UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d )OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

o

 

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)

 

NONE

(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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý  No o

 

As of October 31, 2004, 79,189,894 shares of registrant’s Common Stock, $2 par value per share, were outstanding.

 

 



 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

MERCANTILE BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)

 

September 30,
2004

 

December 31,
2003

 

September 30,
2003

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

290,401

 

$

321,882

 

$

375,627

 

Interest-bearing deposits in other banks

 

158

 

14,583

 

50,518

 

Federal funds sold

 

24,500

 

26,236

 

350,825

 

Total cash and cash equivalents

 

315,059

 

362,701

 

776,970

 

Investment securities available-for-sale (Note 4)

 

3,030,584

 

3,123,514

 

3,128,594

 

Investment securities held-to-maturity (Note 4)

 

49,659

 

49,417

 

56,057

 

Total investment securities

 

3,080,243

 

3,172,931

 

3,184,651

 

Loans held-for-sale

 

15,984

 

14,925

 

26,288

 

Loans:

 

 

 

 

 

 

 

Commercial

 

2,791,396

 

2,577,021

 

2,534,519

 

Commercial real estate

 

3,014,104

 

2,738,832

 

2,610,827

 

Construction

 

1,170,704

 

1,064,021

 

1,043,522

 

Residential real estate

 

1,496,222

 

1,335,375

 

1,299,665

 

Consumer

 

1,483,837

 

1,482,860

 

1,445,004

 

Lease financing

 

58,051

 

74,051

 

81,545

 

Total loans

 

10,014,314

 

9,272,160

 

9,015,082

 

Less: allowance for loan losses

 

(161,441

)

(155,337

)

(155,754

)

Loans, net

 

9,852,873

 

9,116,823

 

8,859,328

 

Bank premises and equipment, less accumulated depreciation of $159,477 (2004), $152,771 (December 2003) and $161,720 (September 2003)

 

140,411

 

140,922

 

137,100

 

Other real estate owned, net

 

388

 

191

 

397

 

Goodwill, net (Note 7)

 

507,791

 

522,173

 

510,406

 

Other intangible assets, net (Note 7)

 

50,391

 

56,223

 

57,359

 

Other assets

 

339,879

 

308,583

 

323,649

 

Total assets

 

$

14,303,019

 

$

13,695,472

 

$

13,876,148

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

3,167,398

 

$

2,750,721

 

$

2,698,277

 

Interest-bearing deposits

 

7,554,685

 

7,511,832

 

7,597,565

 

Total deposits

 

10,722,083

 

10,262,553

 

10,295,842

 

Short-term borrowings

 

923,447

 

809,021

 

958,506

 

Accrued expenses and other liabilities

 

127,534

 

134,735

 

140,913

 

Long-term debt

 

642,510

 

647,722

 

658,565

 

Total liabilities

 

12,415,574

 

11,854,031

 

12,053,826

 

 

 

 

 

 

 

 

 

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 - 79,152,310 (2004), 79,772,705 (December 2003) and 79,602,236 (September 2003); restricted shares - 136,467 (2004), 121,369 (December 2003) and 123,442 (September 2003)

 

158,305

 

159,545

 

159,204

 

Capital surplus

 

525,011

 

548,664

 

544,818

 

Retained earnings

 

1,198,039

 

1,110,748

 

1,085,979

 

Accumulated other comprehensive income

 

6,090

 

22,484

 

32,321

 

Total shareholders’ equity

 

1,887,445

 

1,841,441

 

1,822,322

 

Total liabilities and shareholders’ equity

 

$

14,303,019

 

$

13,695,472

 

$

13,876,148

 

 

See notes to consolidated financial statements

 

2



 

MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CONSOLIDATED INCOME

 

 

 

For the 9 Months
Ended September 30,

 

For the 3 Months
Ended September 30,

 

(Dollars in thousands, except per share data)

 

2004

 

2003

 

2004

 

2003

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

399,223

 

$

343,091

 

$

138,047

 

$

120,137

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Taxable interest income

 

79,614

 

81,107

 

26,048

 

27,285

 

Tax-exempt interest income

 

2,500

 

1,747

 

803

 

783

 

Dividends

 

797

 

640

 

236

 

212

 

Other investment income

 

3,772

 

4,390

 

803

 

1,508

 

Total interest and dividends on investment securities

 

86,683

 

87,884

 

27,890

 

29,788

 

Other interest income

 

1,283

 

3,331

 

519

 

1,291

 

Total interest income

 

487,189

 

434,306

 

166,456

 

151,216

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Interest on deposits

 

60,782

 

70,892

 

20,142

 

22,313

 

Interest on short-term borrowings

 

4,889

 

4,317

 

1,990

 

1,303

 

Interest on long-term debt

 

16,035

 

13,016

 

5,575

 

5,368

 

Total interest expense

 

81,706

 

88,225

 

27,707

 

28,984

 

NET INTEREST INCOME

 

405,483

 

346,081

 

138,749

 

122,232

 

Provision for loan losses

 

7,221

 

9,072

 

2,442

 

3,005

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

398,262

 

337,009

 

136,307

 

119,227

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

Investment and wealth management

 

67,315

 

57,450

 

22,396

 

20,577

 

Service charges on deposit accounts

 

31,107

 

26,072

 

10,637

 

9,701

 

Mortgage banking related fees

 

8,296

 

8,298

 

3,063

 

3,403

 

Investment securities gains and (losses)

 

534

 

7,015

 

(1

)

(336

)

