount

Accumulated Amortization


Net AmountDeposit intangibles

$
13,846

$
(6,215
)

$
7,631

$
13,846

$
(4,899
)

$
8,947Mortgage servicing rights


1,600


(1,243
)


357


1,749


(1,406
)


343Other


50


(39
)


11


50


(21
)


29Total

$
15,496

$
(7,497
)

$
7,999

$
15,645

$
(6,326
)

$
9,319





The aggregate amortization expense was $1,561,000 for the nine months ended September 30,
2002 and $2,082,000 for the year ended December 31, 2001. The estimated aggregate amortization expense for each of the next five years is: 2003  $1,716,000; 2004  $1,463,000; 2005  $1,463,000; 2006  $1,463,000; 2007 
$1,261,000.





7.    Comprehensive Income





The following table summarizes the related tax effect of unrealized gains (losses) on securities available-for-sale for the nine months ended September 30, 2002 and 2001. 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 9 Months Ended September 30,2002


2001(Dollars in thousands)

Pretax Amount


Tax (Expense) Benefit


Net Amount


Pretax Amount


Tax (Expense) Benefit


Net AmountUnrealized gains (losses) on securities available-for-sale:Unrealized holding gains (losses) arising during the period

$
51,629


$
(19,150
)

$
32,479


$
47,224


$
(18,309
)

$
28,915Reclassification adjustment for (gains) losses included in net income


(846
)


335



(511
)


(3,135
)


1,240



(1,895
)Total

$
50,783


$
(18,815
)

$
31,968


$
44,089


$
(17,069
)

$
27,020





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, respectively. Management believes that, as of September 30, 2002, Bankshares and its bank affiliates exceeded all capital adequacy requirements to which
they are subject.





Mercantile Bankshares Corporation




---



Page 9




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 September 30, 2002 and December 31, 2001.





September 30, 2002


December 31, 2001(Dollars in thousands)

Bankshares


MSD&T


Bankshares


MSD&TTier I capital

$
1,161,179


$
427,589


$
1,092,262


$
410,376Total risk-based capital


1,257,027



469,684



1,185,518



451,926Net risk-weighted assets


7,463,392



3,353,464



7,088,939



3,166,865Adjusted average total assets


10,185,319



4,231,574



9,413,946



3,853,753Tier I capital ratio


15.56
%


12.75
%


15.41
%


12.96
%Total capital ratio


16.84
%


14.01
%


16.72
%


14.27
%Leverage ratio


11.40
%


10.10
%


11.60
%


10.65
%





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 Trust Division of MSD&T.





The following tables present selected segment information for the nine months ended September 30, 2002 and 2001. 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. The amounts reported reflect the merger of The Sparks State Bank into MSD&T.





For the 9 Months Ended September 30, 2002(Dollars in thousands)

MSD&T Banking


MSD&T Trust


Total MSD&T


Community Banks


Other


TotalNet interest income

$
109,942


$



$
109,942


$
221,296


$
(1,711
)

$
329,527Provision for loan losses


(6,800
)






(6,800
)


(4,643
)






(11,443
)Noninterest income


29,987



51,195



81,182



37,375



(11,527
)


107,030Noninterest expenses


(68,215
)


(32,261
)


(100,476
)


(112,988
)


10,706



(202,758
)Adjustments


12,720



(1,252
)


11,468



(6,376
)


(5,092
)


Income (loss) before income taxes


77,634



17,682



95,316



134,664



(7,624
)


222,356Income tax (expense) benefit


(28,045
)


(7,073
)


(35,118
)


(47,035
)


1,532



(80,621
)Net income (loss)

$
49,589


$
10,609


$
60,198


$
87,629


$
(6,092
)

$
141,735Average assets









$
4,101,243


$
6,157,184


$
(253,236
)

$
10,005,191Average equity










435,080



774,514



42,913



1,252,507For the 9 Months Ended September 30, 2001(Dollars in thousands)

MSD&T Banking


MSD&T Trust


Total MSD&T


Community Banks


Other


TotalNet interest income

$
107,481


$



$
107,481


$
206,368


$
(372
)

$
313,477Provision for loan losses


(4,853
)






(4,853
)


(4,377
)






(9,230
)Noninterest income


27,851



51,703



79,554



34,442



(6,786
)


107,210Noninterest expenses


(62,863
)


(29,983
)


(92,846
)


(105,961
)


4,150



(194,657
)Adjustments


8,849



(1,381
)


7,468



(14,118
)


6,650



Income (loss) before income taxes


76,465



20,339



96,804



116,354



3,642



216,800Income tax (expense) benefit


(27,741
)


(8,136
)


(35,877
)


(43,048
)


(814
)


(79,739
)Net income (loss)

$
48,724


$
12,203


$
60,927


$
73,306


$
2,828


$
137,061Average assets









$
3,707,151


$
5,586,602


$
(167,130
)

$
9,126,623Average equity










407,806



669,512



118,132



1,195,450





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 was $13,563,000 at September 30, 2002, recorded in other
assets, and $14,625,000 at December 31, 2001, recorded in accrued expenses and other liabilities. For the nine months ended September 30, 2002, Bankshares recognized a net loss of $12,000, 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, 2001, Bankshares recognized a net loss of $28,000. The fair-value hedge of the nonrepayable fixed-rate debt was 100% effective for
the reported periods.





