UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2006

 

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 number0-5127

 

MERCANTILE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

52-0898572

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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 x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one).

Large accelerated filer  x                 Accelerated filer o                 Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
o    No  x

As of July 31, 2006, there were 125,362,712 shares of registrant’s Common Stock, $2 par value per share, outstanding.

 

 




 

MERCANTILE BANKSHARES CORPORATION
Quarterly Report on Form 10-Q
June 30, 2006

Table of Contents

Part I - Financial Information

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Consolidated Balance Sheets

 

 

Statements of Consolidated Income

 

 

Statements of Changes in Consolidated Shareholders’ Equity

 

 

Statements of Consolidated Cash Flows

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

Part II - Other Information

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 6.

Exhibits

 

 

 

 Signatures

 

 

2




PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

MERCANTILE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

380,476

 

$

369,536

 

$

382,695

 

Interest-bearing deposits in other banks

 

200

 

200

 

200

 

Federal funds sold

 

19,106

 

25,104

 

95,102

 

Total cash and cash equivalents

 

399,782

 

394,840

 

477,997

 

Investment securities available-for-sale (Note 4)

 

3,109,708

 

3,089,628

 

2,960,275

 

Investment securities held-to-maturity (Note 4) - fair value of $15,871 (June 2006), $17,181 (December 2005) and $18,788 (June 2005)

 

15,532

 

16,659

 

18,056

 

Total investment securities

 

3,125,240

 

3,106,287

 

2,978,331

 

Loans held-for-sale

 

61,721

 

26,263

 

16,754

 

Loans:

 

 

 

 

 

 

 

Commercial

 

2,935,369

 

2,957,301

 

2,923,419

 

Commercial real estate

 

3,826,335

 

3,703,297

 

3,585,592

 

Construction

 

1,855,110

 

1,607,095

 

1,560,149

 

Residential real estate

 

1,905,032

 

1,802,373

 

1,776,959

 

Home equity lines

 

479,011

 

505,508

 

517,342

 

Consumer

 

1,049,323

 

1,032,271

 

1,000,845

 

Total loans

 

12,050,180

 

11,607,845

 

11,364,306

 

Less: allowance for loan losses

 

(142,860

)

(156,673

)

(157,101

)

Loans, net

 

11,907,320

 

11,451,172

 

11,207,205

 

Bank premises and equipment, less accumulated depreciation of $147,264 (June 2006), $146,585 (December 2005) and $151,132 (June 2005)

 

139,007

 

137,419

 

147,774

 

Other real estate owned, net

 

49

 

667

 

777

 

Goodwill, net

 

679,710

 

670,028

 

667,465

 

Other intangible assets, net (Note 8)

 

42,403

 

46,653

 

49,830

 

Other assets

 

647,482

 

588,400

 

546,861

 

Total assets

 

$

17,002,714

 

$

16,421,729

 

$

16,092,994

 

 

 

 

 

 

 

 

 

COMMITMENTS and CONTINGENCIES (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

3,392,286

 

$

3,324,650

 

$

3,293,344

 

Interest-bearing deposits

 

9,051,736

 

8,752,700

 

8,537,407

 

Total deposits

 

12,444,022

 

12,077,350

 

11,830,751

 

Short-term borrowings

 

1,432,119

 

1,237,714

 

1,192,782

 

Accrued expenses and other liabilities

 

210,699

 

169,780

 

140,390

 

Long-term debt

 

650,829

 

742,163

 

807,954

 

Total liabilities

 

14,737,669

 

14,227,007

 

13,971,877

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Preferred stock, no par value; authorized 2,000,000 shares; issued and outstanding - None

 

 

 

 

 

 

 

Common stock, $2 par value; authorized 200,000,000 shares; issued shares - 123,523,069 (June 2006), 123,248,121 (December 2005) and 122,973,563 (June 2005)

 

247,046

 

164,331

 

163,965

 

Capital surplus

 

600,349

 

676,830

 

665,006

 

Retained earnings

 

1,466,852

 

1,386,405

 

1,302,869

 

Accumulated other comprehensive income (loss)

 

(49,202

)

(32,844

)

(10,723

)

Total shareholders’ equity

 

2,265,045

 

2,194,722

 

2,121,117

 

Total liabilities and shareholders’ equity

 

$

17,002,714

 

$

16,421,729

 

$

16,092,994

 

 

See Notes to Consolidated Financial Statements.