Other income

 

47,537

 

30,358

 

17,259

 

12,558

 

Total noninterest income

 

154,789

 

129,193

 

53,354

 

45,903

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

Salaries

 

138,173

 

114,602

 

48,696

 

43,870

 

Employee benefits

 

33,998

 

28,891

 

10,557

 

10,144

 

Net occupancy expense of bank premises

 

18,007

 

13,451

 

6,128

 

5,136

 

Furniture and equipment expenses

 

22,873

 

21,974

 

7,936

 

8,432

 

Communications and supplies

 

12,610

 

10,506

 

4,111

 

3,889

 

Other expenses

 

60,309

 

48,595

 

21,789

 

19,718

 

Total noninterest expenses

 

285,970

 

238,019

 

99,217

 

91,189

 

Income before income taxes

 

267,081

 

228,183

 

90,444

 

73,941

 

Applicable income taxes

 

98,286

 

82,014

 

33,659

 

26,768

 

NET INCOME

 

$

168,795

 

$

146,169

 

$

56,785

 

$

47,173

 

NET INCOME PER SHARE OF COMMON STOCK (Note 3):

 

 

 

 

 

 

 

 

 

Basic

 

$

2.13

 

$

2.07

 

$

0.72

 

$

0.64

 

Diluted

 

$

2.11

 

$

2.05

 

$

0.71

 

$

0.63

 

DIVIDENDS PAID PER COMMON SHARE

 

$

1.03

 

$

0.96

 

$

0.35

 

$

0.33

 

 

See notes to consolidated financial statements

 

3



 

MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

 

For The Nine Months Ended September 30, 2004 and 2003

 

(Dollars in thousands, except per share data)

 

Total

 

Common
Stock

 

Capital
Surplus

 

Retained
Earnings

 

Accumulated Other
Comprehensive
Income (Loss)

 

BALANCE, DECEMBER 31, 2002

 

$

1,324,358

 

$

137,672

 

$

120,577

 

$

1,010,248

 

$

55,861

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

146,169

 

 

 

 

 

146,169

 

 

 

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

 

(23,540

)

 

 

 

 

 

 

(23,540

)

Comprehensive income

 

122,629

 

 

 

 

 

 

 

 

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($.96 per share)

 

(69,568

)

 

 

 

 

(69,568

)

 

 

Issuance of 10,379,710 shares for bank acquisition

 

428,059

 

20,759

 

407,300

 

 

 

 

 

Fair value of 322,528 converted options related to employee stock option plan of acquired bank

 

5,944

 

 

 

5,944

 

 

 

 

 

Issuance of 95,070 shares for dividend reinvestment and stock purchase plan

 

3,427

 

190

 

3,237

 

 

 

 

 

Issuance of 17,815 shares for employee stock purchase dividend reinvestment plan

 

675

 

35

 

640

 

 

 

 

 

Issuance of 178,512 shares for employee stock option plan

 

3,130

 

357

 

2,773

 

 

 

 

 

Restricted stock awards:

 

 

 

 

 

 

 

 

 

 

 

Issuance of 100,537 shares

 

3,561

 

202

 

3,359

 

 

 

 

 

Deferred compensation, net

 

(870

)

 

 

 

 

(870

)

 

 

Purchase of 5,500 shares under stock repurchase plan

 

(212

)

(11

)

(201

)

 

 

 

 

Vested stock options

 

1,189

 

 

1,189

 

 

 

BALANCE, SEPTEMBER 30, 2003

 

$

1,822,322

 

$

159,204

 

$

544,818

 

$

1,085,979

 

$

32,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2003

 

$

1,841,441

 

$

159,545

 

$

548,664

 

$

1,110,748

 

$

22,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

168,795

 

 

 

 

 

168,795

 

 

 

Unrealized losses on securities available-for-sale, net of reclassification adjustment, net of taxes (Note 8)

 

(16,394

)

 

 

 

 

 

 

(16,394

)

Comprehensive income

 

152,401

 

 

 

 

 

 

 

 

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($1.03 per share)

 

(81,601

)

 

 

 

 

(81,601

)

 

 

Issuance of 91,006 shares for dividend reinvestment and stock purchase plan

 

3,981

 

182

 

3,799

 

 

 

 

 

Issuance of 18,418 shares for employee stock purchase dividend reinvestment plan

 

822

 

37

 

785

 

 

 

 

 

Issuance of 244,698 shares for employee stock option plan

 

4,434

 

490

 

3,944

 

 

 

 

 

Directors’ deferred compensation plan:

 

 

 

 

 

 

 

 

 

 

 

Transfer opening balance

 

6,406

 

 

 

6,406

 

 

 

 

 

Contribution

 

404

 

 

 

404

 

 

 

 

 

Dividend

 

 

 

 

109

 

(109

)

 

 

Restricted stock awards:

 

 

 

 

 

 

 

 

 

 

 

Issuance of 25,483 shares

 

1,169

 

51

 

1,118

 

 

 

 

 

Deferred compensation, net

 

206

 

 

 

 

 

206

 

 

 

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

 

(44,110

)

(2,000

)

(42,110

)

 

 

 

 

Vested stock options

 

1,892

 

 

1,892

 

 

 

BALANCE, SEPTEMBER 30, 2004

 

$

1,887,445

 

$

158,305

 

$

525,011

 

$

1,198,039

 

$

6,090

 

 

See notes to consolidated financial statements

 

4



 

MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS

 

Increase (decrease) in cash and cash equivalents

 