11.    Accounting Changes





In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible
assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142
discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. SFAS No. 142
also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.





Mercantile
Bankshares Corporation adopted SFAS No. 142 on January 1, 2002. In preparing for its adoption of SFAS No. 142, Bankshares determined its reporting units and the amounts of goodwill and intangible assets to be allocated to those reporting units.
Bankshares is not anticipating any reclassifications between goodwill and intangible assets or any changes in the useful lives of intangible assets. Application of the nonamortization provisions of the Statement is expected to result in additional
net income of $8.4 million for the year ended December 31, 2002.





SFAS No. 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step, which Bankshares completed during the first half of 2002, is to identify a potential impairment. The second step, which Bankshares will complete by the end of 2002, measures the amount of the impairment
loss, if any. Based on current information, Bankshares is not expecting impairment charges for goodwill to impact the 2002 financial statements.





The following table presents a reconciliation of reported net income and earnings per share to amounts adjusted to exclude goodwill amortization, net of tax:





For the 9 Months Ended

For the 3 Months EndedSeptember 30,

September 30,(Dollars in thousands, except per share data)

2002

2001

2002

2001Net incomeReported

$
141,735

$
137,061

$
48,615

$
46,079Add: goodwill amortization





6,834





2,089Adjusted

$
141,735

$
143,895

$
48,615

$
48,168Reported

$
2.03

$
1.93

$
.70

$
.66Add: goodwill amortization





.10





.03Adjusted

$
2.03

$
2.03

$
.70

$
.69Diluted earnings per shareReported

$
2.02

$
1.92

$
.69

$
.65Add: goodwill amortization





.09





.03Adjusted

$
2.02

$
2.01

$
.69

$
.68





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 September 30, 2002 was $48,615,000, a 5.5%
increase from net income of $46,079,000 for the same period in 2001. For the quarter ended September 30, 2002, diluted net income per share was $.69, an increase of 6.2% over the $.65 reported for the third quarter last year. As a result of
newly-adopted rules under Generally Accepted Accounting Principles, amortization of goodwill has been discontinued in 2002. Had the same rules been in effect in 2001, net income would have been $.03 per share higher for the quarter ended September
30, 2001. The higher growth in earnings per share was also attributable to a decline in adjusted weighted average shares outstanding from 70,863,000 for the quarter ended September 30, 2001, to 70,111,000 for the quarter ended September 30, 2002.
The decline in shares primarily resulted from activity under the share repurchase program, which had remaining repurchase authorization for 2.4 million shares at September 30, 2002.





For the first nine months of 2002, net income was $141,735,000, an increase of 3.4% over the $137,061,000 reported for the comparable period in 2001. Diluted net income per share for the first three
quarters of 2002 was $2.02, a 5.2% increase over the $1.92 reported for the same period last year. Excluding goodwill amortization, net income would have been $2.01 for the nine months ending September 30, 2001.





The return on average assets for the third quarter of 2002 was 1.87%, as compared with 2.06% for the third quarter of 2001. The return on average tangible equity
was 16.45% and the ratio of average tangible equity to average tangible assets was 11.49% for the third quarter of 2002. For the third quarter 2001, the return on average tangible equity was 17.54% and the ratio of average tangible equity to average
tangible assets was 11.88%.





Net Interest Income and Net Interest Margin





Net interest income for the quarter ended September 30, 2002 increased 7.0% to $111,914,000 from $104,599,000 for the third quarter last year. This represented the best quarterly performance over the
prior year since the first quarter 2001, when the Federal Reserve began lowering short-term interest rates. The current quarter reflected a 1.3% growth over the $110,425,000 reported for the prior quarter this year. The growth in net interest income
was attributable to the growth in average earning assets, particularly investment securities. Average earning assets grew to $9,789,103,000, a 10.8% increase over the previous year's $8,837,624,000 quarterly average. The net interest margin at 4.60%
for the third quarter 2002 was 17 basis points lower than the same quarter last year and 14 basis points lower than the prior quarter this year. The net interest margin was adversely affected by deposit growth that significantly exceeded loan
demand. The excess was employed in lower yielding federal funds sold, which increased approximately $160,000,000 from the prior quarter, accounting for 10 of the 14 basis point decline in the net interest margin.





Net interest income for the first nine months of 2002 increased to $329,527,000 or 5.1% over the $313,477,000 for the same period last year. The growth in net
interest income was attributable to a 9.7% growth in average earning assets, partially offset by a 22 basis point decline in the net interest margin from 4.90% to 4.68%. See the Analysis of Interest Rates and Interest Differentials on pages 17 and
18 and Rate/Volume Analysis on page 19 for further details.