3




MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CONSOLIDATED INCOME

 

 

For the 6 months ended
June 30,

 

For the 3 months ended
June 30,

 

(Dollars in thousands, except per share data)

 

2006

 

2005

 

2006

 

2005

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

404,151

 

$

322,421

 

$

208,096

 

$

169,877

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Taxable interest income

 

60,930

 

50,366

 

31,135

 

25,374

 

Tax-exempt interest income

 

1,543

 

1,509

 

765

 

788

 

Other investment income

 

1,326

 

1,227

 

699

 

583

 

Total interest and dividends on investment securities

 

63,799

 

53,102

 

32,599

 

26,745

 

Other interest income

 

1,756

 

786

 

1,098

 

442

 

Total interest income

 

469,706

 

376,309

 

241,793

 

197,064

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Interest on deposits

 

106,846

 

56,689

 

57,603

 

31,384

 

Interest on short-term borrowings

 

24,523

 

9,526

 

13,500

 

5,484

 

Interest on long-term debt

 

18,614

 

14,644

 

9,280

 

7,829

 

Total interest expense

 

149,983

 

80,859

 

80,383

 

44,697

 

NET INTEREST INCOME

 

319,723

 

295,450

 

161,410

 

152,367

 

Provision for credit losses

 

 

756

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

319,723

 

294,694

 

161,410

 

152,367

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

Investment and wealth management

 

54,986

 

47,837

 

28,865

 

23,780

 

Service charges on deposit accounts

 

21,160

 

21,514

 

10,868

 

11,088

 

Mortgage banking-related fees

 

4,545

 

5,178

 

2,335

 

2,895

 

Investment securities (losses) gains

 

(13

)

490

 

 

76

 

Nonmarketable investments

 

12,233

 

9,493

 

5,964

 

4,222

 

Other income

 

32,163

 

33,423

 

16,436

 

18,005

 

Total noninterest income

 

125,074

 

117,935

 

64,468

 

60,066

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

Salaries

 

96,331

 

96,734

 

47,232

 

50,180

 

Employee benefits

 

29,027

 

23,853

 

14,292

 

11,956

 

Net occupancy expense of bank premises

 

15,702

 

13,779

 

7,931

 

6,857

 

Furniture and equipment expenses

 

16,399

 

15,203

 

8,094

 

7,924

 

Communications and supplies

 

8,287

 

8,059

 

4,469

 

4,019

 

Other expenses

 

50,391

 

46,438

 

27,404

 

22,977

 

Total noninterest expenses

 

216,137

 

204,066

 

109,422

 

103,913

 

Income before income taxes

 

228,660

 

208,563

 

116,456

 

108,520

 

Applicable income taxes

 

84,809

 

78,063

 

43,364

 

40,647

 

NET INCOME

 

$

143,851

 

$

130,500

 

$

73,092

 

$

67,873

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

1.17

 

$

1.09

 

$

0.59

 

$

0.56

 

Diluted

 

$

1.16

 

$

1.08

 

$

0.59

 

$

0.56

 

DIVIDENDS PAID PER COMMON SHARE

 

$

0.54

 

$

0.49

 

$

0.28

 

$

0.25

 

 

See Notes to Consolidated Financial Statements.

4




MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY

For the 6 months ended June 30, 2006 and 2005
(Dollars in thousands, except per share data)

 

Total

 

Common
Stock

 

Capital
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

BALANCE, DECEMBER 31, 2004

 

$

1,917,683

 

$

158,601

 

$

530,705

 

$

1,231,102

 

$

(2,725

)

Net income

 

130,500

 

 

 

 

 

130,500

 

 

 

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

 

(7,998

)

 

 

 

 

 

 

(7,998

)

Comprehensive income

 

122,502

 

 

 

 

 

 

 

 

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.49 per share)

 

(57,897

)

 

 

 

 

(57,897

)

 

 

Issuance of 2,444,408 shares for bank acquisition

 

124,335

 

4,889

 

119,446

 

 

 

 

 

Fair value of 138,764 converted options related to employee stock option plan of acquired bank

 

5,182

 

 

 

5,182

 

 

 

 

 

Issuance of 54,750 shares for dividend reinvestment and stock purchase plan

 

2,677

 

110

 

2,567

 

 

 

 

 

Issuance of 11,740 shares for employee stock purchase dividend reinvestment plan

 

592

 

23

 

569

 

 

 

 

 

Issuance of 132,034 shares for employee stock option plan

 

1,957

 

265

 

1,692

 

 

 

 

 

Directors’ deferred compensation plan:

 

 

 

 

 

 

 

 

 

 

 

Issuance of 1,599 shares

 

 

2

 

(2

)

 

 

 

 

Contribution

 

370

 

 

 

370

 

 

 

 

 

Dividend

 

 

 

 

127

 

(127

)

 

 

Nonvested stock awards

 

 

 

 

 

 

 

 

 

 

 

Issuance of 37,338 shares

 

1,906

 

75

 

1,831

 

 

 

 

 

Deferred compensation

 

(2,000

)

 

 

 

 

(2,000

)

 

 

Expense

 

1,291

 

 

 

 

 

1,291

 

 

 

Vested stock options

 

2,519

 

 

 

2,519

 

 

 

 

 

BALANCE, JUNE 30, 2005

 

$

2,121,117

 

$

163,965

 

$

665,006

 

$

1,302,869

 

$

(10,723

)

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2005

 

$

2,194,722

 

$

164,331

 

$

676,830

 

$

1,386,405

 