For the 9 Months Ended September 30,

 

(Dollars in thousands)

 

2004

 

2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

168,795

 

$

146,169

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

7,221

 

9,072

 

Depreciation and amortization

 

11,732

 

10,028

 

Amortization of other intangible assets

 

6,132

 

3,097

 

Investment securities gains

 

(534

)

(7,015

)

(Income) write-downs of investments in private equity funds

 

(1,544

)

78

 

Write-downs of other real estate owned

 

14

 

7

 

Gains on sales of other real estate owned

 

(119

)

(350

)

Gains on sales of buildings

 

(1,620

)

(228

)

Net (increase) decrease in assets:

 

 

 

 

 

Interest receivable

 

(3,049

)

2,727

 

Other receivables

 

704

 

(10,743

)

Bank-owned life insurance

 

(2,606

)

(1,337

)

Other assets

 

3,769

 

(16,485

)

Loans held-for-sale

 

(1,059

)

19,733

 

Net increase (decrease) in liabilities:

 

 

 

 

 

Interest payable

 

5,031

 

8,422

 

Accrued expenses

 

7,582

 

(18,974

)

Taxes payable

 

(8,582

)

(12,496

)

Net cash provided by operating activities

 

191,867

 

131,705

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from maturities of investment securities held-to-maturity

 

8,199

 

8,406

 

Proceeds from maturities of investment securities available-for-sale

 

727,003

 

772,637

 

Proceeds from sales of investment securities available-for-sale

 

47,182

 

558,481

 

Purchases of investment securities held-to-maturity

 

(8,441

)

(2,486

)

Purchases of investment securities available-for-sale

 

(707,120

)

(1,274,441

)

Net increase in customer loans

 

(745,923

)

(403,404

)

Proceeds from sales of other real estate owned

 

181

 

748

 

Capital expenditures

 

(9,021

)

(9,311

)

Proceeds from sales of buildings

 

3,813

 

602

 

Business acquisitions net of cash received

 

 

(82,204

)

Other investing activity

 

(5,119

)

(3,515

)

Net cash used in investing activities

 

(689,246

)

(434,487

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

416,677

 

315,196

 

Net increase in checking plus interest and savings accounts

 

123,689

 

110,249

 

Net decrease in certificates of deposit

 

(80,836

)

(82,637

)

Net increase (decrease) in short-term borrowings

 

114,426

 

(37,889

)

Proceeds from issuance of long-term debt

 

 

300,000

 

Repayment of long-term debt

 

(7,745

)

(8,400

)

Proceeds from issuance of shares

 

9,237

 

7,232

 

Repurchase of common shares

 

(44,110

)

(212

)

Dividends paid

 

(81,601

)

(69,568

)

Net cash provided by financing activities

 

449,737

 

533,971

 

Net(decrease) increase in cash and cash equivalents

 

(47,642

)

231,189

 

Cash and cash equivalents at beginning of period

 

362,701

 

545,781

 

Cash and cash equivalents at end of period

 

$

315,059

 

$

776,970

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

Cash payments for interest

 

$

76,675

 

$

102,609

 

Cash payments for income taxes

 

100,098

 

80,244

 

 

See notes to consolidated financial statements

 

5



 

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”) (Nasdaq: MRBK) 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 interim period.  These adjustments are of a normal 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 in the financial statements, and the disclosure of revenue and expenses during the reporting period.  These assumptions are based on information available as of the date of the financial statements and could differ from actual results.  See Annual Report on Form 10-K for more detail.

 

2. Business Combinations

 

The following provides information concerning acquisitions. These acquisitions were accounted for as purchases. The results of operations of these acquisitions subsequent to the acquisition dates are included in Bankshares’ Statements of Consolidated Income. Individually, the results of operations of these acquisitions prior to the acquisition dates were not material to Bankshares’ results of operations.

 

In March and April 2003, Bankshares acquired in separate transactions, Boyd Watterson Asset Management LLC (“BW”), an investment management firm, and Peremel & Company, Inc. (“Peremel”), a directed and discount brokerage company, respectively.  In the aggregate, the companies were purchased for approximately $29 million in cash.  The BW acquisition has a potential additional contingent payment of up to $8.6 million which, if paid, will be recorded as goodwill.  The contingent payment will be recorded assuming certain metrics are met and becomes 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 three to eight years.  Goodwill recorded on these transactions totaled approximately $18.0 million at September 30, 2004.

 

On August 12, 2003, Bankshares completed its acquisition of F&M Bancorp (“F&M”), a bank holding company headquartered in Frederick, Maryland.  The total consideration paid to F&M shareholders in connection with the acquisition was $124.1 million in cash and 10.4 million shares of Bankshares’ common stock.  F&M transactions have been included in Bankshares’ financial results since August 13, 2003.  Acquired assets on August 12, 2003 totaled $2.2 billion, including $1.4 billion of loans and leases; liabilities assumed were $2.0 billion, including $1.7 billion of deposits. As of September 30, 2004, Bankshares had recorded $385.9 million of goodwill, $36.0 million of core deposit intangible, $5.8 million of mostly client relationship intangibles (relating to the two insurance subsidiaries) and $1.1 million in a trademark intangible. Intangible assets subjected to amortization are being amortized on a straight-line basis. The weighted average amortization period for the newly-acquired core deposit intangible is nine years, and the client-relationship identified intangible ranges from three to fifteen years. On October 24, 2003, certain assets and liabilities of F&M were transferred to other Bankshares’ affiliates in order to align customers’ accounts with the Bankshares’ affiliate serving the geographic area where those customers reside. Prior to the merger, F&M recorded exit costs of $33.6 million relating to severance, system conversions, branch consolidations and costs associated with terminating contracts (including leases). Management has determined that $3.2 million of the estimated $33.6 million in exit costs will not be disbursed. This $3.2 million was reversed out of the accrued exit costs, with corresponding decreases to deferred taxes ($1.2 million) and goodwill ($2.0 million). As of September 30, 2004, $28.0 million of these exit costs were paid, leaving $2.4 million unpaid.