For the 9 Months Ended September 30,2002 vs. 2001Due to variances in


For the 3 Months Ended September 30,2002 vs. 2001 Due to variances in(Dollars in thousands)

Rates


Volumes

Total


Rates


Volumes

TotalTotal interest income

$
(97,452
)

$
40,339

$
(57,113
)

$
(27,505
)

$
14,467

$
(13,038
)Total interest expense


(86,372
)


13,485


(72,887
)


(25,618
)


5,296


(20,322
)Net interest earned

$
(11,080
)

$
26,854

$
15,774


$
(1,887
)

$
9,171

$
7,284





Interest income for the quarter decreased $13,007,000 or 8.1% to $148,037,000. For the
first nine months of 2002, interest income decreased $56,837,000 or 11.4% to $441,122,000. On a tax-equivalent basis, interest income for the first nine months




Mercantile Bankshares Corporation




---



Page 12




of 2002 decreased $57,113,000. This decline is attributable to the Federal Reserve's 475 basis point reduction in short-term interest rates last year. Reflective of the Federal Reserves
actions, the tax-equivalent yield on the loan portfolio declined 120 basis points from 7.83% last year to 6.63% in the current quarter and 153 basis points from 8.29% to 6.76% for the first three quarters of 2001 and 2002, respectively. Similarly,
the tax-equivalent yield on the investment portfolio declined 75 basis points to 4.76% from 5.51% in the third quarter last year and 88 basis points from 5.78% to 4.90% for the first three quarters 2001 and 2002, respectively. The increase in
interest income related to changes in volume is primarily attributable to the investment portfolio, which grew over the prior year by 32.8% and 35.1% for the quarter and nine months, respectively. In contrast, average loans grew by 3.9% and 3.3% for
the three and nine months ended September 30, 2002 compared to the same periods last year.





Interest expense for the quarter ended
September 30, 2002 decreased $20,322,000 or 36.0% to $36,123,000. For the first nine months of 2002, interest expense decreased $72,887,000 or 39.5% to $111,595,000. Although interest rates have generally stabilized since the fourth quarter 2001,
the repricing upon maturity of longer duration certificates of deposit has continued to reduce interest expense. The average rate paid on time deposits $100,000 and over during the third quarter 2002 was 3.10%, a decline of 222 basis points from the
prior year. For the nine month period, the average rate paid declined 244 basis points to 3.31%. Other time deposits, primarily consumer certificates of deposit, declined 188 basis points and 193 basis points to an average rate paid of 3.39% and
3.65% for the three and nine months ended September 30, 2002, as compared to the same periods last year. Overall, the average rate paid on interest-bearing deposits declined 153 basis points and 171 basis points for the three and nine months ended
September 30, 2002 when compared to the prior year. The average rate paid on short-term borrowings declined 168 basis points for the three months ended and 253 basis points for the nine months ended September 30, 2002, respectively. The increase in
interest expense due to increased volume for both the quarter and nine months is attributable to the growth in long-term debt, short-term borrowings, savings and money market deposits. Average money market balances increased 32.6% compared to the
third quarter 2001, and 30.8% for the nine month period. Comparing this quarter of 2002 with 2001, checking plus interest and savings account balances grew 13.8% and 15.2%, respectively, and the growth was 12.5% and 12.2% for the comparable nine
month period.





Noninterest Income





For the 9 Months Ended September 30, 2002 vs. 2001


For the 3 Months Ended September 30, 2002 vs. 2001Noninterest Income (Dollars in
thousands)

Increase/(Decrease) Amount


%


Increase/(Decrease) Amount


%Investment and wealth management

$
(367
)

(.7
)

$
(63
)

(.4
)Service charges on deposit accounts


2,704


13.2



815


11.4Mortgage banking related fees


(572
)

(7.2
)


(800
)

(25.8
)Investments securities gains and (losses)


(2,289
)

(73.0
)


(1,799
)

(112.7
)Other income


344


1.4



(504
)

(5.8
)Total noninterest income

$
(180
)

(.2
)

$
(2,351
)

(6.2
)





Noninterest income decreased 6.2% to $35,386,000 for the third quarter 2002 versus the
comparable period in 2001. Included in noninterest income was a $203,000 loss in third quarter 2002 and a $1,596,000 gain in third quarter 2001 from the sale of investment securities. Excluding the securities gains and losses realized in the third
quarter of 2002 and 2001, noninterest income declined 1.5%. Investment and wealth management revenues remained relatively unchanged for the quarter ended September 30, 2002. Mortgage banking revenues decreased 25.8% to $2,306,000 due to lower
volumes in commercial mortgage loan originations and outsourcing of the retail origination business. This quarter also reflects earnings of $378,000 from the bank-owned life insurance program (BOLI) initiated through two $25,000,000 investments in
July and August. The other income component of noninterest income for the third quarter of 2002 reflects write-downs of investments in third-party private equity funds of $1,456,000. See the Analysis of Financial Condition section for additional
commentary. For the




Mercantile Bankshares Corporation




---



Page 13




first nine months, excluding investment securities gains, noninterest income increased $2,109,000, or 2.0%. Increased commercial checking and account analysis fees and the BOLI income account for
the increase.