$

(32,844

)

Net income

 

143,851

 

 

 

 

 

143,851

 

 

 

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

 

(16,358

)

 

 

 

 

 

 

(16,358

)

Comprehensive income

 

127,493

 

 

 

 

 

 

 

 

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.54 per share)

 

(66,508

)

 

 

 

 

(66,508

)

 

 

Issuance of 89,574 shares for dividend reinvestment and stock purchase plan

 

3,162

 

179

 

2,983

 

 

 

 

 

Issuance of 16,685 shares for employee stock purchase dividend reinvestment plan

 

643

 

33

 

610

 

 

 

 

 

Issuance of 50,606 shares for employee stock option plan

 

1,083

 

101

 

982

 

 

 

 

 

Directors’ deferred compensation plan:

 

 

 

 

 

 

 

 

 

 

 

Issuance of 4,575 shares

 

143

 

9

 

134

 

 

 

 

 

Contribution

 

690

 

 

 

690

 

 

 

 

 

Dividend

 

 

 

 

102

 

(102

)

 

 

Nonvested stock awards and units

 

 

 

 

 

 

 

 

 

 

 

Issuance of 148,641 shares

 

375

 

297

 

78

 

 

 

 

 

Repurchase of 37,252 shares for tax settlement

 

(1,431

)

(74

)

(1,357

)

 

 

 

 

Expense

 

3,333

 

 

 

3,333

 

 

 

 

 

Vested stock options

 

1,422

 

 

 

1,422

 

 

 

 

 

Adjustment for adoption of SFAS No. 123R

 

 

 

 

(3,206

)

3,206

 

 

 

Issuance of 41,084,826 shares for the 3 for 2 stock split

 

(82

)

82,170

 

(82,252

)

 

 

 

 

BALANCE, JUNE 30, 2006

 

$

2,265,045

 

$

247,046

 

$

600,349

 

$

1,466,852

 

$

(49,202

)

 

See Notes to Consolidated Financial Statements.

5




MERCANTILE BANKSHARES CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS

Increase (decrease) in cash and cash equivalents

 

For the 6 months ended June 30,

 

(Dollars in thousands)

 

2006

 

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

143,851

 

$

130,500

 

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

 

 

 

 

 

Provision for credit losses

 

 

756

 

Depreciation

 

7,822

 

7,560

 

Amortization of other intangible assets

 

4,542

 

4,251

 

Tax benefit from the issuance of stock-based compensation

 

99

 

 

Write-downs of other real estate owned

 

 

1

 

Gains on sales of other real estate owned

 

(7

)

(153

)

Loss (gains) on sales of investments securities

 

13

 

(490

)

Gains on sales of premises

 

(103

)

(4,541

)

Net increase in loans held-for-sale

 

(36,292

)

(5,754

)

Net increase in assets:

 

 

 

 

 

Interest receivable

 

(3,754

)

(444

)

Nonmarketable investments

 

(9,829

)

(6,683

)

Other assets

 

(10,503

)

(4,472

)

Net increase (decrease) in liabilities:

 

 

 

 

 

Interest payable

 

6,774

 

3,591

 

Other liabilities

 

(11,797

)

(27,356

)

Net cash provided by operating activities

 

90,816

 

96,766

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from maturities of investment securities held-to-maturity

 

1,127

 

2,120

 

Proceeds from maturities of investment securities available-for-sale

 

492,581

 

425,262

 

Proceeds from sales of investment securities available-for-sale

 

1,791

 

89,878

 

Purchases of investment securities held-to-maturity

 

 

(408,727

)

Purchases of investment securities available-for-sale

 

(540,550

)

 

Net increase in loans

 

(440,535

)

(465,812

)

Proceeds from sales of other real estate owned

 

2,241

 

273

 

Capital expenditures

 

(10,426

)

(10,189

)

Proceeds from sales of premises

 

536

 

5,893

 

Business acquisitions (net of cash received)

 

 

(78,655

)

Business acquisitions contingent consideration

 

(8,806

)

 

Purchases of nonmarketable investments

 

(5,866

)

(3,926

)

Net cash used in investing activities

 

(507,907

)

(443,883

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

67,636

 

136,463

 

Net increase in interest-bearing deposits

 

299,421

 

268,181

 

Net increase in short-term borrowings

 

194,405

 

295,219

 

Repayment of long-term debt

 

(77,545

)

(67,212

)

Tax benefit from the issuance of stock-based compensation

 

983

 

 

Excess tax benefit related to stock-based compensation

 

327

 

 

Proceeds from issuance of shares

 

4,745

 

5,226

 

Repurchase of common shares

 

(1,431

)

 

Dividends paid

 

(66,508

)

(57,897

)

Net cash provided by financing activities

 

422,033

 

579,980

 

Net increase in cash and cash equivalents

 

4,942

 

232,863

 

Cash and cash equivalents at beginning of period

 

394,840

 

245,134

 

Cash and cash equivalents at end of period

 

$

399,782

 

$

477,997

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

Cash payments for interest

 

$

143,209

 

$

75,916

 

Cash payments for income taxes

 

87,998

 

91,109

 

 

See Notes to Consolidated Financial Statements.