 

In the third quarter of 2004, Bankshares initiated a significant reorganization within its Community Banking network.  In a move designed to create banks of sufficient size and depth to compete more effectively today and in the future, Bankshares combined 11 affiliate banks to create four new organizations, all with a more prominent Mercantile identity. This reorganization will enable Bankshares to operate more effectively and efficiently in the face of increased competitive and regulatory pressures.  Fewer, larger banks will better leverage our branch network, reduce administrative and operational redundancies and increase the breadth and depth of expertise within our Community Banks. All banks that were combined are geographically contiguous, share increasingly common market dynamics and offer the opportunity to create scale efficiencies. The total restructuring costs incurred through the nine months ended September 30, 2004 amounted to $3.1 million. At September 30, 2004 $2.1 million was unpaid.

 

6



 

3. Earnings Per Share

 

Basic earnings per share (“EPS”) are computed by dividing income available to common shareholders by weighted average common shares outstanding.  Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock options, restricted stock awards and vested directors’ deferred compensation plan shares.  The following tables provide reconciliation between the computation of basic EPS and diluted EPS for the nine months and quarters ended September 30, 2004 and 2003, respectively.

 

 

 

For the 9 Months Ended September 30,

 

 

 

2004

 

2003

 

(In thousands, except per share data)

 

Net
Income

 

Weighted Average
Common Shares

 

EPS

 

Net
Income

 

Weighted Average
Common Shares

 

EPS

 

Basic EPS

 

$

168,795

 

79,269

 

$

2.13

 

$

146,169

 

70,647

 

$

2.07

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock awards

 

 

 

489

 

 

 

 

 

510

 

 

 

Vested directors’ deferred compensation plan shares

 

 

 

101

 

 

 

 

 

 

 

 

Diluted EPS

 

$

168,795

 

79,859

 

$

2.11

 

$

146,169

 

71,157

 

$

2.05

 

 

 

 

For the 3 Months Ended September 30,

 

 

 

2004

 

2003

 

(In thousands, except per share data)

 

Net
Income

 

Weighted Average
Common Shares

 

EPS

 

Net
Income

 

Weighted Average
Common Shares

 

EPS

 

Basic EPS

 

$

56,785

 

78,965

 

$

0.72

 

$

47,173

 

74,253

 

$

0.64

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and restricted stock awards

 

 

 

491

 

 

 

 

 

587

 

 

 

Vested directors’ deferred compensation plan shares

 

 

 

155

 

 

 

 

 

 

 

 

Diluted EPS

 

$

56,785

 

79,611

 

$

0.71

 

$

47,173

 

74,840

 

$

0.63

 

 

Antidilutive options and awards excluded from the computation of diluted earnings per share were 526,465 and 238,838 for the nine months ended September 30, 2004 and 2003, respectively, and 57,388 and 170,313 for the third quarter of 2004 and 2003, respectively.

 

4. Investment Securities

 

The amortized cost and fair value of investment securities at September 30, 2004, December 31, 2003 and September 30, 2003 are shown below:

 

 

 

September 30, 2004

 

December 31, 2003

 

September 30, 2003

 

(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

728,454

 

$

737,144

 

$

823,356

 

$

845,754

 

$

869,760

 

$

901,384

 

U.S. Government agencies

 

877,877

 

882,667

 

778,916

 

793,611

 

752,861

 

773,894

 

Mortgage-backed securities

 

1,210,527

 

1,203,931

 

1,288,109

 

1,283,630

 

1,243,745

 

1,240,215

 

States and political subdivisions

 

64,746

 

65,977

 

77,897

 

79,870

 

88,691

 

90,696

 

Other investments

 

139,091

 

140,865

 

118,948

 

120,649

 

121,377

 

122,405

 

Total

 

$

3,020,695

 

$

3,030,584

 

$

3,087,226

 

$

3,123,514

 

$

3,076,434

 

$

3,128,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

21,909

 

$

23,000

 

$

28,213

 

$

30,115

 

$

33,421

 

$

36,030

 

Other investments

 

27,750

 

27,750

 

21,204

 

21,204

 

22,636

 

22,636

 

Total

 

$

49,659

 

$

50,750

 

$

49,417

 

$

51,319

 

$

56,057

 

$

58,666

 

 

At September 30, 2004, there were $289.5 million of individual securities that had unrealized losses for a period greater than one year. At September 30, 2004, these securities had an unrealized loss of $7.5 million. Management has assessed the impairment of these securities and determined that the impairment is temporary.

 

7



 

5. Impaired Loans

 

When scheduled principal or interest payments are past due 90 days or more at quarter-end on any loan, the accrual of interest income is discontinued and subsequent receipts on these loans are recorded as a reduction of principal, and interest income is recorded only once principal recovery is reasonably assured. Previously accrued but uncollected interest on these loans is charged against interest income. Generally, a loan may be restored to accruing status when all past due principal, interest and late charges have been paid and the bank expects repayment of the remaining contractual principal and interest on a timely basis.