Noninterest Expenses








For the 9 Months Ended September 30,2002 vs. 2001


For the 3 Months Ended September 30,2002 vs. 2001Noninterest Expenses (Dollars in
thousands)

Increase/(Decrease) Amount


%


Increase/(Decrease) Amount


%Salaries

$
5,892


6.4


$
1,177


3.8Employee benefits


2,783


12.5



1,319


18.4Stock-based compensation expense


1,350


382.4



(8
)

(4.3
)Net occupancy expense of bank premises


1,717


16.4



519


13.9Furniture and equipment expenses


562


3.2



251


4.4Communications and supplies


162


1.6



72


2.2Other expenses


2,574


7.0



854


6.4Noninterest expenses before goodwillamortization


15,040


8.0



4,184


6.5Goodwill amortization


(6,939
)

(100.0
)


(2,134
)

(100.0
)Total noninterest expenses

$
8,101


4.2


$
2,050


3.1





Noninterest expenses for the quarter ended September 30, 2002, increased 3.1% to
$68,637,000 from $66,587,000 for the third quarter of 2001. Excluding goodwill amortization, noninterest expenses were $64,453,000 for the third quarter of 2001. Excluding goodwill amortization, noninterest expenses for the third quarter 2002
increased by 6.5% over the third quarter 2001. Excluding $1,700,000 in severance expenses related to investment and wealth management reorganization, recorded in the second quarter of 2002, noninterest expenses this quarter increased $2,407,000
compared to the prior quarter. Other expenses provided the largest increase and included increases in professional fees, charitable contribution expense, and merchant card processing fees. Retiree medical insurance premiums also increased from last
quarter. The principal contributor to the year over year increase in expenses was a $1.3 million or 18.4% increase in employee benefits, primarily due to increases in pension expense and medical costs related to retiree insurance premiums. Net
occupancy expense increased $519,000 or 13.9% to $4,245,000 for the current quarter from the quarter ending September 2001 due to growth in rent and utility costs. Other noninterest expense increases are a result of higher professional fees and a
charitable contribution of appreciated equity securities with a cost of $177,000. The gifting of these securities lowered the effective tax rate for the quarter.





Noninterest expenses for the first nine months of 2002 increased $15,040,000, or 8.0%, after excluding the amortization of goodwill in 2001. The increase in expenses was attributable in part, to salaries and benefits related
to severance expenses for the investment and wealth management reorganization, as discussed in the previous quarter. Also impacting this period was increased incentive compensation expenses and increased stock compensation related to stock options
and restricted stock awards. The prior years credit was due to directors deferred compensation, which fluctuates based on the market price of Mercantiles stock. Additionally, the increase in occupancy expense is a function of
increases in rental payments, repair and maintenance expenses associated with improvements at some branch locations and insurance costs. Mercantile continued to expand its internal use of its headquarters building causing a reduction in outside
tenants in that building.





The efficiency ratio, a key measure of expense management, was 46.10% for year to date 2002 versus 44.49% for
the comparable period in 2001.




Mercantile Bankshares Corporation




---



Page 14







Analysis of Financial Condition





At September 30, 2002, total assets increased 11.8% to $10,582,874,000 compared to $9,468,004,000 one year earlier. Compared to the year ended December 31, 2001 at $9,928,786,000, total assets
increased 6.6%. Investment securities increased 28.0% to $2,464,395,000 compared to $1,925,284,000 at September 30, 2001. Total loans increased 4.4% to $7,200,790,000 at September 30, 2002, compared to $6,900,139,000 at September 30, 2001. The mix
of the loan portfolio is relatively consistent, except for the expected decline in leases in the portfolio from 2.3% of outstandings at September 2001 to 2.2% at December 2001 to 1.7% currently.





Included in other assets is the investment in third-party equity investments of $5,205,000 at September 30, 2002. The total commitment to these investments is $23,000,000, of which
$9,605,000 has been advanced. These investments are carried at the lower of cost or fair value. Also included in other assets this quarter is the BOLI at cash surrender value of $50,378,000 funded in July and August of this quarter. The BOLI
investment was made to partially fund increasing costs of employee benefits.





Total deposits at September 30, 2002, were $8,045,497,000
an increase of 11.0% from $7,247,724,000 at the end of the third quarter 2001, and an 8.0% increase from the end of last year. Interest-bearing deposits were $6,004,976,000, an increase of 10.0% from September 30, 2001, and a 7.9% increase from the
end of 2001. Interest-bearing deposits were 74.6% of total deposits at September 30, 2002, which represented a decrease from the 75.3% at September 30, 2001 and remained relatively unchanged from 74.7% at the end of last year. Noninterest-bearing
deposits increased as a percentage of total deposits. Noninterest-bearing deposits were 24.7% of deposits at September 2001, 25.3% at the end of 2001 and 25.4% for the current quarter. Noninterest-bearing deposits increased 14.0% to $2,040,521,000
as of September 30, 2002, compared to $1,789,489,000 at September 30, 2001, and increased 8.3% compared to $1,883,878,000 at December 31, 2001.