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”) (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 purposes of comparability, certain prior period amounts have been reclassified to conform to 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 Bankshares’ Annual Report on Form 10-K for more detail.

On January 10, 2006, Bankshares announced a three-for-two stock split on its common stock payable in the form of a stock dividend on January 27, 2006 to stockholders of record as of the close of business on January 20, 2006.  For comparative purposes, certain share, average share and per share amounts have been restated.

2.  Business Combinations / Restructuring

The following provides information concerning acquisitions and restructurings.  Acquisitions were accounted for as purchases with the results of their operations subsequent to the acquisition date included in Bankshares’ Statements of Consolidated Income.

On March 27, 2006, Bankshares signed a definitive merger agreement with James Monroe Bancorp, Inc. (“James Monroe”).  The acquisition of this Arlington, Virginia-based commercial bank was completed on July 17, 2006, and it was merged into Mercantile-Safe Deposit & Trust Company (“MSD&T”).  Under the terms of the agreement, shareholders of James Monroe were entitled to elect to receive either cash in the amount of $23.50 for each share, or .6033 shares of Bankshares common stock for each share of James Monroe common stock they held.  The total consideration paid to James Monroe shareholders in connection with the acquisition was $71.4 million and 1.8 million shares of Bankshares’ common stock.  Bankshares’ acquisition of James Monroe, as of July 17, 2006, will add approximately $552 million in total assets, $414 million in gross loans, $434 million in total deposits, and six full-service branches and a loan production office located in Northern Virginia and suburban Washington, D.C.  For additional information, see the Form 8-K filed in connection with the merger on March 27, 2006.

On May 18, 2005, Bankshares completed its acquisition of Community Bank of Northern Virginia (“CBNV”), a bank headquartered in Sterling, Virginia, which was merged into MSD&T.  The total consideration paid to CBNV shareholders in connection with the acquisition was $82.9 million in cash and 3.7 million shares of Bankshares’ common stock.  The transaction resulted in total assets acquired as of May 18, 2005 of $888.2 million, including $671.0 million of loans and leases; liabilities assumed were $842.3 million, including $626.9 million of deposits.  Additionally, Bankshares recorded $162.9 million of goodwill and $4.6 million of core deposit intangibles.  Bankshares expensed no merger-related costs for the six-month period ended June 30, 2006 and has expensed $1.3 million since the inception of the merger.

7




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, restricted stock units and vested directors’ deferred compensation plan shares.  The following tables provide reconciliations between the computation of basic EPS and diluted EPS for the six and three months ended June 30, 2006 and 2005, respectively.

 

 

 

For the 6 months ended June 30,

 

 

 

2006

 

2005

 

(In thousands, except per share data)

 

Net
Income

 

Weighted
Average
Common
Shares

 

EPS

 

Net
Income

 

Weighted
Average
Common
Shares

 

EPS

 

Basic EPS

 

$

143,851

 

123,133

 

$

1.17

 

$

130,500

 

119,812

 

$

1.09

 

Dilutive effect of :

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

768

 

 

 

 

 

603

 

 

 

Restricted stock awards and units

 

 

 

112

 

 

 

 

 

112

 

 

 

Vested directors’ deferred compensation plan shares

 

 

 

292

 

 

 

 

 

255

 

 

 

Diluted EPS

 

$

143,851

 

124,305

 

$

1.16

 

$

130,500

 

120,782

 

$

1.08

 

 

 

 

 

For the 3 months ended June 30,

 

 

 

2006

 

2005

 

(In thousands, except per share data)

 

Net
Income

 

Weighted
Average
Common
Shares

 

EPS

 

Net
Income

 

Weighted
Average
Common
Shares

 

EPS

 

Basic EPS

 

$

73,092

 

123,222

 

$

0.59

 

$

67,873

 

120,772

 

$

0.56

 

Dilutive effect of :

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

743

 

 

 

 

 

601

 

 

 

Restricted stock awards and units

 

 

 

65

 

 

 

 

 

110

 

 

 

Vested directors’ deferred compensation plan shares

 

 

 

294

 

 

 

 

 

258

 

 

 

Diluted EPS

 

$

73,092

 

124,324

 

$

0.59

 

$

67,873

 

121,741

 

$

0.56

 

 

Antidilutive options, awards and units excluded from the computation of diluted earnings per share were 311,207 and 314,961 for the six months ended June 30, 2006 and 2005, respectively and 581,790 and 468,483 for the second quarter of 2006 and 2005, respectively.

8




4.  Investment Securities

At June 30, 2006 and December 31, 2005, securities with an amortized cost of $1.4 billion and $1.3 billion, respectively, were pledged as collateral for repurchase transactions and certain deposits as required by regulatory guidelines.  The following table shows the amortized cost and fair value of investment securities at June 30, 2006 and December 31, 2005.