 

Under Statements of Financial Accounting Standards (SFAS) Nos. 114 and 118, “Accounting by Creditors for Impairment of a Loan-an amendment of FASB Statements No. 5 and 15,” 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. 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. 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, 2004, December 31, 2003 and September 30, 2003 is shown below.  See Annual Report on Form 10-K for more detail.

 

(Dollars in thousands)

 

September 30,
2004

 

December 31,
2003

 

September 30,
2003

 

Impaired loans with a specific valuation allowance

 

$

25,045

 

$

26,715

 

$

27,869

 

All other impaired loans

 

10,306

 

18,692

 

18,609

 

Total impaired loans

 

$

35,351

 

$

45,407

 

$

46,478

 

 

 

 

 

 

 

 

 

Specific allowance for loan losses applicable to impaired loans

 

$

14,499

 

$

14,925

 

$

14,766

 

General allowance for loan losses applicable to other than impaired loans

 

146,942

 

140,412

 

140,988

 

Total allowance for loan losses

 

$

161,441

 

$

155,337

 

$

155,754

 

 

 

 

 

 

 

 

 

Year-to-date interest income on impaired loans recorded on the cash basis

 

$

300

 

$

443

 

$

220

 

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

 

$

40,172

 

$

31,241

 

$

29,194

 

Quarter-to-date interest income on impaired loans recorded on the cash basis

 

$

88

 

$

223

 

$

65

 

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

 

$

38,285

 

$

37,382

 

$

34,707

 

 

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 general allowance for loan losses applicable to other than impaired loans.

 

6. Commitments

 

Bankshares is a party to financial instruments that are not reflected in the balance sheet, which include commitments to extend credit and standby letters of credit. Various commitments to extend credit (lines of credit) are made in the normal course of banking business. Letters of credit are issued for the benefit of customers by affiliated banks. These commitments are subject to loan underwriting standards and geographic boundaries consistent with Bankshares’ loans outstanding. Bankshares’ lending activities are concentrated in Maryland, Delaware and Virginia.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit were $4.1 billion at September 30, 2004, $3.6 billion at December 31, 2003, and $3.4 billion at September 30, 2003.

 

Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Outstanding letters of credit were $347.5 million at September 30, 2004, $281.4 million at December 31, 2003 and $284.3 million at September 30, 2003.  Fees received for issuing letters of credit are deferred and amortized over the life of the commitment.  The unamortized fees on letters of credit at September 30, 2004, December 31, 2003, and September 30, 2003 had a carrying value of $1.3 million, $1.0 million and $0.7 million, respectively.

 

8



 

Bankshares’ mortgage banking subsidiary is a Fannie Mae Delegated Underwriting and Servicing lender, and has a loss sharing arrangement for loans originated on behalf of and sold to Fannie Mae.  The unamortized principal balance of the underlying loans totaled $191.7 million, $149.4 million and $150.0 million at September 30, 2004, December 31, 2003 and September 30, 2003, respectively.  No loss reserve has been established for potential losses on loans originated and sold in the secondary market since there have been no losses recognized during the history of this arrangement and no losses were incurred at September 30, 2004.  The mortgage subsidiary also has originated and sold loans with recourse in the event of foreclosure on the underlying real estate.  The unamortized amount of principal balance of loans sold with recourse totaled $1.8 million at September 30, 2004, $2.3 million at December 31, 2003 and $2.5 million at September 30, 2003.  These mortgages are generally in good standing, are well-collateralized and no loss has ensued and no future loss is expected.

 

Bankshares has committed to invest funds in third-party private equity investments. At September 30, 2004, December 31, 2003 and September 30, 2003, $21.9 million, $16.1 million and $17.8 million, respectively, remained unfunded.

 

7. Goodwill and Other Intangible Assets

 

Goodwill decreased by $9.8 million during the third quarter of 2004.  This decrease was due to the finalization of F&M’s purchase accounting adjustments related to exit costs accrued by F&M prior to merger, sale of a branch and the finalization of deferred taxes.

 

The following table discloses the gross carrying amount and accumulated amortization of intangible assets subject to amortization at September 30, 2004 and December 31, 2003:

 

 

 

September 30, 2004

 

December 31, 2003

 

(Dollars in thousands)

 

Gross carrying
amount

 

Accumulated
amortization

 

Net
amount

 

Gross carrying
amount

 

Accumulated
amortization

 

Net
amount

 

Deposit intangibles

 

$

49,881

 

$

(13,647

)

$

36,234

 

$

49,881

 

$

(9,546

)

$

40,335

 

Mortgage servicing intangibles

 

2,303

 

(1,729

)

574

 

2,351

 

(1,790

)

561

 

Customer lists and other

 

17,010

 

(3,427

)

13,583

 

17,010

 

(1,683

)

15,327

 

Total

 

$

69,194

 

$

(18,803

)

$

50,391

 

$

69,242

 

$

(13,019

)

$

56,223

 

 

Identifiable intangible assets are amortized based on estimated lives of up to 15 years. Management reviews other intangible assets for impairment yearly, or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For those intangible assets subject to amortization, impairment is indicated if the sum of undiscounted estimated future net cash flows is less than the carrying amount of the asset. Impairment is recognized by writing down the carrying value of the asset. Any impairment recognized in a valuation account is reflected in the income statement in the corresponding period. Bankshares recorded a write down of $43.9 thousand in the third quarter of 2004 for mortgage servicing rights.