Shareholders equity at September 30, 2002, was $1,330,421,000, an increase of 8.7% from $1,224,144,000 at September 30, 2001 and an increase of 8.1% from $1,230,206,000 at December 31, 2001. The Corporation, having repurchased
504,500 shares year to date, still has prior authorizations enabling it to repurchase up to 2.4 million shares. For more details see the Statement of Changes in Consolidated Shareholders Equity on page 5.





Asset Quality





Nonperforming Assets





Nonperforming assets consist of nonaccrual loans, renegotiated loans and other real estate
owned (ie., real estate acquired in foreclosure or in lieu of foreclosure). With respect to nonaccrual loans, Bankshares 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 September 30, 2002, nonperforming assets declined $5,701,000 to $39,640,000. Nonperforming loans, one of the components of nonperforming assets, decreased $5,761,000 while other real estate owned, the
other component increased $60,000. The decrease in nonperforming loans is a result of successful efforts in collection and sale of collateral. Nonperforming assets as a percent of period-end loans and other real estate owned was .55% at September
30, 2002, .64% at June 30, 2002 and .50% at September 30, 2001, respectively. The current decline resulted from actions taken to address credit quality issues, particularly in the leasing business. The leasing companys portfolio accounted for
$8,114,000 or 20.5% of nonperforming loans at September 30, 2002, as compared to 2.3% of the outstanding portfolio of loans and leases. At June 30, 2002, nonperforming assets in the leasing portfolio were $10,073,000 or 22.2% of nonperforming loans.
As a result of credit quality concerns about the leasing portfolio, management previously announced it was narrowing the focus of the leasing business and discontinuing certain activities. These concerns are reflected in the increased allocation to
leasing of the allowance for loan losses, reflected in the 2001 Form 10-K. Excluding the leasing portfolio, nonperforming loans are .44% of period-end loans.




Mercantile Bankshares Corporation




---



Page 15




The level of monitored loans, or loans with characteristics suggesting that they could be classified as nonperforming in the
near future, also improved during the quarter. At September 30, 2002, monitored loans were $1,940,000 compared to $7,885,000 at June 30, 2002. One monitored loan of $3,861,000 at June 2002, was moved to nonaccrual/impaired status at September 30,
2002 and a valuation reserve of $2,894,000 was established.





The level of impaired loans improved during the quarter. Impaired loans are
also given nonaccrual or nonperforming status. Impaired loans at September 30, 2002 reflected a net decrease of $17,407,000 to $36,935,000, from $54,342,000 at December 31, 2001. This is largely the result of gross charge-offs of $18,673,000 this
year. At December 31, 2001, 88.3% of the total impaired loans had a valuation allowance, while 47.3% did at June 30, 2002. At September 30, 2002 the percentage has declined to 39.7%. The decline in the ratio at December 31, 2001 to September 30,
2002 was also due to charge-offs. The decline in the portion of loans with a valuation allowance in this quarter is a result of a charge-off taken and a sale of collateral. The loan involved was previously shown as impaired with a valuation
allowance and the current balance is now less than the collateral proceeds to be received. Therefore, while the remaining portion of this loan is still nonaccrual and included in impaired, there is no valuation allowance assigned.





The table below presents a comparison of nonperforming assets at September 30 and June 30, 2002 and at the end of December 2001.





Nonperforming Assets(Dollars in thousands)

September 30,2002


June 30, 2002


December 31,2001Nonaccrual loans (1)Commercial

$
30,420


$
35,764


$
23,284Construction


2,015



2,450



2,201Residential real estate


2,325



2,648



2,251Consumer


257



317



408Lease financing


4,500



4,099



4,775Total nonaccrual loans


39,517



45,278



32,919Renegotiated loans (1)










Loans contractually past due 90 days or more and still accruing interest










Total nonperforming loans


39,517



45,278



32,919Other real estate owned


123



63



181Total nonperforming assets

$
39,640


$
45,341


$
33,100Nonperforming assets as a percent of period-end loans and other real estate owned


.55
%


.64
%


.48
%





|(1) |  | Aggregate gross interest income of $2,681,000, $2,285,000 and $3,737,000 for the first nine months of 2002, the first six months of 2002 and the year 2001,
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 $536,000, $458,000 and $1,593,000 for the first nine months of 2002, the first six months of 2002 and the year 2001, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Note:The Corporation was monitoring loans estimated to aggregate $1,940,000 at September 30, 2002, $7,885,000 at June 30, 2002 and $15,940,000 at
December 31, 2001, 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 third quarter of 2002 was $3,244,000, a 4.6% increase over $3,101,000 for the same period last year and 36.6% less than last quarter. The provision for the first nine months of 2002 was $11,443,000, an increase of 24.0% over