 

 

 

June 30, 2006

 

December 31, 2005

 

(Dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Investment securities held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

15,532

 

$

366

 

$

27

 

$

15,871

 

$

16,659

 

$

541

 

$

19

 

$

17,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

439,856

 

$

 

$

4,923

 

$

434,933

 

$

434,893

 

$

223

 

$

3,080

 

$

432,036

 

U.S. Government agencies

 

995,392

 

 

14,670

 

980,722

 

992,040

 

29

 

12,761

 

979,308

 

Mortgage-backed securities

 

1,623,647

 

346

 

58,014

 

1,565,979

 

1,581,845

 

685

 

38,269

 

1,544,261

 

States and political subdivisions

 

63,670

 

45

 

472

 

63,243

 

70,017

 

306

 

188

 

70,135

 

Other bonds, notes and debentures

 

16,137

 

 

263

 

15,874

 

19,083

 

 

215

 

18,868

 

Total bonds

 

3,138,702

 

391

 

78,342

 

3,060,751

 

3,097,878

 

1,243

 

54,513

 

3,044,608

 

Other investments

 

49,321

 

1,076

 

1,440

 

48,957

 

43,980

 

1,236

 

196

 

45,020

 

Total

 

$

3,188,023

 

$

1,467

 

$

79,782

 

$

3,109,708

 

$

3,141,858

 

$

2,479

 

$

54,709

 

$

3,089,628

 

 

The following table shows the unrealized gross losses and fair value of securities in the securities available-for-sale portfolio at June 30, 2006, by length of time that individual securities in each category have been in a continuous loss position.

 

 

Less than 12 Months

 

12 months or more

 

Total

 

(Dollars in thousands)

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. Treasury

 

$

2,715

 

$

321,877

 

$

2,208

 

$

113,056

 

$

4,923

 

$

434,933

 

U.S. Government agencies

 

5,086

 

473,034

 

9,584

 

507,688

 

14,670

 

980,722

 

Mortgage-backed securities

 

17,330

 

798,954

 

40,684

 

767,025

 

58,014

 

1,565,979

 

States and political subdivisions

 

431

 

59,197

 

41

 

4,046

 

472

 

63,243

 

Other bonds, notes and debentures

 

87

 

6,751

 

176

 

9,123

 

263

 

15,874

 

Total bonds

 

25,649

 

1,659,813

 

52,693

 

1,400,938

 

78,342

 

3,060,751

 

Other investments

 

1,440

 

48,957

 

 

 

1,440

 

48,957

 

Total

 

$

27,089

 

$

1,708,770

 

$

52,693

 

$

1,400,938

 

$

79,782

 

$

3,109,708

 

 

At June 30, 2006, there were $1.4 billion of individual securities that had unrealized losses for a period greater than 12 months.  At June 30, 2006, these securities had an unrealized loss of $52.7 million of which 54.7% were mortgage-backed securities. Management has assessed the impairment of these securities and determined that the impairment is temporary.  All principal and interest payments on available-for-sale debt securities in an unrealized loss position for greater than 12 months are expected to be collected given the high credit quality of the U.S. government agency debt securities and Bankshares’ ability and intent to hold the securities until the value recovers or they mature.

9




5.  Allowance for Loan Losses and Reserve for Unfunded Commitments

During the first quarter of 2006, Bankshares refined the model used for determining certain components of the allowance for loan losses. The model refinement did not have a material impact on Bankshares’ recorded allowance for loan losses. Additionally, Bankshares reclassified a portion of the allowance for loan losses to a reserve for unfunded lending commitments reflected in other liabilities in the consolidated balance sheet.  As a result of the refinement of the modeling process for the allowance for loan losses, Bankshares was able specifically to identify risk inherent in unfunded commitments and make the reclassification noted above.  As no model data existed for previous years, prior period data has not been reclassified for comparability.

The allowance for loan losses and reserve for unfunded commitments is presented below.

 

 

For the 6 months ended June 30,

 

For the 3 months ended June 30,

 

(Dollars in thousands)

 

2006

 

2005

 

2006

 

2005

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

156,673

 

$

149,002

 

$

141,874

 

$

149,017

 

Allowance of acquired bank

 

 

7,086

 

 

7,086

 

Provision for credit losses

 

(990

)

756

 

 

 

Transfer to reserve for unfunded commitments

 

(13,968

)

 

 

 

Total

 

141,715

 

156,844

 

141,874

 

156,103

 

Charge-offs

 

(2,228

)

(3,115

)

(850

)

(1,173

)

Recoveries

 

3,373

 

3,372

 

1,836

 

2,171

 

Net recoveries (charge-offs)

 

1,145

 

257

 

986

 

998

 

Balance, end of period

 

$

142,860

 

$

157,101

 

$

142,860

 

$

157,101

 

 

 

 

 

 

 

 

 

 

 

Reserve for Unfunded Commitments

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

 

$

 

$

14,958

 

$

 

Provision for credit losses

 

990

 

 

 

 

Transfer from allowance for loan losses

 

13,968

 

 

 

 

Balance, end of period

 

$

14,958

 

$

 

$

14,958

 

$

 

 

6.  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 Nos. 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.  Information with respect to impaired loans and the related valuation allowance (if the measure of the impaired loan is less than the recorded investment) at June 30, 2006, December 31, 2005 and June 30, 2005 is shown below.  See Bankshares’ Annual Report on Form 10-K for more detail.

10




 

(Dollars in thousands)

 

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

Impaired loans with a specific valuation allowance

 

$

2,474

 

$

11,512

 

$

16,460

 

All other impaired loans

 

25,030

 

9,086

 

8,746

 

Total impaired loans

 

$

27,504

 

$

20,598

 

$

25,206

 

 

 

 

 

 

 

 

 

Specific allowance for loan losses applicable to impaired loans

 

$

2,054

 

$

4,150

 

$

10,225

 

General allowance for loan losses applicable to other than impaired loans

 

140,806

 

152,523

 

146,876

 

Total allowance for loan losses

 

$

142,860

 

$

156,673

 

$

157,101

 

 

 

 

 

 

 

 

 

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

 

$

76

 

$

128

 

$

53

 

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

 

$

22,448

 

$

26,703

 

$

27,887

 

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

 

$

41

 

$

14

 

$

30

 

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

 

$

24,133

 

$

24,817

 

$

26,993

 

 

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.

On May 18, 2005, Bankshares acquired, as part of the CBNV acquisition, two commercial real estate loans totaling $4.9 million that were within the scope of American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”  One of the loans was subsequently paid in full and the remaining loan is deemed to be immaterial for purposes of the required disclosures.

7.  Commitments and Contingencies

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 $4.9 billion at June 30, 2006, $4.8 billion at December 31, 2005, and $4.7 billion at June 30, 2005.

Letters of credit are commitments issued to guarantee the performance of a customer to a third party.  Outstanding letters of credit were $564.3 million at June 30, 2006, $540.6 million at December 31, 2005 and $438.3 million at June 30, 2005.  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 June 30, 2006, December 31, 2005, and June 30, 2005 had a carrying value of $2.9 million, $2.7 million and $2.3 million, respectively.

One of Bankshares’ mortgage-banking subsidiaries 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 $268.5 million, $249.8 million and $225.8 million at June 30, 2006, December 31, 2005 and June 30, 2005, respectively.  The loss reserve for potential losses on loans originated and sold in the secondary market was $84.0 thousand at June 30, 2006 and $60.7 thousand at December 31, 2005.  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 $1.0 million at June 30, 2006 and $1.3 million at both December 31, 2005 and June 30, 2005.  These mortgages are generally in good standing and are well collateralized; no loss has ensued and no future loss is expected.

11




Bankshares has committed to invest funds in third-party private equity investments.  At June 30, 2006, December 31, 2005 and June 30, 2005, $25.6 million, $26.6 million and $30.0 million, respectively, remained unfunded.

In the ordinary course of business, Bankshares and its subsidiaries are involved in a number of pending and threatened legal actions and proceedings.  In certain of these actions and proceedings, claims for substantial monetary damages are asserted against Bankshares and its subsidiaries.  In view of the inherent difficulty of predicting the outcome of such matters, Bankshares cannot state what the eventual outcome of pending matters will be.  However, based on current knowledge, management does not believe that liabilities, if any, arising from pending litigation matters, will have a material adverse effect on the consolidated financial position, earnings or liquidity of Bankshares.  If payment associated with a claim becomes probable and the cost can be reasonably estimated, a contingent liability would be established based on information currently available, advice of counsel and available insurance coverage.

8.  Goodwill and Other Intangible Assets

Goodwill, net, totaled $679.7 million at June 30, 2006 and $670.0 million at December 31, 2005.  In 2005, Bankshares recorded $162.9 million in goodwill in connection with the CBNV acquisition.  In the first quarter of 2006, there was an increase in goodwill of $8.8 million related to a payment made in contingent consideration to the management of Boyd Watterson Asset Management as they met the performance conditions outlined in the merger agreement.

The following table discloses the gross carrying amount and accumulated amortization of intangible assets subject to amortization at June 30, 2006 and December 31, 2005.

 

 

 

June 30, 2006

 

December 31, 2005

 

(Dollars in thousands)

 

Gross
carrying
amount

 

Accumulated
amortization

 

Net
amount

 

Gross
carrying
amount

 

Accumulated
amortization

 

Net
amount

 

Core deposits

 

$

54,509

 

$

(23,765

)

$

30,744

 

$

54,509

 

$

(20,790

)

$

33,719

 

Mortgage servicing

 

3,116

 

(1,258

)

1,858

 

2,902

 

(1,145

)

1,757

 

Customer lists and other

 

17,845

 

(8,044

)

9,801

 

17,845

 

(6,668

)

11,177

 

Total

 

$

75,470

 

$

(33,067

)

$

42,403

 

$

75,256

 

$

(28,603

)

$

46,653

 

 

In connection with the CBNV acquisition, Bankshares recorded $4.6 million in core deposit intangibles.  The core deposit intangible from CBNV is amortized over a weighted average remaining useful life of nine years on a straight-line basis.

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 or adjusting the estimated life of the asset.  Any impairment recognized in a valuation account is reflected in the income statement in the corresponding period.

12




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 June 30, 2006.  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
Deposits

 

Mortgage
Servicing

 

Customer Lists
and Other

 

Total

 

Six months ended June 30, 2006 (actual)

 

 

 

$

2,975

 

$

180

 

$

1,387

 

$

4,542

 

Six months ended December 31, 2006 (estimated)

 

 

 

2,975

 

140

 

1,231

 

4,346

 

Twelve months ended December 31, 2006 (estimated)

 

 

 

$

5,950

 

$

320

 

$

2,618

 

$

8,888

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimate for years ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

$

5,747

 

$

274

 

$

2,533

 

$

8,554

 

 

 

2008

 

4,653

 

257

 

1,637

 

6,547

 

 

 

2009

 

4,502

 

257

 

641

 

5,400

 

 

 

2010

 

4,502

 

236

 

505

 

5,243

 

 

9.  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 six months and three months ended June 30, 2006 and 2005, respectively.  Total comprehensive income is included in the Statements of Changes in Consolidated Shareholders’ Equity.

 

 

For the 6 months ended June 30,

 

 

 

2006

 

2005

 

(Dollars in thousands)

 

Pretax
Amount

 

Tax
(Expense)
Benefit

 

Net
 Amount

 

Pretax
Amount

 

Tax
(Expense)
Benefit

 

Net
Amount

 

Net Income

 

 

 

 

 

$

143,851

 

 

 

 

 

$

130,500

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(26,097

)

9,731

 

(16,366

)

(12,477

)

4,775

 

(7,702

)

Reclassification adjustment for (gains) losses included in net income

 

13

 

(5

)

8

 

(490

)

194

 

(296

)

Total other comprehensive income

 

(26,084

)

9,726

 

(16,358

)

(12,967

)

4,969

 

(7,998

)

Total comprehensive income

 

 

 

 

 

$

127,493

 

 

 

 

 

$

122,502

 

 

 

 

 

For the 3 months ended June 30,

 

 

 

2006

 

2005

 

(Dollars in thousands)

 

Pretax
Amount

 

Tax
(Expense)
Benefit

 

Net
 Amount

 

Pretax
Amount

 

Tax
(Expense)
Benefit

 

Net
Amount

 

Net Income

 

 

 

 

 

$

73,092

 

 

 

 

 

$

67,873

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(11,265

)

4,192

 

(7,073

)

(19,744

)

(7,256

)

12,488

 

Reclassification adjustment for (gains) losses included in net income

 

 

 

 

(76

)

30

 

(46

)

Total other comprehensive income

 

(11,265

)

4,192

 

(7,073

)

(19,668

)

(7,226

)

12,442

 

Total comprehensive income

 

 

 

 

 

$

66,019

 

 

 

 

 

$

80,315

 

 

13




10.  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 June 30, 2006, Bankshares and each of its bank affiliates exceeded all capital adequacy requirements to be considered well capitalized.

Actual capital amounts and ratios are presented in the following table for Bankshares and its affiliates.

 

June 30, 2006
(Dollars in thousands)

 

Tier I
Capital

 

Total
Risk-Based
Capital

 

Net
Risk-Weighted
Assets

 

Adjusted
Average
Total Assets

 

Tier I
Capital
Ratio

 

Total
Capital
Ratio

 

Leverage
Ratio

 

Bankshares

 

$

1,597,978

 

$

2,049,782

 

$

13,346,820

 

$

16,000,332

 

11.97

%

15.36

%

9.99

%

Annapolis Banking & Trust

 

43,962

 

51,224

 

340,939

 

478,732

 

12.89

 

15.02

 

9.18

 

Citizens National Bank

 

107,036

 

154,814

 

1,176,819

 

1,324,604

 

9.10

 

13.16

 

8.08

 

Farmers & Mechanics Bank

 

166,507

 

227,647

 

1,356,200

 

1,695,357

 

12.28

 

16.79

 

9.82

 

Marshall National Bank & Trust

 

13,587

 

20,021

 

138,278

 

181,032

 

9.83

 

14.48

 

7.51

 

Mercantile County Bank

 

81,471

 

118,289

 

732,072

 

941,815

 

11.13

 

16.16

 

8.65

 

Mercantile Eastern Shore Bank

 

54,074

 

85,376

 

471,352

 

602,238

 

11.47

 

18.11

 

8.98

 

Mercantile Peninsula Bank

 

148,022

 

219,360

 

1,396,872

 

1,763,519

 

10.60

 

15.70

 

8.39

 

Mercantile-Safe Deposit & Trust Company

 

542,958

 

661,045

 

6,053,819

 

7,167,270

 

8.97

 

10.92

 

7.58

 

Mercantile Southern Maryland Bank

 

95,251

 

132,077

 

679,647

 

980,757

 

14.01

 

19.43

 

9.71

 

National Bank of Fredericksburg

 

38,737

 

49,492

 

384,705

 

473,753

 

10.07

 

12.86

 

8.18

 

Westminster Union Bank

 

69,578

 

100,048

 

520,477

 

820,147

 

13.37

 

19.22

 

8.48

 

 

December 31, 2005
(Dollars in thousands)

 

Tier I
Capital

 

Total
Risk-Based
Capital

 

Net
Risk-Weighted
Assets

 

Adjusted
Average
Total Assets

 

Tier I
Capital
Ratio

 

Total
Capital
Ratio

 

Leverage
Ratio

 

Bankshares

 

$

1,518,454

 

$

1,975,313

 

$

12,848,926

 

$

15,471,385

 

11.82

%

15.37

%

9.81

%

Annapolis Banking & Trust

 

43,148

 

50,382

 

331,167

 

484,567

 

13.03

 

15.21

 

8.90

 

Citizens National Bank

 

103,600

 

151,903

 

1,139,217

 

1,281,737

 

9.09

 

13.33

 

8.08

 

Farmers & Mechanics Bank

 

164,489

 

225,553

 

1,341,615

 

1,700,721

 

12.26

 

16.81

 

9.67

 

Marshall National Bank & Trust

 

12,661

 

19,235

 

132,110

 

164,212

 

9.58

 

14.56

 

7.71

 

Mercantile County Bank

 

77,489

 

116,005

 

728,884

 

916,864

 

10.63

 

15.92

 

8.45

 

Mercantile Eastern Shore Bank

 

52,538

 

83,614

 

451,831

 

575,426

 

11.63

 

18.51

 

9.13

 

Mercantile Peninsula Bank

 

141,149

 

214,251

 

1,336,315

 

1,677,958

 

10.56

 

16.03

 

8.41

 

Mercantile-Safe Deposit & Trust Company

 

509,252

 

624,036

 

5,795,437

 

6,721,535

 

8.79

 

10.77

 

7.58

 

Mercantile Southern Maryland Bank

 

94,717

 

131,461

 

620,898

 

954,636

 

15.25

 

21.17

 

9.92

 

National Bank of Fredericksburg

 

37,081

 

48,169

 

353,718

 

455,590

 

10.48

 

13.62

 

8.14

 

Westminster Union Bank

 

66,961

 

98,053

 

509,424

 

810,677

 

13.14

 

19.25

 

8.26

 

 

Bankshares has an ongoing share repurchase program.  Purchases may be made from time to time, subject to regulatory requirements, in open market or in privately negotiated transactions.  Purchased shares are retired.  During the six months ended June 30, 2006, Bankshares purchased 37,252 shares in net settlement of the minimum tax liability for vested restricted stock.  On June 13, 2006, Bankshares’ Board of Directors authorized the repurchase of an additional 2,000,000 shares to the 677,000 shares remaining from a previously announced program.  At June 30, 2006, there were approximately 2.68 million shares remaining available for repurchase under the program.

14




 

11.  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 the operating results of which management relies on for decision-making and performance assessment. Bankshares has two reportable segments — Banking and Investment and Wealth Management (“IWM”).  The Banking segment is comprised of 11 affiliate banks.  During 2005, the Private Bank Group of Mercantile-Safe Deposit and Trust Company was consolidated into the Private Banking Group of  IWM.  The segment results have been reclassified to conform to current presentation for comparability.  Additionally, as loans and deposits are now being reflected in the IWM segment, a funds transfer-pricing model was utilized to match the duration of the funding and investment of the IWM segment assets and liabilities.

The tables below present selected segment information for the six and three months ended June 30, 2006 and 2005.  The components in the “Other” column consist of amounts for the nonbank affiliates, unallocated corporate expenses, including income taxes, and intercompany eliminations.  Certain expense amounts such as operations overhead were reclassified from internal financial reporting in order to provide for full cost absorption.  These reclassifications are shown in the “Adjustments” line.

 

 

 

For the 6 months ended June 30, 2006

 

For the 6 months ended June 30, 2005

 

(Dollars in thousands)

 

Banking

 

IWM

 

Other

 

Total

 

Banking

 

IWM

 

Other

 

Total

 

Net interest income

 

$

313,993

 

$

5,942

 

$

(212

)

$

319,723

 

$

291,444

 

$

4,222

 

$

(216

)

$

295,450

 

Provision for credit losses

 

 

 

 

 

(756

)

 

 

(756

)

Noninterest income

 

60,857

 

55,200

 

9,017

 

125,074

 

62,479