 

The following table shows the current period and estimated future amortization expense for amortized intangible assets. The projections of amortization expense shown for mortgage servicing rights are based on asset balances and the interest rate environment as of September 30, 2004. Future amortization expense may be significantly different depending upon changes in the mortgage servicing portfolio, mortgage interest rates and market conditions.

 

(Dollars in thousands)

 

Core
deposit
intangibles

 

Mortgage
servicing
intangibles

 

Customer lists
and other
intangibles

 

Total

 

Nine months ended September 30, 2004 (actual)

 

$

4,101

 

$

274

 

$

1,757

 

$

6,132

 

Three months ended December 31, 2004 (estimated)

 

1,366

 

86

 

581

 

2,033

 

Twelve months ended December 31, 2004 (estimated)

 

5,467

 

360

 

2,338

 

8,165

 

 

 

 

 

 

 

 

 

 

 

Estimate for year ended December 31,

2005

 

5,467

 

342

 

2,326

 

8,135

 

 

2006

 

5,467

 

146

 

2,083

 

7,696

 

 

2007

 

5,209

 

 

 

1,890

 

7,099

 

 

2008

 

4,344

 

 

 

1,708

 

6,052

 

 

2009

 

4,120

 

 

 

985

 

5,105

 

 

9



 

8. Comprehensive Income

 

The following table summarizes the market value change and related tax effect of unrealized gains (losses) on securities available-for-sale for the nine months ended and the quarters ended September 30, 2004 and 2003, respectively.  The total comprehensive income is included in the Statements of Changes in Consolidated Shareholders’ Equity.

 

 

 

For the 9 Months Ended
September 30,

 

For the 3 Months Ended
September 30,

 

(Dollars in thousands)

 

2004

 

2003

 

2004

 

2003

 

Net income

 

$

168,795

 

$

146,169

 

$

56,785

 

$

47,173

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

(16,071

)

(19,299

)

14,190

 

(13,194

)

Reclassification adjustment for (gains) losses included in net income

 

(323

)

(4,241

)

1

 

203

 

Total comprehensive income

 

$

152,401

 

$

122,629

 

$

70,976

 

$

34,182

 

 

9. Capital Adequacy

 

Bankshares and its bank affiliates are subject to various regulatory capital adequacy requirements administered by 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 percentages of net risk-weighted assets and tier I capital as a percentage 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.  As of September 30, 2004, Bankshares and each of its bank affiliates exceeded all capital adequacy requirements to be considered 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 September 30, 2004 and December 31, 2003.

 

 

 

September 30, 2004

 

December 31, 2003

 

(Dollars in thousands)

 

Bankshares

 

MSD&T

 

Bankshares

 

MSD&T

 

 

 

 

 

 

 

 

 

 

 

Tier I capital

 

$

1,329,898

 

$

406,526

 

$

1,248,492

 

$

396,186

 

Total risk-based capital

 

1,759,611

 

453,514

 

1,666,064

 

440,479

 

Net risk-weighted assets

 

10,817,560

 

3,730,852

 

10,020,487

 

3,529,223

 

Adjusted average total assets

 

13,465,769

 

4,403,191

 

13,011,399

 

4,353,713

 

 

 

 

 

 

 

 

 

 

 

Tier I capital ratio

 

12.29

%

10.90

%

12.46

%

11.23

%

Total capital ratio

 

16.27

%

12.16

%

16.63

%

12.48

%

Leverage ratio

 

9.88

%

9.23

%

9.60

%

9.10

%

 

Bankshares has an ongoing share repurchase program.  At September 30, 2004, there were 476,327 shares remaining for repurchase of the 2,000,000 shares previously authorized by the Board of Directors on December 11, 2001.  For the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, 1,000,000 and 5,500 shares, respectively, were repurchased by Bankshares.  In April 2004, Bankshares entered into a privately negotiated agreement for the accelerated repurchase of the one million shares.  Shares repurchased in 2003 were acquired in open market transactions.

 

10



 

10. Segment Reporting

 

Operating segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, are components of an enterprise with separate financial information.  The component engages in business activities from which it derives revenues and incurs expenses and whose operating results management relies on for decision-making and performance assessment. Bankshares has three reportable segments – its 12 Community Banks, MSD&T Banking and Investment and Wealth Management  (IWM).

 

The following tables present selected segment information for the nine months and quarters ended September 30, 2004 and 2003, respectively.  The components in the “Other” column consist of amounts for the nonbanking affiliates, unallocated corporate expenses 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.  F&M is included in the column “Community Banking” whereas BW and Peremel are included in the column “IWM”.

 

 

 

For the 9 Months Ended September 30, 2004

 

 

 

Banking

 

 

 

 

 

 

 

(Dollars in thousands)

 

Community

 

MSD&T

 

Total (1)

 

IWM

 

Other

 

Total

 

Net interest income

 

$

292,546

 

$

110,004

 

$

402,550

 

$

 

$

2,933

 

$

405,483

 

Provision for loan losses

 

81

 

(7,302

)

(7,221

)

 

 

(7,221

)

Noninterest income

 

64,595

 

33,664

 

84,881

 

67,548

 

2,360

 

154,789

 

Noninterest expenses

 

(168,444

)

(78,517

)

(233,583

)

(50,748

)

(1,639

)

(285,970

)

Adjustments

 

(5,661

)

19,912

 

14,251

 

(3,070

)

(11,181

)

 

Income (loss) before income taxes

 

183,117

 

77,761

 

260,878

 