Mercantile Bankshares Corporation




---



Page 16




last years provision of $9,230,000. 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. Charge-offs were lower in this quarter than the prior year and prior quarter. However, on a year to date basis, charge-offs increased over the prior year. There were
no charge-offs related to the leasing business this quarter, but 43.5% of the charge-offs in 2002 were related to the leasing business. Net charge-offs were $2,051,000 for the third quarter of 2002 compared to $5,703,000 for the same period in 2001.
Net charge-offs for the first three quarters of 2002 were $16,319,000 compared to $6,839,000 last year. The allowance for loan losses as a percent of period-end loans was 1.90% at September 30, 2002 and 2.04% at the end of the third quarter last
year.





The following table presents a summary of the activity in the Allowance for Loan Losses for the nine months and quarters ended
September 30, 2002 and 2001:





For the 9 Months Ended


For the 3 Months EndedAllowance for Loan Losses(Dollars in thousands)

September 30,


September 30,2002


2001


2002


2001Allowance balance  beginning

$
141,463


$
138,612


$
135,394


$
143,605Charge-offs:Commercial


(11,522
)


(655
)


(2,136
)


(353
)Construction














Residential real estate


(117
)


(71
)


(7
)


(1
)Consumer


(2,234
)


(2,432
)


(702
)


(907
)Lease financing


(4,800
)


(5,828
)






(5,175
)Total


(18,673
)


(8,986
)


(2,845
)


(6,436
)Recoveries:Commercial


675



655



158



103Construction


148



66



11



37Residential real estate


77



85



19



30Consumer


1,244



1,341



396



563Lease financing


210







210



Total


2,354



2,147



794



733Net charge-offs


(16,319
)


(6,839
)


(2,051
)


(5,703
)Provision for loan losses


11,443



9,230



3,244



3,101Allowance balance  ending

$
136,587


$
141,003


$
136,587


$
141,003Average loans

$
7,041,412


$
6,816,978


$
7,162,156


$
6,890,076Net charge-offs (annualized) as a percent of average loans


.31
%


.13
%


.11
%


.33
%Period-end loans

$
7,200,790


$
6,900,139Allowance for loan losses as a percent of period-end loans


1.90
%


2.04
%





Cautionary Statement





This report contains forward-looking statements within the meaning of and pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. A forward-looking statement
encompasses any estimate, prediction, opinion or statement of belief contained in this report, and the underlying management assumptions. Such statements in this report include identification of trends, loan growth, comments on adequacy of the
allowance for loan losses, credit quality, changes in leasing activities, impact of FASB pronouncements (including impairment testing of goodwill), 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 17




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 nine months of 2002 and 2001.


For the 9 Months Ended September 30, 2002


For the 9 Months Ended September 30, 2001(Dollars in thousands)

AverageBalance


Income*/Expense

Yield*/Rate


AverageBalance


Income*/Expense

Yield*/RateEarning assetsLoans:Commercial

$
4,256,364


$
209,810

6.59
%

$
3,917,090


$
243,750

8.32
%Construction


714,563



33,139

6.20



839,682



52,195

8.31Residential real estate


1,074,334



59,239

7.37



1,061,458



63,665

8.02Consumer


996,151



53,603

7.19



998,748



63,155

8.45Total loans


7,041,412



355,791

6.76



6,816,978



422,765

8.29Federal funds sold, et al


152,041



4,028

3.54



141,591



5,073

4.79Securities:**Taxable securitiesU.S. Treasury securities


1,494,734



52,100

4.66



1,331,986



55,096

5.53U.S. Agency securities


583,895



21,802

4.99



300,149



13,794

6.14Other stocks and bonds


224,559



9,633

5.74



60,906



3,608

7.92Tax-exempt securitiesStates and political subdivisions


38,888



2,364

8.13



40,603



2,492

8.21Total securities


2,342,076



85,899

4.90



1,733,644



74,990

5.78Interest-bearing deposits in other banks


358



11

4.21



368



14

5.12Total earning assets


9,535,887



445,729

6.25



8,692,581



502,842

7.73Cash and due from banks


224,488









213,652Bank premises and equipment, net


101,275









103,304Other assets


285,367









259,555Less: allowance for loan losses


(141,826
)








(142,469
)Total assets

$
10,005,191








$
9,126,623Interest-bearing liabilitiesDeposits:Savings

$
951,952



6,630

.93


$
848,242



10,448

1.65Checking plus interest


855,101



2,234

.35



759,916



4,423

.78Money market


1,065,126



10,913

1.37



814,008



17,554

2.88Certificates of deposit $100,000 and over


1,057,250



26,147

3.31



1,153,200



49,631

5.75Other time deposits


1,768,526



48,344

3.65



1,825,978



76,185

5.58Total interest-bearing deposits


5,697,955



94,268

2.21



5,401,344



158,241

3.92Short-term borrowings


852,070



9,074

1.42



739,080



21,816

3.95Long-term debt


280,752



8,253

3.93



89,669



4,425

6.60Total interest-bearing funds


6,830,777



111,595

2.18



6,230,093



184,482

3.96Noninterest-bearing deposits


1,815,090









1,585,413Other liabilities and accrued expenses


106,817









115,667Total liabilities


8,752,684









7,931,173Shareholders equity


1,252,507









1,195,450Total liabilities and shareholders equity

$
10,005,191








$
9,126,623Net interest income





$
334,134








$
318,360Net interest rate spread








4.07
%








3.77
%Effect of noninterest-bearing funds








.61









1.13Net interest margin on earning assets








4.68
%








4.90
%Taxable-equivalent adjustment included in:Loan income





$
3,571








$
3,767Investment securities income






1,036









1,116Total





$
4,607








$
4,883


* Presented on a tax-equivalent basis using the statutory federal corporate income tax rate of 35%.


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




Mercantile Bankshares Corporation




---



Page 18




MERCANTILE BANKSHARES CORPORATION





ANALYSIS OF INTEREST RATES & 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 third quarters of 2002 and 2001.


For the 3 Months Ended September 30, 2002


For the 3 Months Ended September 30, 2001(Dollars in thousands)

AverageBalance


Income*/Expense

Yield*/Rate


AverageBalance


Income*/Expense

Yield*/RateEarning assetsLoans:Commercial

$
4,309,714


$
70,450

6.49
%

$
3,985,579


$
78,547

7.82
%Construction


769,238



11,702

6.04



849,489



16,162

7.55Residential real estate


1,076,355



19,518

7.19



1,049,194



20,787

7.86Consumer


1,006,849



17,954

7.07



1,005,814



20,566

8.11Total loans


7,162,156



119,624

6.63



6,890,076



136,062

7.83Federal funds sold, et al


240,313



1,369

2.26



150,013



1,607

4.25Securities:**Taxable securitiesU.S. Treasury securities


1,462,968



16,602

4.50



1,304,455



17,647

5.37U.S. Agency securities


663,388



8,093

4.84



392,234



5,339

5.40Other stocks & bonds


221,417



3,136

5.62



59,355



1,149

7.68Tax-exempt securitiesStates & political subdivisions


38,503



778

8.02



41,135



835

8.05Total securities


2,386,276



28,609

4.76



1,797,179



24,970

5.51Interest-bearing deposits in other banks


358



3

3.84



356



4

4.72Total earning assets


9,789,103



149,605

6.06



8,837,624



162,643

7.30Cash and due from banks


234,441









221,736Bank premises and equipment


101,131









102,849Other assets


316,554









260,892Less: allowance for loan losses


(137,249
)








(144,813
)Total assets

$
10,303,980








$
9,278,288Interest-bearing liabilitiesDeposits:Savings

$
983,806



2,228

.90


$
854,026



3,040

1.41Checking plus interest


872,322



754

.34



766,858



1,191

.62Money market


1,140,825



3,735

1.30



860,471



5,519

2.54Certificates of deposit $100,000 and over


1,138,356



8,881

3.10



1,153,042



15,455

5.32Other time deposits


1,763,253



15,061

3.39



1,814,301



24,098

5.27Total interest-bearing deposits


5,898,562



30,659

2.06



5,448,698



49,303

3.59Short-term borrowings


833,966



2,834

1.35



754,235



5,762

3.03Long-term debt


275,677



2,630

3.78



84,200



1,380

6.50Total interest-bearing funds


7,008,205



36,123

2.04



6,287,133



56,445

3.56Noninterest-bearing deposits


1,917,680









1,670,375Other liabilities and accrued expenses


103,074









125,362Total liabilities


9,028,959









8,082,870Shareholders equity


1,275,021









1,195,418Total liabilities & shareholders equity

$
10,303,980








$
9,278,288Net interest income





$
113,482








$
106,198Net interest rate spread








4.02
%








3.74
%Effect of noninterest-bearing funds








.58









1.03Net interest margin on earning assets








4.60
%








4.77
%Taxable-equivalent adjustment included in:Loan income





$
1,226








$
1,227Investment securities income






342









372Total





$
1,568








$
1,599


* Presented on a tax-equivalent basis using the statutory federal corporate income tax rate of 35%.


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




Mercantile Bankshares Corporation




---



Page 19







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 9 Months Ended September 30, 2002 vs. 2001 Due to variances in


For the 3 Months Ended
September 30, 2002 vs. 2001 Due to variances in(Dollars in thousands)

Rates


Volumes


Total


Rates


Volumes


TotalInterest earned on:Loans:Commercial (1)

$
(55,052
)

$
21,112


$
(33,940
)

$
(14,485
)

$
6,388


$
(8,097
)Construction (2)


(11,279
)


(7,777
)


(19,056
)


(2,933
)


(1,527
)


(4,460
)Residential real estate


(5,198
)


772



(4,426
)


(1,807
)


538



(1,269
)Consumer


(9,388
)


(164
)


(9,552
)


(2,633
)


21



(2,612
)Total loans


(80,917
)


13,943



(66,974
)


(21,858
)


5,420



(16,438
)Taxable securities (3)


(15,090
)


26,127



11,037



(4,437
)


8,133



3,696Tax-exempt securities (3)


(23
)


(105
)


(128
)


(4
)


(53
)


(57
)Federal funds sold, et al


(1,419
)


374



(1,045
)


(1,205
)


967



(238
)Interest-bearing deposits in other banks


(3
)






(3
)


(1
)






(1
)Total interest income


(97,452
)


40,339



(57,113
)


(27,505
)


14,467



(13,038
)Interest paid on:Savings deposits


(5,095
)


1,277



(3,818
)


(1,274
)


462



(812
)Checking plus interest deposits


(2,743
)


554



(2,189
)


(601
)


164



(437
)Money market accounts


(12,056
)


5,415



(6,641
)


(3,582
)


1,798



(1,784
)Certificates of deposit $100,000 and over


(19,355
)


(4,129
)


(23,484
)


(6,377
)


(197
)


(6,574
)Other time deposits


(25,444
)


(2,397
)


(27,841
)


(8,359
)


(678
)


(9,037
)Short-term borrowings


(16,077
)


3,335



(12,742
)


(3,537
)


609



(2,928
)Long-term debt


(5,602
)


9,430



3,828



(1,888
)


3,138



1,250Total interest expense


(86,372
)


13,485



(72,887
)


(25,618
)


5,296



(20,322
)Net interest earned

$
(11,080
)

$
26,854


$
15,774


$
(1,887
)

$
9,171


$
7,284





|(1) |  | Year-to-date tax-equivalent adjustments of $2,728,000 and $3,134,000 for 2002 and 2001, respectively and quarter-to-date tax-equivalent adjustments of $907,000
and $998,000 for 2002 and 2001, respectively are included in the commercial loan rate variances.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Year-to-date tax-equivalent adjustments of $843,000 and $633,000 for 2002 and 2001, respectively and quarter-to-date tax-equivalent adjustments of $319,000 and
$229,000 for 2002 and 2001, respectively are included in the construction loan rate variances.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Year-to-date tax-equivalent adjustments of $1,036,000 and $1,116,000 for 2002 and 2001, respectively and quarter-to-date tax-equivalent adjustments of $342,000
and $372,000 for 2002 and 2001, respectively are included in the investment securities rate variances.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 3. Quantitative
and Qualitative Disclosures About Market Risk





Information responsive to this Item as of December 31, 2001 appears under the captions
Asset/Liability and Liquidity Management, Interest Rate Sensitivity Analysis and Earnings Simulation Model Projections on pages 21-23 of the registrants 2001 Annual Report to Shareholders, filed as Exhibit
13 to registrants Annual Report on Form 10-K for the year ended December 31, 2001. There was no material change in such information as of September 30, 2002.





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




Mercantile Bankshares Corporation




---



Page 20




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 5.    Other Information





The 2003 Annual Meeting of Stockholders of the registrant is expected to be held on April 30, 2003.





Item 6. Exhibits and Reports on Form 8-K





(a) Exhibits





3 A (15).

Certificate of Correction effective July 3, 2002, concerning Articles of Amendment effective May 8,
1986.3 A (16).

Certificate of Correction effective July 3, 2002, concerning Articles of Amendment effective April 26,
1990.99.1

Certification of Chief Executive Officer99.2

Certification of Chief Financial Officer





(b) Reports on Form 8-K


Form 8-K filed, dated July 19, 2002, Item 5.




Mercantile
Bankshares Corporation




---



Page 21




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 CORPORATIONNovember 8, 2002



Principal Executive Officer/s/ Edward J. Kelly, IIIBy: Edward J. Kelly, III President and Chief Executive OfficerNovember 8, 2002



Principal Financial Officer/s/ Terry L. TroupeBy: Terry L. Troupe Chief Financial OfficerNovember 8, 2002



Chief Accounting Officer/s/ Diana E. NelsonBy: Diana E. Nelson Controller and Chief Accounting Officer











Mercantile Bankshares Corporation




---



Page 22







I, Edward J. Kelly, III, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Mercantile Bankshares Corporation:
|-- |  | ----------------------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a  14 and 15d-14) for the registrant and we have:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




/s/     EDWARD J. KELLY,
III Edward J. Kelly, III President and Chief Executive Officer




Mercantile Bankshares Corporation




---



Page 23







I, Terry L. Troupe, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Mercantile Bankshares Corporation:
|-- |  | ----------------------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a  14 and 15d-14) for the registrant and we have:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




/s/    TERRY L.
TROUPE Terry L. Troupe Chief Financial Officer and Treasurer







Mercantile Bankshares Corporation