13,730

 

(7,527

)

267,081

 

Income tax (expense) benefit

 

(62,959

)

(28,020

)

(90,979

)

(5,492

)

(1,815

)

(98,286

)

Net income (loss)

 

$

120,158

 

$

49,741

 

$

169,899

 

$

8,238

 

$

(9,342

)

$

168,795

 

Average loans

 

$

6,551,220

 

$

3,045,466

 

$

9,596,686

 

 

$

189

 

$

9,596,875

 

Average earning assets

 

8,859,644

 

4,069,343

 

12,620,653

 

 

107,630

 

12,728,283

 

Average assets

 

9,344,183

 

4,424,233

 

13,335,183

 

 

550,375

 

13,885,558

 

Average deposits

 

7,419,030

 

3,121,148

 

10,400,049

 

 

(75,173

)

10,324,876

 

Average equity

 

935,872

 

444,985

 

1,380,857

 

 

477,720

 

1,858,577

 

 

 

 

For the 9 Months Ended September 30, 2003

 

 

 

Banking

 

 

 

 

 

 

 

(Dollars in thousands)

 

Community

 

MSD&T

 

Total (1)

 

IWM

 

Other

 

Total

 

Net interest income

 

$

240,278

 

$

106,701

 

$

346,979

 

$

 

$

(898

)

$

346,081

 

Provision for loan losses

 

(3,819

)

(5,253

)

(9,072

)

 

 

(9,072

)

Noninterest income

 

50,151

 

32,070

 

71,498

 

57,560

 

135

 

129,193

 

Noninterest expenses

 

(127,627

)

(69,145

)

(186,049

)

(50,014

)

(1,956

)

(238,019

)

Adjustments

 

(7,796

)

13,589

 

5,793

 

(2,457

)

(3,336

)

 

Income (loss) before income taxes

 

151,187

 

77,962

 

229,149

 

5,089

 

(6,055

)

228,183

 

Income tax (expense) benefit

 

(52,125

)

(28,075

)

(80,200

)

(2,035

)

221

 

(82,014

)

Net income (loss)

 

$

99,062

 

$

49,887

 

$

148,949

 

$

3,054

 

$

(5,834

)

$

146,169

 

Average loans

 

$

4,828,958

 

$

2,909,190

 

$

7,738,148

 

 

$

240

 

$

7,738,388

 

Average earning assets

 

6,793,767

 

4,087,620

 

10,658,211

 

 

84,781

 

10,742,992

 

Average assets

 

7,156,379

 

4,390,264

 

11,220,870

 

 

180,161

 

11,401,031

 

Average deposits

 

5,757,564

 

3,129,902

 

8,771,045

 

 

(175,624

)

8,595,421

 

Average equity

 

846,404

 

454,583

 

1,300,987

 

 

90,134

 

1,391,121

 

 

11



 

 

 

For the 3 Months Ended September 30, 2004

 

 

 

Banking

 

 

 

 

 

 

 

(Dollars in thousands)

 

Community

 

MSD&T

 

Total (1)

 

IWM

 

Other

 

Total

 

Net interest income

 

$

99,483

 

$

38,786

 

$

138,269

 

$

 

$

480

 

$

138,749

 

Provision for loan losses

 

(175

)

(2,267

)

(2,442

)

 

 

(2,442

)

Noninterest income

 

22,121

 

11,577

 

29,268

 

22,319

 

1,767

 

53,354

 

Noninterest expenses

 

(57,121

)

(28,128

)

(80,819

)

(16,939

)

(1,459

)

(99,217

)

Adjustments

 

(2,175

)

8,040

 

5,865

 

(1,144

)

(4,721

)

 

Income (loss) before income taxes

 

62,133

 

28,008

 

90,141

 

4,236

 

(3,933

)

90,444

 

Income tax (expense) benefit

 

(20,950

)

(10,047

)

(30,997

)

(1,695

)

(967

)

(33,659

)

Net income (loss)

 

$

41,183

 

$

17,961

 

$

59,144

 

$

2,541

 

$

(4,900

)

$

56,785

 

Average loans

 

$

6,731,985

 

$

3,093,622

 

$

9,825,607

 

 

$

186

 

$

9,825,793

 

Average earning assets

 

8,992,959

 

4,089,231

 

12,827,949

 

 

107,663

 

12,935,612

 

Average assets

 

9,494,036

 

4,447,860

 

13,551,016

 

 

548,472

 

14,099,488

 

Average deposits

 

7,565,588

 

3,183,183

 

10,599,179

 

 

(91,463

)

10,507,716

 

Average equity

 

930,007

 

447,276

 

1,377,283

 

 

500,561

 

1,877,844

 

 

 

 

For the 3 Months Ended September 30, 2003

 

 

 

Banking

 

 

 

 

 

 

 

(Dollars in thousands)

 

Community

 

MSD&T

 

Total (1)

 

IWM

 

Other

 

Total

 

Net interest income

 

$

86,775

 

$

35,212

 

$

121,987

 

$

 

$

245

 

$

122,232

 

Provision for loan losses

 

(710

)

(2,295

)

(3,005

)

 

 

(3,005

)

Noninterest income

 

18,609

 

10,478

 

25,530

 

20,396

 

(23

)

45,903

 

Noninterest expenses

 

(49,275

)

(25,216

)

(70,934

)

(19,588

)

(667

)

(91,189

)

Adjustments

 

(4,576

)

5,826

 

1,250

 

(898

)

(352

)

 

Income (loss) before income taxes

 

50,823

 

24,005

 

74,828

 

(90

)

(797

)

73,941

 

Income tax (expense) benefit

 

(17,488

)

(8,632

)

(26,120

)

37

 

(685

)

(26,768

)

Net income (loss)

 

$

33,335

 

$

15,373

 

$

48,708

 

$

(53

)

$

(1,482

)

$

47,173

 

Average loans

 

$

5,422,443

 

$

2,908,605

 

$

8,331,048

 

 

$

217

 

$

8,331,265

 

Average earning assets

 

7,756,209

 

4,196,854

 

11,664,463

 

 

86,503

 

11,750,966

 

Average assets

 

8,202,204

 

4,516,120

 

12,320,367

 

 

301,733

 

12,622,100

 

Average deposits

 

6,539,970

 

3,151,528

 

9,573,723

 

 

(185,009

)

9,388,714

 

Average equity

 

852,712

 

455,372

 

1,308,084

 

 

242,853

 

1,550,937

 

 


(1)  Amounts do not necessarily crossfoot due to eliminations.

 

11. Derivative Instruments and Hedging Activities

 

FASB Statement No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities, FASB Statement No. 138 (SFAS No. 138), Accounting for Certain Derivative Instruments and Certain Hedging Activities – an amendment to FASB Statement No. 133 and FASB Statement No. 149 (SFAS No. 149), Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities  (collectively referred to as “derivatives”), establishes accounting and reporting standards for derivative instruments and for 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. As of September 30, 2004, Bankshares has interest rate swaps to convert its nonprepayable fixed-rate debt to floating-rate debt.  Bankshares also arranges interest rate swaps, caps and swaptions for commercial loan customers through its capital markets group.  Derivative transactions done with loan customers are hedged by means of an off-setting derivative trade with a third party.  In this way, Bankshares manages the market risk arising from capital markets related derivative activity.  The increase in the number of contracts since December 31, 2003 is related to the capital markets group activities.

 

The fair value of derivative instruments relating to hedging activities recorded in other assets was $9.0 million (notional $280.5 million) and $6.6 million (notional $203.1 million) at September 30, 2004 and December 31, 2003, respectively.  The fair value of derivative instruments relating to hedging activities recorded in other liabilities was $6.6 million (notional $130.5 million) and $8.0 million (notional $150.0 million) at September 30, 2004 and December 31, 2003, respectively. The fair-value hedges of nonprepayable fixed-rate debt were effective for the reported periods.  The impact of the hedges decreased interest expense $8.2 million in the first nine months of 2004 and $8.5 million in 2003.

 

12



 

The following tables summarize the gross position of derivatives relating to hedging activities at September 30, 2004 and December 31, 2003:

 

 

 

 

 

 

 

Weighted Average

 

September 30, 2004 (Dollars in thousands)

 

Number
of Contracts

 

Notional
Amount

 

Years to
Maturity

 

Fixed Rate

 

Variable Rate

 

Fair
Value

 

Gross Position Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay Fixed/Receive Variable Interest Rate Swaps

 

5

 

$

24,513

 

6.72

 

4.23

%

1.68

%

$

(478

)

Receive Fixed/Pay Variable Interest Rate Swaps

 

8

 

374,513

 

7.66

 

5.17

%

2.42

%

2,832

 

Swaptions/Caps Purchased

 

2

 

6,000

 

7.11

 

 

 

 

 

 

Swaptions/Caps Sold

 

2

 

6,000

 

7.11

 

 

 

 

 

 

Total

 

17

 

$

411,026

 

7.59

 

 

 

 

 

$

2,354

 

 

 

 

 

 

 

 

Weighted Average

 

December 31, 2003 (Dollars in thousands)

 

Number
of Contracts

 

Notional
Amount

 

Years to
Maturity

 

Fixed Rate

 

Variable Rate

 

Fair
Value

 

Gross Position Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay Fixed/Receive Variable Interest Rate Swaps

 

1

 

$

3,108

 

0.33

 

9.38

%

4.00

%

$

(64

)

Receive Fixed/Pay Variable Interest Rate Swaps

 

3

 

350,000

 

8.44

 

5.21

%

1.98

%

(1,366

)

Total

 

4

 

$

353,108

 

8.37

 

 

 

 

 

$

(1,430

)

 

Mortgage loans held-for-sale have inherent forward contract (agreements to sell or purchase loans at a specific rate or yield) characteristics. Risk may arise from the corresponding parties’ inability to meet the terms of their contracts and from movement in interest rates. Bankshares has forward commitments to sell and fund individual fixed-rate and variable-rate mortgage loans that are reported at fair value. The fair value adjustment was $0.4 million at September 30, 2004.

 

12. Stock-based Compensation Expense

 

Bankshares has several stock-based compensation programs for its directors, management and employees. Compensation costs for stock options and restricted stock awards are measured under the fair value method and are included in salary expense.  Another form of stock-based compensation is phantom stock, which is used for a portion of the Bankshares’ Directors’ Deferred Compensation Plan.  A change in this plan was approved at the annual shareholders’ meeting, and was effective April 1, 2004.  This plan requires all deferred fees to be settled in Bankshares’ stock.  This reduces the expense fluctuations that occurred with phantom stock, which resulted in variances corresponding to the changes in Bankshares’ stock price.  The compensation cost for the phantom stock is included in other expenses.  Stock-based compensation amounts for the nine months and quarters ended September 30, 2004 and 2003, respectively, are summarized in the following table: