UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003,
2004, or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number: 0-10587
FULTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 23-2195389 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania | 17604 | |
(Address of principal executive offices) | (Zip Code) |
(717) 291-2411
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
Indicate by check mark whether the Registrantregistrant (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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the Registrantregistrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The aggregate market value of the voting stockCommon Stock held by non-affiliates of the Registrant atregistrant, based on the average bid and asked prices on June 30, 20032004, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.9$2.3 billion. The number of shares of the Registrant’sregistrant’s Common Stock outstanding on February 27, 200428, 2005 was 108,284,000.125,978,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 22, 200413, 2005 are incorporated by reference in Part III.
General
Fulton Financial Corporation (the Corporation) was incorporated under the laws of Pennsylvania on February 8, 1982 and became a bank holding company through the acquisition of all of the outstanding stock of Fulton Bank on June 30, 1982. In 2000, the Corporation became a financial holding company as defined in the Gramm-Leach-Bailey Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See “Competition” and “Regulation and Supervision”). The Corporation directly owns 100% of the common stock of eleventhirteen community banks, two financial services companies and eightnine non-bank entities.
The common stock of Fulton Financial Corporation is listed for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System under the symbol FULT. The Corporation’s Internet address iswww.fult.com. Electronic copies of the Corporation’s 20032004 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section ofwww.fult.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this Internet address. These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (SEC).
Bank and Financial Services Subsidiaries
The Corporation’s eleventhirteen subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a fourfive state region (Pennsylvania, Maryland, New Jersey, Delaware and Delaware)Virginia). Pursuant to its “super-community” banking strategy, the Corporation operates the banks autonomously to maximize the advantage of community banking and service to its customers. Where appropriate, operations are centralized through common platforms and back-office functions; however, decision-making generally remains with the local bank management.
The subsidiary banks are located in areas whichthat are home to a wide range of manufacturing, distribution, health care and other service companies. The Corporation and its banks are not dependent upon one or a few customers or any one industry and the loss of any single customer or a few customers would not have a material adverse impact on any of the subsidiary banks.
Each of the subsidiary banks offers a full range of consumer and commercial banking services in its local market area. Personal banking services include various checking and savings products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their respective market areas. Secured lending optionsloan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the lending policy. Residential mortgage lending options are provided by allSubsidiary banks in conjunction with Fulton Mortgage Company, which offersalso offer a wide variety of fixed and variable-rate products, including construction loans and jumbo loans. These loansResidential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank (except for Resource Bank, which maintains its own mortgage lending operation). Residential mortgages are generally underwritten based on secondary market standards. Loans secured by newConsumer loan products also include automobile loans, automobile and used vehicles are also offered, as well as vehicle leasing. Unsecured lending options includeequipment leases, credit cards, personal lines of credit and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales of less than $100 million) in the subsidiary banks’ market areas. Loans to one borrower are generally limited to $30 million in total commitments, which is below the Corporation’s regulatory lending limit. Commercial lending options include commercial, financial, and agricultural and real estate loans. Both floating and fixed rate loans are provided, with floating loans generally tied to an index such as the Prime rateRate or LIBOR (London Interbank Offered Rate). The Corporation’s commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, construction lending, equipment leasing, credit cards, letters of credit, cash management services and traditional deposit products are offered to commercial customers.
Through its financial services subsidiaries, the Corporation offers investment management, trust, brokerage, insurance and investment advisory services in the market areas serviced by the subsidiary banks.
The Corporation’s subsidiary banks deliver their products and services through traditional branch banking, with a network of full service branch offices. Electronic delivery channels include a network of automated teller machines, telephone banking and PConline banking through the Internet. The variety of available delivery channels allows customers to access their account information and perform certain transactions such as transferring funds and paying bills at virtually any hour of the day.
The following table provides geographical and statisticalcertain information for the Corporation’s banking and financial services subsidiaries.subsidiaries as of December 31, 2004.
Subsidiary | Main Office Location | Total Assets | Total Deposits | Full-Time Equivalent Employees | Branches (1) | Main Office Location | Total Assets | Total Deposits | Branches (1) | |||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||
Fulton Bank | Lancaster, PA | $ | 4,083 | $ | 2,567 | 775 | 73 | Lancaster, PA | $ | 3,975 | $ | 2,596 | 71 | |||||||||
Lebanon Valley Farmers Bank | Lebanon, PA | 780 | 637 | 154 | 14 | Lebanon, PA | 744 | 604 | 14 | |||||||||||||
Swineford National Bank | Hummels Wharf, PA | 289 | 212 | 85 | 7 | Hummels Wharf, PA | 250 | 199 | 7 | |||||||||||||
Lafayette Ambassador Bank | Easton, PA | 1,237 | 947 | 279 | 24 | Easton, PA | 1,178 | 945 | 24 | |||||||||||||
FNB Bank, N.A. | Danville, PA | 293 | 209 | 72 | 8 | Danville, PA | 271 | 203 | 8 | |||||||||||||
Hagerstown Trust | Hagerstown, MD | 467 | 375 | 127 | 13 | Hagerstown, MD | 459 | 397 | 13 | |||||||||||||
Delaware National Bank | Georgetown, DE | 367 | 276 | 117 | 12 | Georgetown, DE | 374 | 277 | 13 | |||||||||||||
The Bank | Woodbury, NJ | 1,064 | 846 | 284 | 27 | Woodbury, NJ | 1,075 | 907 | 27 | |||||||||||||
The Peoples Bank of Elkton | Elkton, MD | 105 | 86 | 34 | 2 | Elkton, MD | 109 | 93 | 2 | |||||||||||||
Skylands Community Bank | Hackettstown, NJ | 412 | 323 | 84 | 9 | Hackettstown, NJ | 452 | 374 | 10 | |||||||||||||
Premier Bank | Doylestown, PA | 544 | 347 | 70 | 7 | Doylestown, PA | 520 | 344 | 7 | |||||||||||||
Fulton Financial Advisors, N.A. and Fulton Insurance | Lancaster, PA | — | — | 195 | — | |||||||||||||||||
Fulton Financial (Parent Company) | Lancaster, PA | — | — | 674 | — | |||||||||||||||||
Resource Bank | Virginia Beach, VA | 1,161 | 586 | 6 | ||||||||||||||||||
First Washington State Bank | Windsor, NJ | 585 | 426 | 16 | ||||||||||||||||||
Fulton Financial Advisors, N.A. and Fulton Insurance Services Group, Inc (2) | Lancaster, PA | — | — | — | ||||||||||||||||||
2,950 | 196 | 218 | ||||||||||||||||||||
(1) | See additional information in “Item 2. Properties”. |
(2) |
Dearden, Maguire, Weaver and Barrett LLC, an investment management and advisory company, is a wholly-owned subsidiary of Fulton Financial Advisors, N.A. |
Non-Bank Subsidiaries
The Corporation also owns 100% of the common stock of eightnine non-bank subsidiaries: (i) Fulton Reinsurance Company, which engages in the business of reinsuring credit life and accident and health insurance directly related to extensions of credit by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds title to or leases certain properties upon which Corporation branch offices and other facilities are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership interests in partnerships invested in low and moderate income housing projects; (iv) FFC Management, Inc., which owns certain investment securities and other passive investments; (v) FFC Penn Square, Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of the Corporation’s largest bank subsidiary; (vi) Drovers Capital Trust I, a Delaware business trust whose sole asset is $7.7 million of junior subordinated deferrable interest debentures from the Corporation; (vii) PBI Capital Trust, a Delaware business trust whose sole asset is $10.3 million of junior subordinated deferrable interest debentures from the Corporation; and (viii)(vii) Premier Capital Trust II, a Delaware business trust whose sole asset is $15.5 million of junior subordinated deferrable interest debentures from the Corporation; (viii) Resource Capital Trust II, a Delaware business trust whose sole asset is $5.2 million of junior subordinated deferrable interest debentures from the Corporation; and (ix) Resource Capital Trust III, a Delaware business trust whose sole asset is $3.1 million of junior subordinated deferrable interest debentures from the Corporation.
Competition
The banking and financial services industries are highly competitive. Within its geographical region, the Corporation’s subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national banks, and credit unions. With the growth in electronic commerce and distribution channels, the banks also face competition from banks not physically located in the Corporation’s geographical markets.
The competition in the industry has also increased in recent years as a result of the passage of the GLB Act. Under the GLB Act, banks, insurance companies or securities firms may affiliate under a financial holding company structure, allowing expansion into non-
bankingnon-banking financial services activities that were previously restricted. These include a full range of banking, securities and insurance activities, including securities and insurance underwriting, issuing and selling annuities and merchant banking activities. While the Corporation does not currently engage in all of these activities, the ability to do so without separate approval from the Federal Reserve Board enhances the ability of the Corporation – and financial holding companies in general – to compete more effectively in all areas of financial services.
As a result of the GLB Act, there is more competition for customers that were traditionally served by the banking industry. While the GLB Act increased competition, it also provided opportunities for the Corporation to expand its financial services offerings, such as insurance products through Fulton Insurance Services Group, Inc. The Corporation also competes through the variety of products that it offers and the quality of service that it provides to its customers. However, there is no guarantee that these efforts will insulate the Corporation from competitive pressure, which could impact its pricing decisions for loans, deposits and other services and could ultimately impact financial results.
Market Share
Although there are many ways to assess the size and strength of banks, deposit market share continues to be an important industry statistic. This publicly available information is compiled, annuallyas of June 30th of each year by the Federal Deposit Insurance Corporation (FDIC) and is available to the public.. The Corporation’s banks maintain branch offices in 3141 counties across four Mid-Atlanticfive states. In nine of these counties, the Corporation ranks in the top three in deposit market share (based on deposits as of June 30, 2003)2004). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.
State | Population (2003 Est.) | Banking Subsidiary | No. of Financial Institutions | Deposit Market Share (6/30/03) | No. of Financial Institutions | Deposit Market Share (6/30/04) | ||||||||||||||||||||||||
County | Banks/ Thrifts | Credit Unions | Rank | % | State | Population (2004 Est.) | Banking Subsidiary | Banks/ Thrifts | Credit Unions | Rank | % | |||||||||||||||||||
Lancaster | PA | 480,563 | Fulton Bank | 20 | 12 | 1 | 20.2 | % | PA | 485,000 | Fulton Bank | 18 | 12 | 1 | 18.6 | % | ||||||||||||||
Dauphin | PA | 254,176 | Fulton Bank | 19 | 14 | 6 | 5.1 | % | PA | 255,000 | Fulton Bank | 19 | 12 | 6 | 5.2 | % | ||||||||||||||
Cumberland | PA | 216,849 | Fulton Bank | 19 | 7 | 12 | 1.7 | % | PA | 221,000 | Fulton Bank | 19 | 7 | 12 | 1.6 | % | ||||||||||||||
York | PA | 392,956 | Fulton Bank | 17 | 19 | 3 | 9.6 | % | PA | 395,000 | Fulton Bank | 16 | 19 | 3 | 8.9 | % | ||||||||||||||
Chester | PA | 451,870 | Fulton Bank | 34 | 7 | 21 | 0.9 | % | PA | 462,000 | Fulton Bank | 30 | 6 | 18 | 1.0 | % | ||||||||||||||
Delaware | PA | 555,000 | Fulton Bank | 33 | 17 | 42 | 0.0 | % | ||||||||||||||||||||||
Montgomery | PA | 767,150 | Fulton Bank | 44 | 33 | 52 | 0.1 | % | PA | 778,000 | Fulton Bank | 40 | 30 | 49 | 0.1 | % | ||||||||||||||
Premier Bank | 41 | 0.2 | % | Premier Bank | 35 | 0.2 | % | |||||||||||||||||||||||
Berks | PA | 383,137 | Fulton Bank | 21 | 16 | 8 | 4.0 | % | PA | 389,000 | Fulton Bank | 21 | 16 | 9 | 3.3 | % | ||||||||||||||
Lebanon Valley Farmers Bank | 19 | 0.4 | % | Lebanon Valley Farmers Bank | 22 | 0.4 | % | |||||||||||||||||||||||
Lebanon | PA | 122,355 | Lebanon Valley Farmers Bank | 9 | 1 | 1 | 32.3 | % | PA | 122,000 | Lebanon Valley Farmers Bank | 9 | 2 | 1 | 33.1 | % | ||||||||||||||
Schuylkill | PA | 150,779 | Lebanon Valley Farmers Bank | 19 | 8 | 9 | 3.6 | % | PA | 147,000 | Lebanon Valley Farmers Bank | 18 | 8 | 9 | 3.5 | % | ||||||||||||||
Bucks | PA | 610,779 | Premier Bank | 32 | 12 | 13 | 3.2 | % | PA | 620,000 | Premier Bank | 31 | 12 | 14 | 2.7 | % | ||||||||||||||
Snyder | PA | 37,651 | Swineford National Bank | 7 | 0 | 1 | 33.4 | % | PA | 38,000 | Swineford National Bank | 7 | — | 1 | 30.7 | % | ||||||||||||||
Union | PA | 42,287 | Swineford National Bank | 13 | 3 | 6 | 7.9 | % | ||||||||||||||||||||||
Northumberland | PA | 93,841 | Swineford National Bank | 17 | 3 | 11 | 2.2 | % | ||||||||||||||||||||||
FNB Bank, N.A. | 7 | 5.5 | % | |||||||||||||||||||||||||||
Montour | PA | 18,360 | FNB Bank, N.A. | 5 | 3 | 1 | 30.8 | % | ||||||||||||||||||||||
Columbia | PA | 64,219 | FNB Bank, N.A. | 9 | 0 | 7 | 4.5 | % |
State | Population (2003 Est.) | Banking Subsidiary | No. of Financial Institutions | Deposit Market Share (6/30/03) | No. of Financial Institutions | Deposit Market Share (6/30/04) | ||||||||||||||||||||||||
County | Banks/ Thrifts | Credit Unions | County | State | State | Population (2003 Est.) | Banking Subsidiary | Banks/ Thrifts | Credit Unions | Rank | % | |||||||||||||||||||
Union | PA | 42,000 | Swineford National Bank | 7 | 1 | 6 | 4.6 | % | ||||||||||||||||||||||
Northumberland | PA | 96,000 | Swineford National Bank | 16 | 3 | 12 | 1.9 | % | ||||||||||||||||||||||
FNB Bank, N.A. | 8 | 4.8 | % | |||||||||||||||||||||||||||
Montour | PA | 18,000 | FNB Bank, N.A. | 4 | 3 | 1 | 28.9 | % | ||||||||||||||||||||||
Columbia | PA | 64,000 | FNB Bank, N.A. | 9 | — | 7 | 4.3 | % | ||||||||||||||||||||||
Lycoming | PA | 119,961 | FNB Bank, N.A. | 13 | 10 | 16 | 0.7 | % | PA | 119,000 | FNB Bank, N.A. | 13 | 10 | 17 | 0.6 | % | ||||||||||||||
Northampton | PA | 272,052 | Lafayette Ambassador Bank | 17 | 15 | 1 | 16.5 | % | PA | 279,000 | Lafayette Ambassador Bank | 15 | 15 | 2 | 15.3 | % | ||||||||||||||
Lehigh | PA | 315,950 | Lafayette Ambassador Bank | 30 | 31 | 26 | 0.1 | % | PA | 322,000 | Lafayette Ambassador Bank | 19 | 13 | 6 | 4.2 | % | ||||||||||||||
Washington | MD | 136,636 | Hagerstown Trust | 9 | 3 | 3 | 21.4 | % | MD | 136,000 | Hagerstown Trust | 10 | 3 | 2 | 22.0 | % | ||||||||||||||
Frederick | MD | 212,084 | Hagerstown Trust | 15 | 3 | 17 | 0.1 | % | MD | 219,000 | Hagerstown Trust | 15 | 3 | 16 | 0.1 | % | ||||||||||||||
Cecil | MD | 91,585 | Peoples Bank of Elkton | 8 | 3 | 5 | 11.3 | % | MD | 93,000 | Peoples Bank of Elkton | 8 | 3 | 4 | 11.9 | % | ||||||||||||||
Sussex | DE | 169,368 | Delaware National Bank | 13 | 4 | 7 | 1.2 | % | DE | 169,000 | Delaware National Bank | 15 | 4 | 7 | 1.6 | % | ||||||||||||||
New Castle | DE | 514,415 | Delaware National Bank | 31 | 31 | 26 | 0.1 | % | DE | 522,000 | Delaware National Bank | 32 | 29 | 26 | 0.1 | % | ||||||||||||||
Camden | NJ | 512,738 | The Bank | 21 | 11 | 18 | 0.6 | % | NJ | 514,000 | The Bank | 21 | 11 | 17 | 0.7 | % | ||||||||||||||
Gloucester | NJ | 263,905 | The Bank | 24 | 5 | 12 | 14.1 | % | NJ | 267,000 | The Bank | 23 | 5 | 2 | 13.4 | % | ||||||||||||||
Salem | NJ | 64,610 | The Bank | 8 | 4 | 1 | 29.7 | % | NJ | 65,000 | The Bank | 8 | 4 | 1 | 29.7 | % | ||||||||||||||
Cape May | NJ | 104,442 | The Bank | 14 | 0 | 14 | 0.6 | % | NJ | 101,000 | The Bank | 14 | — | 14 | 0.4 | % | ||||||||||||||
Atlantic | NJ | 261,355 | The Bank | 17 | 6 | 18 | 0.5 | % | NJ | 264,000 | The Bank | 17 | 6 | 18 | 0.4 | % | ||||||||||||||
Warren | NJ | 106,557 | Skylands Community Bank | 13 | 3 | 6 | 7.9 | % | NJ | 110,000 | Skylands Community Bank | 12 | 3 | 6 | 7.8 | % | ||||||||||||||
Sussex | NJ | 149,568 | Skylands Community Bank | 17 | 19 | 3 | 9.6 | % | NJ | 151,000 | Skylands Community Bank | 12 | 1 | 11 | 0.8 | % | ||||||||||||||
Morris | NJ | 486,034 | Skylands Community Bank | 36 | 9 | 16 | 1.3 | % | NJ | 484,000 | Skylands Community Bank | 34 | 9 | 15 | 1.3 | % | ||||||||||||||
Hunterdon | NJ | 128,000 | Skylands Community Bank | 17 | 3 | 16 | 0.4 | % | ||||||||||||||||||||||
Mercer | NJ | 365,000 | First Washington State Bank | 24 | 21 | 12 | 2.1 | % | ||||||||||||||||||||||
Monmouth | NJ | 638,000 | First Washington State Bank | 28 | 10 | 24 | 0.8 | % | ||||||||||||||||||||||
Ocean | NJ | 554,000 | First Washington State Bank | 23 | 5 | 16 | 0.9 | % | ||||||||||||||||||||||
Chesapeake | VA | 211,000 | Resource Bank | 15 | 4 | 11 | 1.9 | % | ||||||||||||||||||||||
Fairfax | VA | 1,025,000 | Resource Bank | 30 | 17 | 28 | 0.2 | % | ||||||||||||||||||||||
Newport News | VA | 180,000 | Resource Bank | 11 | 6 | 13 | 0.8 | % | ||||||||||||||||||||||
Richmond City | VA | 194,000 | Resource Bank | 12 | 19 | 18 | 0.1 | % | ||||||||||||||||||||||
Virginia Beach | VA | 437,000 | Resource Bank | 15 | 9 | 5 | 7.6 | % |
Supervision and Regulation
The Corporation operates in an industry that is subject to various laws and regulations that are enforced by a number of Federal and state agencies. Changes in these laws and regulations, including interpretation and enforcement activities, could impact the cost of operating in the financial services industry, limit or expand permissible activities or affect competition among banks and other financial institutions. The Corporation cannot predict the changes in laws and regulations that might occur, however, it is likely, that the current high level of enforcement and compliance-related activities of Federal and state authorities will continue and potentially increase.
The following discussion summarizes the current regulatory environment for financial holding companies and banks, including a summary of the more significant laws and regulations.
Regulators – The Corporation is a registered financial holding company and its subsidiary banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its subsidiaries are subject to various regulations and examinations by regulatory authorities. The following table summarizes the charter types and primary regulators for each of the Corporation’s subsidiary banks.
Subsidiary | Charter | Primary | ||
Fulton Bank | PA | PA/FDIC | ||
Lebanon Valley Farmers Bank | PA | PA/FRB | ||
Swineford National Bank | National | OCC (1) | ||
Lafayette Ambassador Bank | PA | PA/FRB | ||
FNB Bank, N.A. | National | OCC | ||
Hagerstown Trust | MD | MD/FDIC | ||
Delaware National Bank | National | OCC | ||
The Bank | NJ | NJ/FDIC | ||
Peoples Bank of Elkton | MD | MD/FDIC | ||
Premier Bank | PA | PA/FRB | ||
Skylands Community Bank | NJ | NJ/FDIC | ||
Resource Bank | VA | VA/FRB | ||
First Washington State Bank | NJ | NJ/FDIC | ||
Fulton Financial Advisors, N.A. | National (2) | OCC | ||
Fulton Financial (Parent Company) | N/A | FRB |
(1) | Office of the Comptroller of the Currency. |
(2) | Fulton Financial Advisors, N.A. is chartered as an uninsured national trust bank. |
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act. In general, these statutes establish the corporate governance and eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, and capital adequacy requirements, among other regulations.
The Corporation is subject to regulation and examination by the Federal Reserve Board (FRB),FRB, and is required to file periodic reports and to provide additional information that the FRB may require. The BHCA imposes certain restrictions upon the Corporation regarding the acquisition of substantially all of the assets of or direct or indirect ownership or control of any bank of which it is not already the majority owner. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur.
Capital Requirements – There are a number of restrictions on financial and bank holding companies and FDIC-insured depository subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. If an FDIC-insured depository subsidiary is “undercapitalized”, the bank holding company is required to ensure (subject to certain limits) the subsidiary’s compliance with the terms of any capital restoration plan filed with its appropriate banking agency. Also, a bank holding company is required to
serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines whichthat require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In addition to the risk-based capital guidelines, the FRB has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum.
Dividends and Loans from Subsidiary Banks – There are also various restrictions on the extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking subsidiaries. In general, these restrictions require that such loans be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10% of the lending bank’s regulatory capital (20% in the aggregate to all such entities).
The Corporation is also limited in the amount of dividends that it may receive from its subsidiary banks. Dividend limitations vary, depending on the subsidiary bank’s charter and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits exist on paying dividends in excess of net income for specified periods. See “Note J – Regulatory Matters” in the Notes to the Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations.
MonetaryUSA Patriot Act – Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (“Patriot Act”) expanded the scope of anti-money laundering laws and Fiscal Policyregulations and imposed significant new compliance obligations for financial institutions, including the Corporation’s subsidiary banks. These regulations include obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.
Failure to comply with the Patriot Act’s requirements could have serious legal, financial and reputational consequences for the institution. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its subsidiary banks are affected by fiscalpolicies, procedures and monetary policies of the Federal government, including those of the FRB, which regulates the national money supply in ordercontrols to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted.reflect changes required, as necessary.
Sarbanes-Oxley Act of 2002 –
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was signed into law in July 2002, impacts all companies with securities registered under the Securities Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the areas of corporate governance and financial disclosure including, among other things, (i) increased responsibility for Chief Executive Officers and Chief Financial Officers with respect to the content of filings with the SEC; (ii) enhanced requirements for audit committees, including independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations for companies, their directors and their executive officers; and (vii) new and increased civil and criminal penalties for violations of securities laws. Many of the provisions became effective immediately, while others became effective as a result of rulemaking procedures delegated by Sarbanes-Oxley to the SEC.
Section 404 of Sarbanes Oxley became effective for the year ended December 31, 2004. This section required management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent registered public accountants were required to issue an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. These reports can be found in Item 8, “Financial Statements and Supplementary Information”. Certifications of the Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the resulting SEC rules can be found in the “Signatures““Signatures” and “Exhibits“ sections“Exhibits” sections.
Monetary and Fiscal Policy – The Corporation and its subsidiary banks are affected by fiscal and monetary policies of this Form 10-K.the Federal government, including those of the FRB, which regulates the national money supply in order to manage recessionary and inflationary pressures. Among the techniques available to the FRB are engaging in open market transactions of U.S. Government securities,
changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted.
The following table summarizes the Corporation’s branch properties, by subsidiary bank. Remote service facilities (mainly stand-alone ATM’s) are excluded.
Bank | Owned | Leased | Term (1) | Total Branches | Owned | Leased | Term (1) | Total Branches | ||||||||
Fulton Bank | 21 | 52 | 2019 | 73 | 25 | 46 | 2025 | 71 | ||||||||
Lebanon Valley Farmers Bank | 11 | 3 | 2014 | 14 | 11 | 3 | 2020 | 14 | ||||||||
Swineford National Bank | 5 | 2 | 2007 | 7 | 5 | 2 | 2009 | 7 | ||||||||
Lafayette Ambassador Bank | 9 | 15 | 2010 | 24 | 9 | 15 | 2017 | 24 | ||||||||
FNB Bank, N.A. | 6 | 2 | 2004 | 8 | 6 | 2 | 2004 | 8 | ||||||||
Hagerstown Trust | 7 | 6 | 2014 | 13 | 7 | 6 | 2014 | 13 | ||||||||
Delaware National Bank | 9 | 3 | 2009 | 12 | 10 | 3 | 2009 | 13 | ||||||||
The Bank | 21 | 6 | 2005 | 27 | 20 | 7 | 2024 | 27 | ||||||||
Peoples Bank of Elkton | 1 | 1 | 2016 | 2 | ||||||||||||
The Peoples Bank of Elkton | 1 | 1 | 2016 | 2 | ||||||||||||
Premier Bank | 4 | 3 | 2020 | 7 | 2 | 5 | 2020 | 7 | ||||||||
Skylands Community Bank | 4 | 5 | 2012 | 9 | 4 | 6 | 2012 | 10 | ||||||||
Resource Bank | 1 | 5 | 2011 | 6 | ||||||||||||
First Washington State Bank | 7 | 9 | 2012 | 16 | ||||||||||||
Total | 98 | 98 | 196 | 108 | 110 | 218 | ||||||||||
(1) | Latest lease term expiration date, excluding renewal options. |
The following table summarizes the Corporation’s other significant properties (administrative headquarters locations generally include a branch; these are also reflected in the table above)preceding table):
Bank | Property | Location | Owned/
| ||||
| |||||||
| |||||||
Fulton Financial Corp. | Operations Center | East Petersburg, PA | Owned | ||||
Fulton Bank/Fulton Financial Corp. | Admin. Headquarters | Lancaster, PA | (1) | ||||
Fulton Bank. | Operations Center | Mantua, NJ | Owned | ||||
Fulton Bank, Drovers Division | Admin. Headquarters | York, PA | Leased | (2) | |||
Fulton Bank, Great Valley Division | Admin. Headquarters | Reading, PA | Owned | ||||
Lebanon Valley Farmers Bank | Admin. Headquarters | Lebanon, PA | Owned | ||||
Swineford National Bank | Admin. Headquarters | Hummels Wharf, PA | Owned | ||||
Lafayette Ambassador Bank | Admin. Headquarters | Easton, PA | Owned | ||||
Lafayette Ambassador Bank | Operations Center | Bethlehem, PA | Owned | ||||
FNB Bank, N.A. | Admin. Headquarters | Danville, PA | Owned | ||||
Hagerstown Trust | Admin. Headquarters | Hagerstown, MD | Owned | ||||
Delaware National Bank | Admin. Headquarters | Georgetown, DE | Leased | (3) | |||
The Bank | Admin. Headquarters | Woodbury, NJ | Owned | ||||
Peoples Bank of Elkton | Admin. Headquarters | Elkton, MD | Owned | ||||
Premier Bank | Admin. Headquarters | Doylestown, PA | Owned | ||||
Skylands Community Bank | Admin. Headquarters | Hackettstown, NJ | Leased | (4) | |||
Resource Bank | Admin. Headquarters | Herndon, VA | Owned | ||||
First Washington State Bank | Admin. Headquarters | Windsor, NJ | Owned |
(1) | Includes approximately 100,000 square feet which is owned by an independent third party who financed the construction through a loan from Fulton Bank. The Corporation is leasing this space from the third party in an arrangement accounted for as a capital lease. The lease term expires in 2027. The remainder of the Administrative Headquarters location is owned by the Corporation. |
(2) | Lease expires in 2013 |
(3) | Lease expires in 2006. |
(4) | Lease expires in |
There are no legal proceedings pending against Fulton Financial Corporation or any of its subsidiaries which are expected to have a material impact upon the financial position and/or the operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Fulton Financial Corporation during the fourth quarter of 2003.2004.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The information appearing under the heading “Common Stock” in Item 7, “Management’s Discussion7A, “Quantitative and Analysis of Financial Condition and Results of Operations”Qualitative Disclosures about Market Risk” is incorporated herein by reference.
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(Dollarsdollars in thousands, except ratios and per-share data)
For the Year | For the Year | |||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||
SUMMARY OF INCOME | ||||||||||||||||||||||||||||||||||||||||
Interest income | $ | 435,531 | $ | 469,288 | $ | 518,680 | $ | 519,661 | $ | 465,221 | $ | 493,643 | $ | 435,531 | $ | 469,288 | $ | 518,680 | $ | 519,661 | ||||||||||||||||||||
Interest expense | 131,094 | 158,219 | 227,962 | 243,874 | 199,128 | 135,994 | 131,094 | 158,219 | 227,962 | 243,874 | ||||||||||||||||||||||||||||||
Net interest income | 304,437 | 311,069 | 290,718 | 275,787 | 266,093 | 357,649 | 304,437 | 311,069 | 290,718 | 275,787 | ||||||||||||||||||||||||||||||
Provision for loan losses | 9,705 | 11,900 | 14,585 | 15,024 | 9,943 | 4,717 | 9,705 | 11,900 | 14,585 | 15,024 | ||||||||||||||||||||||||||||||
Other income | 136,987 | 115,783 | 102,744 | 76,980 | 68,002 | 138,864 | 134,370 | 114,012 | 102,057 | 76,717 | ||||||||||||||||||||||||||||||
Other expenses | 234,176 | 225,536 | 218,921 | 186,472 | 177,026 | 273,615 | 231,559 | 223,765 | 218,234 | 186,209 | ||||||||||||||||||||||||||||||
Income before income taxes | 197,543 | 189,416 | 159,956 | 151,271 | 147,126 | 218,181 | 197,543 | 189,416 | 159,956 | 151,271 | ||||||||||||||||||||||||||||||
Income taxes | 59,363 | 56,468 | 46,367 | 44,437 | 42,499 | 65,264 | 59,363 | 56,468 | 46,367 | 44,437 | ||||||||||||||||||||||||||||||
Net income | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 106,834 | $ | 104,627 | $ | 152,917 | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 106,834 | ||||||||||||||||||||
PER-SHARE DATA (1) | ||||||||||||||||||||||||||||||||||||||||
Net income (basic) | $ | 1.29 | $ | 1.23 | $ | 1.05 | $ | 1.00 | $ | 0.97 | $ | 1.28 | $ | 1.23 | $ | 1.17 | $ | 1.00 | $ | 0.95 | ||||||||||||||||||||
Net income (diluted) | 1.28 | 1.23 | 1.04 | 1.00 | 0.96 | 1.27 | 1.22 | 1.17 | 0.99 | 0.95 | ||||||||||||||||||||||||||||||
Cash dividends | 0.623 | 0.558 | 0.505 | 0.452 | 0.406 | 0.647 | 0.593 | 0.531 | 0.481 | 0.430 | ||||||||||||||||||||||||||||||
RATIOS | ||||||||||||||||||||||||||||||||||||||||
Return on average assets | 1.57 | % | 1.68 | % | 1.51 | % | 1.52 | % | 1.60 | % | 1.48 | % | 1.57 | % | 1.68 | % | 1.51 | % | 1.52 | % | ||||||||||||||||||||
Return on average assets (2) | 1.57 | 1.68 | 1.60 | 1.52 | 1.60 | |||||||||||||||||||||||||||||||||||
Return on average equity | 15.45 | 15.86 | 14.58 | 15.85 | 15.76 | 14.31 | 15.45 | 15.86 | 14.58 | 15.85 | ||||||||||||||||||||||||||||||
Return on average equity (2) | 15.45 | 15.86 | 15.40 | 15.85 | 15.76 | |||||||||||||||||||||||||||||||||||
Return on average equity (tangible) (2) | 18.64 | 17.42 | 17.38 | 15.81 | 16.29 | |||||||||||||||||||||||||||||||||||
Net interest margin | 3.82 | 4.35 | 4.27 | 4.31 | 4.48 | 3.83 | 3.82 | 4.35 | 4.27 | 4.31 | ||||||||||||||||||||||||||||||
Efficiency ratio (2) | 53.80 | 52.40 | 53.20 | 52.40 | 52.60 | |||||||||||||||||||||||||||||||||||
Efficiency ratio | 55.10 | 52.80 | 52.60 | 55.60 | 52.80 | |||||||||||||||||||||||||||||||||||
Average equity to average assets | 10.20 | 10.60 | 10.40 | 9.60 | 10.20 | 10.30 | 10.20 | 10.60 | 10.40 | 9.60 | ||||||||||||||||||||||||||||||
Dividend payout ratio | 48.70 | 45.40 | 48.60 | 45.10 | 42.20 | 50.50 | 48.20 | 45.40 | 48.10 | 45.30 | ||||||||||||||||||||||||||||||
PERIOD-END BALANCES | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 9,767,288 | $ | 8,387,778 | $ | 7,770,711 | $ | 7,364,804 | $ | 6,787,424 | $ | 11,158,351 | $ | 9,767,288 | $ | 8,387,778 | $ | 7,770,711 | $ | 7,364,804 | ||||||||||||||||||||
Loans, net of unearned income | 6,159,994 | 5,317,068 | 5,373,020 | 5,374,659 | 4,882,606 | 7,584,547 | 6,159,994 | 5,317,068 | 5,373,020 | 5,374,659 | ||||||||||||||||||||||||||||||
Deposits | 6,751,783 | 6,245,528 | 5,986,804 | 5,502,703 | 5,051,512 | 7,895,524 | 6,751,783 | 6,245,528 | 5,986,804 | 5,502,703 | ||||||||||||||||||||||||||||||
Long-term debt | 568,730 | 535,555 | 456,802 | 559,503 | 460,573 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances and long-term debt | 684,236 | 568,730 | 535,555 | 456,802 | 559,503 | |||||||||||||||||||||||||||||||||||
Shareholders’ equity | 946,936 | 863,742 | 811,454 | 731,171 | 662,749 | 1,242,290 | 946,936 | 863,742 | 811,454 | 731,171 | ||||||||||||||||||||||||||||||
AVERAGE BALANCES | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 8,802,138 | $ | 7,900,500 | $ | 7,520,071 | $ | 7,019,523 | $ | 6,533,632 | $ | 10,343,328 | $ | 8,802,138 | $ | 7,900,500 | $ | 7,520,071 | $ | 7,019,523 | ||||||||||||||||||||
Loans, net of unearned income | 5,589,663 | 5,381,950 | 5,341,497 | 5,131,651 | 4,601,801 | 6,901,452 | 5,589,663 | 5,381,950 | 5,341,497 | 5,131,651 | ||||||||||||||||||||||||||||||
Deposits | 6,505,371 | 6,052,667 | 5,771,089 | 5,245,019 | 5,006,751 | 7,285,134 | 6,505,371 | 6,052,667 | 5,771,089 | 5,245,019 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank advances and long-term debt | 637,654 | 566,437 | 476,415 | 500,162 | 476,590 | |||||||||||||||||||||||||||||||||||
Shareholders’ equity | 894,469 | 838,213 | 779,014 | 673,971 | 663,841 | 1,068,464 | 894,469 | 838,213 | 779,014 | 673,971 |
(1) | Adjusted for stock dividends and stock splits. |
(2) |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) concerns Fulton Financial Corporation (the Corporation), a financial holding company registered under the Bank Holding Company Act and incorporated under the laws of the Commonwealth of Pennsylvania in 1982, and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information presented in this report.
FORWARD-LOOKING STATEMENTS
The Corporation has made, and may continue to make, certain forward-looking statements with respect to acquisition and growth strategies, market risk, the effect of competition on net interest margin and net interest income, investment strategy and income growth, investment securities gains, other than temporary impairment of investment securities, deposit and loan growth, asset quality, balances of risk-sensitive assets to risk-sensitive liabilities, employee benefits and other expenses, amortization of goodwill and intangible assets, capital and liquidity strategies and other financial and business matters for future periods. The Corporation cautions that these forward-looking statements are subject to various assumptions, risks and uncertainties. Because of the possibility that the underlying assumptions may change, actual results could differ materially from these forward-looking statements.
In addition to the factors identified herein, the following could cause actual results to differ materially from such forward-looking statements: pricing pressures on loan and deposit products, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board (FRB), creditworthiness of current borrowers, and customers’ acceptance of the Corporation’s products and services.services and acquisition pricing and the ability of the Corporation to continue making acquisitions.
The Corporation’s forward-looking statements are relevant only as of the date on which such statements are made. By making any forward-looking statements, the Corporation assumes no duty to update them to reflect new, changing or unanticipated events or circumstances.
RESULTS OF OPERATIONSOVERVIEW
Overview
As a financial institution with a focus on traditional banking activities, Fulton Financialthe Corporation generates the majority of its revenue through net interest income, or the difference between interest income earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through sales of assets, such as loans or investments. Offsetting these revenue sources are provisions for credit losses on loans, administrative expenses and income taxes.
The Corporation’s net income for 2004 increased $14.7 million, or 10.7%, from $138.2 million in 2003 to $152.9 million in 2004. Diluted net income per share increased $0.05, or 4.1%, from $1.22 per share in 2003 to $1.27 per share in 2004. In 2004, the Corporation realized a return on average assets of 1.48% and a return on average tangible equity of 18.64% compared to 1.57% and 17.42% in 2003. Net income for 2003 increased $5.2 million, or 3.9%, from $132.9 million in 2002 to $138.2 million in 2003. Diluted net income per share increased $0.05, or 4.1%4.3%, from $1.23$1.17 per share in 2002 to $1.28$1.22 per share in 2003. In 2003, the Corporation realized a return on average assets of 1.57% and a return on average equity of 15.45%.
Net income for 2002 was $132.9 million, or $1.23 per share (diluted), compared to $113.6 million, or $1.04 per share (diluted), in 2001. The increase in net income for the year was $19.4 million, or 17.0%, and the increase in net income per share was $0.19, or 18.3%. Excluding the impact of merger-related expenses in 2001, the increase in net income was $13.0 million, or 10.8%.
The increase in earnings in 20032004 was achieved despite the continued contraction of the net interest margin and the resulting $6.6driven by a $53.2 million, or 2.1%17.5%, decreaseincrease in net interest income due to the lowboth internal and external growth and a stable net interest rate environment. This declinemargin. Contributing to this increase was offset by a $10.3$6.6 million, or 9.7%5.8%, increase in non-interest revenue, excluding investmentother income (excluding securities gains, particularly from investment management and trust servicesgains), primarily as well as mortgage sale gains,a result of acquisitions, and a $2.2$5.0 million, or 18.4%51.4%, decreasereduction in the provision for loan losses due to continued strong asset quality. These items were was offset by a $42.1 million, or 18.2%, increase in other expenses, as asset quality continued to improve. Finally, the Corporation realized $19.9a result of both internal and external growth, and a $2.1 million, or 10.8%, reduction in investment securities gains, a $10.9 million increase over 2002.
The following summarizes some of the more significant factors that influenced the Corporation’s 20032004 results.
Interest RatesAcquisitions – - Short-term interest rates remained low throughout 2003, as the FRB’s monetary policies focused on lower interest rates to stimulate economic growth. The overnight borrowing, or Federal funds, rate and the prime lending rate ended the year at 1.00% and 4.00%, respectively, the lowest these key rates have been in decades. The low short-term interest rates had a negative impact on the Corporation’s net interest income and net interest margin. As interest rates dropped in 2002 and 2003, reducing the rates paid on deposits became exceedingly difficult. As a result, average rates on earning assets decreased more than the average rates paid on liabilities, and the net interest margin and net interest income both decreased in 2003 compared to 2002.
While not directly influenced by the monetary policies of the FRB, longer-term interest rates, including residential mortgage rates, also remained low during 2003, dropping to the lowest rates in decades around mid-year. This stimulated mortgage refinance activity which, coupled with the Corporation’s recent investments in its mortgage banking business through the formation of Fulton Mortgage Company, resulted in unprecedented residential mortgage volumes and gains on sales of loans in the secondary market. As longer-term rates started to increase during the third and fourth quarter of 2003, mortgage volumes declined. Lower long-term interest rates also affected the Corporation’s deposit mix as funds from maturing time deposits were deposited in core demand and savings accounts as customers were reluctant to lock into the relatively low rates being offered on time deposit products.
If the current interest rate environment continues, the Corporation will be challenged to maintain and grow its net interest margin and to increase net interest income. Most of the Corporation’s balance sheet has repriced to current rates, however, and management does not expect further significant erosion of the net interest margin if rates remain low. In such an environment, however, growth in net interest income will be more reliant on growth in balances than changes in rates. In a rising rate environment, the Corporation expects improvements in net interest income, as discussed in the “Market Risk” section of Management’s Discussion. Increasing long-term rates, however, tend to have a detrimental impact on mortgage loan origination volumes and related mortgage-banking income.
Earning Assets - The Corporation’s total average loan portfolio grew modestly during 2003, as the runoff of residential mortgages from refinancings offset moderate growth in commercial loans and commercial mortgages. This lack of net loan growth, combined with an increase in funds from deposit growth and additional borrowings, resulted in an increase in investment securities. This change in the mix of earning assets from loans to investments also had a negative impact on interest income, as rates earned on investments are generally lower than those on loans.
With the improving economy, the slowdown in mortgage refinance activity and recent and pending acquisitions, the Corporation is optimistic that loan growth will improve during 2004, resulting in an increase in net interest income.
Asset Quality - Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures.
Throughout the recent economic recession, which ended in the third quarter of 2001, and the subsequent recovery, the Corporation was able to maintain strong asset quality, attributable to its credit culture and underwriting policies. This continued in 2003 as asset quality measures such as non-performing assets to total assets and net charge-offs to average loans improved in comparison to 2002. As a result, asset quality had no negative impact on earnings beyond normal provisions for loan losses. While overall asset quality has remained strong, a deterioration in quality of one or several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on their ability to pay according to the terms of their loans.
Equity Markets - During 2003, equity markets in general experienced significant growth, which benefited the Corporation in two ways. First, investment management and trust services income increased as values of assets under management improved and as brokerage income grew. Second, the value of the Corporation’s equity investment portfolio, which consists mainly of bank stocks, increased, resulting in decisions to sell certain securities and allowing additional gains to be realized.
Gains on sales of equities have been a recurring component of the Corporation’s earnings for many years. The contribution of these gains to earnings in 2003, however, exceeded previous years due to the aforementioned improving values. If equity markets do not continue to perform, this component of earnings could contract.
Acquisitions - DuringAugust 2003, the Corporation completed two acquisitions. In August,acquired Premier Bancorp, Inc. (Premier), a $600 million bank holding company located in Doylestown, Pennsylvania whose primary subsidiary was Premier Bank, (Premier) of Doylestown, Pennsylvania became a wholly-owned subsidiary and strengthened the Corporation’sstrengthening its presence in eastern Pennsylvania markets. In December 2003, the Corporation acquired approximately $165 million of agricultural loans in Central Pennsylvania and Delaware. Both acquisitions strengthen the Corporation’s core banking franchise.
In August,April 2004, the Corporation announced its intention to acquireacquired Resource Bankshares Corporation, (Resource), an $885 million financial holding
company located in Virginia Beach, Virginia.Virginia whose primary subsidiary was Resource Bank. This will bewas the Corporation’s first acquisition in Virginia, allowing it to enter a new geographic market. Results for 2004 in comparison to 2003 were impacted by these acquisitions (referred to collectively as the “Acquisitions”).
On December 31, 2004, the Corporation acquired First Washington FinancialCorp (First Washington), of Windsor, New Jersey. First Washington was a $490 million bank holding company whose primary subsidiary was First Washington State Bank, which operates sixteen community banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey. The transactionaccounts of First Washington are included in the Corporation’s December 31, 2004 consolidated balance sheet, however, First Washington did not impact average balances or the consolidated statement of income.
On January 11, 2005, the Corporation entered into a merger agreement to acquire SVB Financial Services, Inc. (SVB) of Somerville, New Jersey. SVB is a $475 million bank holding company whose primary subsidiary is Somerset Valley Bank, which operates eleven community banking offices in Somerset, Hunterdon and Middlesex counties in New Jersey. The acquisition is expected to closebe completed in the third quarter of 2005. For additional information on or about April 1, 2004.the terms of this pending acquisition, see Note Q, “Mergers and Acquisitions”, in the Notes to Consolidated Financial Statements.
Acquisitions have long been a supplement to the Corporation’s internal growth. These recent and pending acquisitions provide the opportunity for additional growth as they will allow the Corporation’s existing products and services to be sold in new markets. The Corporation’s acquisition strategy focuses on high growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and good asset quality, among other factors. Under its “supercommunity” banking philosophy, acquired organizations generally retain their status as separate legal entities, unless consolidation with an existing affiliate bank is practical. Back office functions are generally consolidated to maximize efficiencies.
Merger and acquisition activity in the financial services industry has becomebeen very competitive andin recent years, as evidenced by the prices paid for certain acquisitions have increased recently.acquisitions. While the Corporation has been an active acquirer, management is committed to basing its pricing on rational economic models. Management will continue to focus on generating growth in the most cost-effective manner.
Asset Quality – Asset quality refers to the underlying credit characteristics of borrowers and the likelihood that defaults on contractual loan payments will result in charge-offs of account balances. Asset quality is generally a function of economic conditions, but can be managed through conservative underwriting and sound collection policies and procedures.
The Corporation has been able to maintain strong asset quality through different economic cycles, attributable to its credit culture and underwriting policies. This trend continued in 2004 as asset quality measures such as non-performing assets to total assets and net charge-offs to average loans improved in comparison to 2003, allowing a reduction in the provision for loan losses. While overall asset quality has remained strong, deterioration in quality of one or several significant accounts could have a detrimental impact and result in losses that may not be foreseeable based on current information. In addition, rising interest rates could increase the total payments of borrowers and could have a negative impact on their ability to pay according to the terms of their loans.
Interest Rates –During the second half of 2004, the FRB increased short-term interest rates a total of 1.25%, with the overnight borrowing, or Federal funds, rate ending the year at 2.25%. The average Federal funds rate for the year increased 22 basis points from 1.13% in 2003 to 1.35% in 2004 and the average prime lending rate increased from 4.13% in 2003 to 4.35% in 2004. This increase in rates resulted in an expansion of the Corporation’s net interest margin during 2004 after decreasing significantly during 2003. While the net interest margin for the year increased only slightly, the improvement is evident in the quarterly trend, which is shown in the following table:
2004 | 2003 | |||||
1st Quarter | 3.79 | % | 4.06 | % | ||
2nd Quarter | 3.73 | 3.91 | ||||
3rd Quarter | 3.88 | 3.62 | ||||
4th Quarter | 3.92 | 3.74 | ||||
Year to Date | 3.83 | 3.82 |
Unlike short-term interest rates, longer-terms rates remained relatively flat, with ten-year United States Treasury rates beginning and ending the year at about the same level. However, this level was higher than the historic lows experienced during 2002 and 2003 and, consequently, mortgage refinance activity continued its relative slowdown which started during the third and fourth quarter of 2003. Long-term interest rate levels also continued to affect the Corporation’s deposit mix as funds from maturing time deposits continued to flow into core demand and savings accounts as customers were reluctant to lock into the relatively low rates being offered on time deposit products.
In a rising rate environment, the Corporation expects improvements in net interest income, as discussed in the “Market Risk” section of Management’s Discussion. Increasing long-term rates, however, tend to have a detrimental impact on mortgage loan origination volumes and related mortgage-banking income.
Regulatory Environment – The Corporation is a registered financial holding company and its subsidiary banks are depository institutions whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The Corporation and its subsidiaries are subject to various regulations and examinations by bank regulatory authorities, including the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and certain state agencies. The financial services industry has been subjected to heightened scrutiny by bank regulatory authorities in the areas of Bank Secrecy Act compliance and other anti-money laundering rules and regulations. As a result the Corporation has hired additional staff for compliance related activities.
As a publicly traded company, the Corporation is also subject to Securities and Exchange Commission (SEC) regulations, which govern the frequency and content of financial information required to be made available to the public. Recent legislative and regulatory actions of the Federal government have significantly changed financial reporting requirements, primarily as a result of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). For the 2004 financial statements and footnotes, Sarbanes-Oxley required management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporation’s independent public accountants were required to issue an opinion on management’s report and the Corporation’s internal controls over financial reporting. These reports can be found after the Consolidated Financial Statements and Notes to Consolidated Financial Statements.
The burden of compliance with the new reporting requirements has been significant for all publicly traded companies, including the Corporation. The cost includes both the time devoted by its employees to complete the documentation and testing of controls and the expense for engaging professionals to assist in the process. In addition, the Corporation experienced a significant increase in independent accountant fees related to the internal controls testing process. See additional information in the “Other Expenses” section of Management’s Discussion.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporation’s net income, accounting for approximately 72%75% of total 20032004 revenues, excluding investment securities gains. The ability to manage net interest income over a variety of interest rate and economic environments is important to the success of a financial institution. Growth in net interest income is generally dependent upon balance sheet growth and maintaining or growing the net interest margin. The “Market Risk” section of Management’s Discussion beginning on page 2225 provides additional information on the policies and procedures used by the Corporation to manage net interest income.
The following table summarizes the average balances and interest earned or paid on the Corporation’s interest-earning assets and interest-bearing liabilities.
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases (1) | $ | 5,589,663 | $ | 341,393 | 6.11 | % | $ | 5,381,950 | $ | 370,318 | 6.88 | % | $ | 5,341,497 | $ | 424,527 | 7.95 | % | $ | 6,901,452 | $ | 396,731 | 5.75 | % | $ | 5,589,663 | $ | 341,393 | 6.11 | % | $ | 5,381,950 | $ | 370,318 | 6.88 | % | ||||||||||||||||||||||||
Taxable inv. securities (2) | 2,170,889 | 77,450 | 3.57 | 1,605,077 | 84,139 | 5.24 | 1,300,169 | 77,701 | 5.98 | 2,161,195 | 76,792 | 3.55 | 2,170,889 | 77,450 | 3.57 | 1,605,077 | 84,139 | 5.24 | ||||||||||||||||||||||||||||||||||||||||||
Tax-exempt inv. securities (2) | 266,426 | 10,436 | 3.92 | 229,938 | 9,835 | 4.28 | 216,783 | 9,465 | 4.37 | 264,578 | 9,553 | 3.61 | 266,426 | 10,436 | 3.92 | 229,938 | 9,835 | 4.28 | ||||||||||||||||||||||||||||||||||||||||||
Equity securities (2) | 129,584 | 4,076 | 3.15 | 113,422 | 4,066 | 3.58 | 103,286 | 5,097 | 4.93 | 133,870 | 4,023 | 3.01 | 129,584 | 4,076 | 3.15 | 113,422 | 4,066 | 3.58 | ||||||||||||||||||||||||||||||||||||||||||
Total investment securities | 2,566,889 | 91,962 | 3.58 | 1,948,437 | 98,040 | 5.03 | 1,620,238 | 92,263 | 5.69 | 2,559,643 | 90,368 | 3.53 | 2,566,889 | 91,962 | 3.58 | 1,948,437 | 98,040 | 5.03 | ||||||||||||||||||||||||||||||||||||||||||
Short-term investments | 47,122 | 2,176 | 4.62 | 27,741 | 930 | 3.35 | 44,405 | 1,890 | 4.26 | 97,759 | 6,544 | 6.69 | 47,122 | 2,176 | 4.62 | 27,741 | 930 | 3.35 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 8,203,684 | 435,531 | 5.31 | 7,358,128 | 469,288 | 6.38 | 7,006,140 | 518,680 | 7.40 | 9,558,854 | 493,643 | 5.16 | 8,203,684 | 435,531 | 5.31 | 7,358,128 | 469,288 | 6.38 | ||||||||||||||||||||||||||||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 279,980 | 253,503 | 241,660 | 316,170 | 279,980 | 253,503 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment | 123,172 | 123,658 | 124,003 | 128,902 | 123,172 | 123,658 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets (2) | 270,611 | 238,441 | 217,717 | 424,385 | 270,611 | 238,441 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: Allowance for loan losses | (75,309 | ) | (73,230 | ) | (69,449 | ) | (84,983 | ) | (75,309 | ) | (73,230 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | 8,802,138 | $ | 7,900,500 | $ | 7,520,071 | $ | 10,343,328 | $ | 8,802,138 | $ | 7,900,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | $ | 1,158,333 | $ | 6,011 | 0.52 | % | $ | 910,934 | $ | 6,671 | 0.73 | % | $ | 744,831 | $ | 8,795 | 1.18 | % | $ | 1,364,953 | $ | 7,201 | 0.53 | % | $ | 1,158,333 | $ | 6,011 | 0.52 | % | $ | 910,934 | $ | 6,671 | 0.73 | % | ||||||||||||||||||||||||
Savings deposits | 1,655,325 | 10,770 | 0.65 | 1,516,832 | 16,453 | 1.08 | 1,313,880 | 25,381 | 1.93 | 1,846,503 | 11,928 | 0.65 | 1,655,325 | 10,770 | 0.65 | 1,516,832 | 16,453 | 1.08 | ||||||||||||||||||||||||||||||||||||||||||
Time deposits | 2,496,234 | 77,417 | 3.10 | 2,579,441 | 102,270 | 3.96 | 2,786,513 | 152,793 | 5.48 | 2,693,414 | 70,650 | 2.62 | 2,496,234 | 77,417 | 3.10 | 2,579,441 | 102,270 | 3.96 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 5,309,892 | 94,198 | 1.77 | 5,007,207 | 125,394 | 2.50 | 4,845,224 | 186,969 | 3.86 | 5,904,870 | 89,779 | 1.52 | 5,309,892 | 94,198 | 1.77 | 5,007,207 | 125,394 | 2.50 | ||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings | 738,527 | 7,373 | 1.00 | 434,402 | 6,598 | 1.52 | 355,953 | 13,150 | 3.69 | 1,238,073 | 15,182 | 1.23 | 738,527 | 7,373 | 1.00 | 434,402 | 6,598 | 1.52 | ||||||||||||||||||||||||||||||||||||||||||
Long-term debt | 566,437 | 29,523 | 5.21 | 476,415 | 26,227 | 5.51 | 500,162 | 27,843 | 5.57 | 637,654 | 31,033 | 4.87 | 566,437 | 29,523 | 5.21 | 476,415 | 26,227 | 5.51 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 6,614,856 | 131,094 | 1.98 | 5,918,024 | 158,219 | 2.67 | 5,701,339 | 227,962 | 4.00 | 7,780,597 | 135,994 | 1.75 | 6,614,856 | 131,094 | 1.98 | 5,918,024 | 158,219 | 2.67 | ||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 1,195,479 | 1,045,460 | 925,865 | 1,380,264 | 1,195,479 | 1,045,460 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 97,334 | 98,803 | 113,853 | 114,003 | 97,334 | 98,803 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | 7,907,669 | 7,062,287 | 6,741,057 | 9,274,864 | 7,907,669 | 7,062,287 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 894,469 | 838,213 | 779,014 | 1,068,464 | 894,469 | 838,213 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabs. and Equity | $ | 8,802,138 | $ | 7,900,500 | $ | 7,520,071 | $ | 10,343,328 | $ | 8,802,138 | $ | 7,900,500 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | 304,437 | 311,069 | 290,718 | 357,649 | 304,437 | 311,069 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net yield on earning assets | 3.71 | 4.23 | 4.15 | 3.74 | 3.71 | 4.23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax equivalent adjustment (3) | 9,698 | 9,193 | 8,286 | 9,176 | 9,698 | 9,193 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin | $ | 314,135 | 3.82 | % | $ | 320,262 | 4.35 | % | $ | 299,004 | 4.27 | % | $ | 366,825 | 3.83 | % | $ | 314,135 | 3.82 | % | $ | 320,262 | 4.35 | % | ||||||||||||||||||||||||||||||||||||
(1) | Includes non-performing loans. |
(2) | Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are included in other assets. |
(3) | Based on marginal Federal income tax rate and statutory interest expense disallowances. |
The following table sets forth a summary of changes in interest income and interest expense resulting from changes in volumes (average balances) and changes in rates:
2003 vs. 2002 Increase (decrease) due to change in | 2002 vs. 2001 Increase (decrease) due to change in | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest income on: | ||||||||||||||||||||||||
Loans and leases | $ | 14,292 | $ | (43,217 | ) | $ | (28,925 | ) | $ | 3,229 | $ | (57,438 | ) | $ | (54,209 | ) | ||||||||
Taxable investment securities | 29,660 | (36,349 | ) | (6,689 | ) | 17,995 | (11,557 | ) | 6,438 | |||||||||||||||
Tax-exempt investment securities | 1,561 | (960 | ) | 601 | 572 | (202 | ) | 370 | ||||||||||||||||
Equity securities | 579 | (569 | ) | 10 | 500 | (1,531 | ) | (1,031 | ) | |||||||||||||||
Short-term investments | 650 | 596 | 1,246 | (711 | ) | (249 | ) | (960 | ) | |||||||||||||||
Total interest-earning assets | $ | 46,742 | $ | (80,499 | ) | $ | (33,757 | ) | $ | 21,585 | $ | (70,977 | ) | $ | (49,392 | ) | ||||||||
Interest expense on: | ||||||||||||||||||||||||
Demand deposits | $ | 1,812 | $ | (2,472 | ) | $ | (660 | ) | $ | 1,974 | $ | (4,098 | ) | $ | (2,124 | ) | ||||||||
Savings deposits | 1,502 | (7,185 | ) | (5,683 | ) | 3,938 | (12,866 | ) | (8,928 | ) | ||||||||||||||
Time deposits | (3,299 | ) | (21,554 | ) | (24,853 | ) | (11,355 | ) | (39,168 | ) | (50,523 | ) | ||||||||||||
Short-term borrowings | 4,619 | (3,844 | ) | 775 | 2,886 | (9,438 | ) | (6,552 | ) | |||||||||||||||
Long-term debt | 4,956 | (1,660 | ) | 3,296 | (1,317 | ) | (299 | ) | (1,616 | ) | ||||||||||||||
Total interest-bearing liabilities | $ | 9,590 | $ | (36,715 | ) | $ | (27,125 | ) | $ | (3,874 | ) | $ | (65,869 | ) | $ | (69,743 | ) | |||||||
2004 vs. 2003 Increase (decrease) due To change in | 2003 vs. 2002 Increase (decrease) due To change in | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest income on: | ||||||||||||||||||||||||
Loans and leases | $ | 76,352 | $ | (21,014 | ) | $ | 55,338 | $ | 14,292 | $ | (43,217 | ) | $ | (28,925 | ) | |||||||||
Taxable investment securities | (345 | ) | (313 | ) | (658 | ) | 29,660 | (36,349 | ) | (6,689 | ) | |||||||||||||
Tax-exempt investment securities | (72 | ) | (811 | ) | (883 | ) | 1,561 | (960 | ) | 601 | ||||||||||||||
Equity securities | 132 | (185 | ) | (53 | ) | 579 | (569 | ) | 10 | |||||||||||||||
Short-term investments | 3,080 | 1,288 | 4,368 | 650 | 596 | 1,246 | ||||||||||||||||||
Total interest-earning assets | $ | 79,147 | $ | (21,035 | ) | $ | 58,112 | $ | 46,742 | $ | (80,499 | ) | $ | (33,757 | ) | |||||||||
Interest expense on: | ||||||||||||||||||||||||
Demand deposits | $ | 1,088 | $ | 102 | $ | 1,190 | $ | 1,812 | $ | (2,472 | ) | $ | (660 | ) | ||||||||||
Savings deposits | 1,236 | (78 | ) | 1,158 | 1,502 | (7,185 | ) | (5,683 | ) | |||||||||||||||
Time deposits | 5,796 | (12,563 | ) | (6,767 | ) | (3,299 | ) | (21,554 | ) | (24,853 | ) | |||||||||||||
Short-term borrowings | 5,839 | 1,970 | 7,809 | 4,619 | (3,844 | ) | 775 | |||||||||||||||||
Long-term debt | 3,551 | (2,041 | ) | 1,510 | 4,956 | (1,660 | ) | 3,296 | ||||||||||||||||
Total interest-bearing liabilities | $ | 17,510 | $ | (12,610 | ) | $ | 4,900 | $ | 9,590 | $ | (36,715 | ) | $ | (27,125 | ) | |||||||||
Note: Changes which are partly attributable to rate and volume are allocated based on the proportion of the direct changes attributable to rate and volume.
2004 vs. 2003
Net interest income increased $53.2 million, or 17.5%, from $304.4 million in 2003 to $357.6 million in 2004, primarily as a result of earning asset growth as the Corporation’s net interest margin for the year was relatively constant at 3.83% for 2004 compared to 3.82% for 2003.
Average earning assets grew 16.5%, from $8.2 billion in 2003 to $9.6 billion in 2004. The Acquisitions contributed approximately $900 million to this increase in average balances. Interest income increased $58.1 million, or 13.3%, mainly as a result of the 16.5% increase in average earning assets, which resulted in a $79.1 million increase in interest income. This increase was partially offset by the $21.0 million decrease in interest income that resulted from the decline in the average yield earned. This reflects the impact of customers favoring floating rate loans which tend to carry lower interest rates than fixed rate products.
The increase in average interest-earning assets was due to loan growth, both internal and through acquisitions, as investment balances remained relatively flat. Average loans increased by $1.3 billion, or 23.5%, to $6.9 billion in 2004. The following table presents the growth in average loans, by type:
Increase (decrease) | |||||||||||||
2004 | 2003 | $ | % | ||||||||||
(dollars in thousands) | |||||||||||||
Commercial - industrial and financial | $ | 1,769,801 | $ | 1,519,609 | $ | 250,192 | 16.5 | % | |||||
Commercial - agricultural | 330,269 | 197,381 | 132,888 | 67.3 | |||||||||
Real estate - commercial mortgage | 2,205,025 | 1,724,635 | 480,390 | 27.9 | |||||||||
Real estate - commercial construction | 304,845 | 228,833 | 76,012 | 33.2 | |||||||||
Real estate - residential mortgage | 509,593 | 497,095 | 12,498 | 2.5 | |||||||||
Real estate - residential construction | 205,581 | 46,692 | 158,889 | 340.3 | |||||||||
Real estate - home equity | 988,454 | 772,020 | 216,434 | 28.0 | |||||||||
Consumer | 517,138 | 531,384 | (14,246 | ) | (2.7 | ) | |||||||
Leasing and other | 70,746 | 72,014 | (1,268 | ) | (1.8 | ) | |||||||
Total | $ | 6,901,452 | $ | 5,589,663 | $ | 1,311,789 | 23.5 | % | |||||
The Acquisitions contributed approximately $675.6 million to this increase in average balances. The following table presents the average balance impact of the Acquisitions, by type:
2004 | 2003 | Increase | ||||||||
(in thousands) | ||||||||||
Commercial - industrial and financial | $ | 139,169 | $ | 25,048 | $ | 114,121 | ||||
Commercial - agricultural | 520 | — | 520 | |||||||
Real estate - commercial mortgage | 382,500 | 111,219 | 271,281 | |||||||
Real estate - commercial construction | 63,566 | 4,836 | 58,730 | |||||||
Real estate - residential mortgage | 54,761 | 457 | 54,304 | |||||||
Real estate - residential construction | 155,687 | — | 155,687 | |||||||
Real estate - home equity | 13,042 | 822 | 12,220 | |||||||
Consumer | 2,770 | 271 | 2,499 | |||||||
Leasing and other | 5,864 | (408 | ) | 6,272 | ||||||
Total | $ | 817,879 | $ | 142,245 | $ | 675,634 | ||||
The following table presents the growth in average loans, by type, excluding the average balances contributed by the Acquisitions:
Increase (decrease) | |||||||||||||
2004 | 2003 | $ | % | ||||||||||
(dollars in thousands) | |||||||||||||
Commercial - industrial and financial | $ | 1,630,632 | $ | 1,494,561 | $ | 136,071 | 9.1 | % | |||||
Commercial - agricultural | 329,749 | 197,381 | 132,368 | 67.1 | |||||||||
Real estate - commercial mortgage | 1,822,525 | 1,613,416 | 209,109 | 13.0 | |||||||||
Real estate - commercial construction | 241,279 | 223,997 | 17,282 | 7.7 | |||||||||
Real estate - residential mortgage | 454,832 | 496,638 | (41,806 | ) | (8.4 | ) | |||||||
Real estate - residential construction | 49,894 | 46,692 | 3,202 | 6.9 | |||||||||
Real estate - home equity | 975,412 | 771,198 | 204,214 | 26.5 | |||||||||
Consumer | 514,368 | 531,113 | (16,745 | ) | (3.2 | ) | |||||||
Leasing and other | 64,882 | 72,422 | (7,540 | ) | (10.4 | ) | |||||||
Total | $ | 6,083,573 | $ | 5,447,418 | $ | 636,155 | 11.7 | % | |||||
Loan growth continued to be strong in the commercial and commercial mortgage categories. The growth shown in the commercial – agricultural category reflects the agricultural loan portfolio purchased in December 2003. The reduction in mortgage loan balances was due to customer refinance activity that occurred during 2003. The Corporation generally sells newly originated fixed rate mortgages in the secondary market to promote liquidity and manage interest rate risk. Home equity loans increased significantly due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative and as a preferred type of consumer loan. Consumer loans decreased, reflecting customers’ repayment of these loans with tax-advantaged residential mortgage or home equity loans. In addition, the indirect finance market remains extremely competitive with the participation of vehicle manufacturers.
The average yield on loans during 2004 was 5.75%, a 36 basis point, or 5.9%, decline from 2003. Much of the recent loan growth has been experienced in the floating rate categories that tend to carry lower interest rates than fixed-rate products.
Average investments decreased slightly during 2004, however, without the impact of the Acquisitions, the investment balances would have decreased $165.9 million, or 6.6%. The Corporation’s netinvestment balances had increased over the last few years due to both significant deposit growth and the use of limited strategies to manage the Corporation’s gap position and to take advantage of low short-term borrowing rates. During 2004, the Corporation did not reinvest a significant portion of investment maturities in order to minimize interest rate risk in expectation of a rising rate environment and to help fund loan growth.
The average yield on investment securities declined slightly from 3.58% in 2003 to 3.53% in 2004. Premium amortization, which is accounted for as a reduction of interest income, has been significantly impactedwas $20.0 million in 2003 compared to $10.5 million in 2004. The benefit from the lower premium amortization was offset by the reductionsreduction in short-term interest rates enactedstated yields experienced throughout 2004.
Interest expense increased $4.9 million, or 3.7%, to $136.0 million in 2004 from $131.1 million in 2003, mainly as a result of $1.2 billion increase in average interest-bearing liabilities, which included approximately $800 million added by the FRB over the past three years, as well as by the historic low levels of those rates. During 2001, the FRB reduced the overnight borrowing rate from 6.00% at the beginning of the year to 1.75% at the end of the year. During this time, the Corporation’s assets repriced more quickly than its deposits (primarily time deposits), resultingAcquisitions. The increase in a reduction in the net interest margin. During 2002, the overnight borrowing rate declined further to 1.25% and the Corporation’s longer-termaverage interest-bearing liabilities primarily time deposits, repriced to lower rates resultingresulted in an increase in interest expense of $17.5 million during 2004. This increase was partially offset by a $12.6 million decrease due to the net23 basis point decrease in the cost of total interest-bearing liabilities. The cost of interest-bearing deposits declined 25 basis points, or 14.1%, from 1.77% in 2003 to 1.52% in 2004. This reduction was due to both the impact of declining short-term interest margin. rates in the first half of 2003 and the continuing shift in the composition of deposits from higher-rate time deposits to lower-rate demand and savings deposits. Customers continued to exhibit an unwillingness to invest in certificates of deposit at the rates available, instead keeping their funds in demand and savings products.
The positivefollowing table presents the growth in average deposits, by type:
Increase | ||||||||||||
2004 | 2003 | $ | % | |||||||||
(dollars in thousands) | ||||||||||||
Noninterest-bearing demand | $ | 1,380,264 | $ | 1,195,479 | $ | 184,785 | 15.5 | % | ||||
Interest-bearing demand | 1,364,953 | 1,158,333 | 206,620 | 17.8 | ||||||||
Savings/money market | 1,846,503 | 1,655,325 | 191,178 | 11.5 | ||||||||
Time deposits | 2,693,414 | 2,496,234 | 197,180 | 7.9 | ||||||||
Total | $ | 7,285,134 | $ | 6,505,371 | $ | 779,763 | 12.0 | % | ||||
The Acquisitions accounted for approximately $595.4 million of the increase in average balances. The following table presents the average balance impact of the time deposit repricing onAcquisitions, by type:
2004 | 2003 | Increase | |||||||
(in thousands) | |||||||||
Noninterest-bearing demand | $ | 64,683 | $ | 14,454 | $ | 50,229 | |||
Interest-bearing demand | 126,569 | 45,099 | 81,470 | ||||||
Savings/money market | 103,797 | 33,522 | 70,275 | ||||||
Time deposits | 470,733 | 77,337 | 393,396 | ||||||
Total | $ | 765,782 | $ | 170,412 | $ | 595,370 | |||
The following table presents the net interest margin peakedgrowth in mid-2002,average deposits, by type, excluding the contribution of the Acquisitions:
Increase (decrease) | |||||||||||||
2004 | 2003 | $ | % | ||||||||||
(dollars in thousands) | |||||||||||||
Noninterest-bearing demand | $ | 1,315,581 | $ | 1,181,025 | $ | 134,556 | 11.4 | % | |||||
Interest-bearing demand | 1,238,384 | 1,113,234 | 125,150 | 11.2 | |||||||||
Savings/money market | 1,742,706 | 1,621,803 | 120,903 | 7.5 | |||||||||
Time deposits | 2,222,681 | 2,418,897 | (196,216 | ) | (8.1 | ) | |||||||
Total | $ | 6,519,352 | $ | 6,334,959 | $ | 184,393 | 2.9 | % | |||||
Average borrowings increased significantly during 2004, with average short-term borrowings increasing $499.5 million, or 67.6%, to $1.2 billion, and was somewhat offset byaverage long-term debt increasing $71.2 million, or 12.6%, to $637.7 million. The Acquisitions added $174.6 million to the inabilityshort-term borrowings increase and $83.6 million to continuethe long-term debt increase. The additional increase in short-term borrowings resulted primarily from certain limited strategies employed during 2003 to lower core depositmanage the Corporation’s gap position and to take advantage of low short-term borrowing rates. During 2003, the overnight borrowing rate declinedIn addition, customer cash management accounts, which are included in short-term borrowings, grew $54.9 million, or 15.6%, to 1.00% at mid-year and the impactan average of not being able to lower core deposit rates sufficiently became more pronounced, resulting$406.2 million in further net interest margin compression.2004.
2003 vs. 2002
Net interest income decreased $6.6 million, or 2.1%, from $311.1 million in 2002 to $304.4 million in 2003. While average earning assets grew 11.5%, from $7.4 billion in 2002 to $8.2 billion in 2003, the net interest margin declined 12.2%, or 53 basis points, from 4.35% in 2002 to 3.82% in 2003 as a result of the interest rate environment, as discussed above.environment. During 2003, yields earned on assets decreased further than rates paid on liabilities.
Interest income decreased $33.8 million, or 7.2%, mainly as a result of the 107 basis point decrease in the average yield on earning assets. Average yields decreased during 2003 due both to the general decrease in short-term interest rates as well as the shift in earning assets, on a percentage basis, from higher yielding loans to generally lower yielding investment securities. ThisThe decrease in interest incomeof $80.5 million as a result of rates was partially offset by a $46.7 million increase due to average earning asset growth.
Average interest-earning assets increased both in the loan and investment categories. Average loans increased by $207.7 million, or 3.9%, to $5.6 billion in 2003. The following summarizes the growth in average loans by category.
2003 | 2002 | Increase (decrease) | |||||||||||
$ | % | ||||||||||||
(dollars in thousands) | |||||||||||||
Commercial | $ | 1,717,000 | $ | 1,566,000 | $ | 151,000 | 9.6 | % | |||||
Commercial mortgage | 1,953,000 | 1,697,000 | 256,000 | 15.1 | |||||||||
Residential mortgage | 544,000 | 758,000 | (214,000 | ) | (28.2 | ) | |||||||
Home equity | 772,000 | 696,000 | 76,000 | 10.9 | |||||||||
Consumer and other | 604,000 | 665,000 | (61,000 | ) | (9.2 | ) | |||||||
Total | $ | 5,590,000 | $ | 5,382,000 | $ | 208,000 | 3.9 | % | |||||
Loan growth was particularly strong in the commercial and commercial mortgage categories. Even factoring out the loans acquired in the Premier acquisition, these categories both grew approximately 8.0%. The significant reduction in mortgage loan balances was due to customer refinance activity that continued at a high rate through much of the year. The Corporation generally sells newly originated fixed rate mortgages in the secondary market to promote liquidity and manage interest rate risk. Home equity loans increased significantly due to promotional efforts and customers using home equity loans as a cost-effective refinance alternative. Consumer loans decreased, reflecting customers’ repayment of these loans with tax-advantaged residential mortgage or home equity loans. In addition, many vehicle manufacturers continued to offer attractive financing rates, with which the Corporation chose not to compete.
The average yield on loans during 2003 was 6.11%, a 77 basis point, or 11.2%, decline from 2002. This reflects the 55 basis point reduction in the Corporation’s average prime lending rate from 4.68% in 2002 to 4.13% in 2003, as well as higher than normal prepayments received on fixed rate commercial and commercial mortgage loans.
Average investment securities increased $618.5 million, or 31.7%, during 2003. The increase was attributable primarily to deposit growth exceeding loan growth. Total average deposit growth of $452.7 million exceeded average loan growth by $245.0 million during 2003. In addition, the Corporation employed certain limited strategies to manage the Corporation’s gap position and to take advantage of low wholesale fundingshort-term borrowing rates. Most of the growth in investment securities was in mortgage-backed securities, which increased by $553.2 million, or 38.1%.
The average yield on investment securities declined significantly from 5.03% in 2002 to 3.58% in 2003. This 28.8% decrease was due to both the relatively short maturity of the portfolio as well as the high prepayment levels experienced on mortgage-backed securities. During the past two years2003 and particularly during 2003,2002, most mortgage-backed securities were being purchased at premiums. As longer-term interest rates continued to fall through the first half of 2003, the prepayments on these securities exceeded expected levels. Prepayments negatively impact yields through the acceleration of premium amortization expense, which is accounted for as a reduction of interest income. Premium amortization was $20.0 million in 2003 compared to $5.7 million in 2002. Approximately $17.3 million of premium amortization during 2003 was accelerated amortization.
Interest expense decreased $27.1 million, or 17.1%, to $131.1 million in 2003 from $158.2 million in 2002, mainly as a result of the 69 basis point decrease in the cost of total interest-bearing liabilities. This decrease in cost resulted in a $36.7 million decrease in interest expense, which was partially offset by a $9.6 million increase in interest expense due to average balance growth. The cost of interest-bearing deposits declined 73 basis points, or 29.2%, from 2.50% in 2002 to 1.77% in 2003. This reduction was due to both the impact of declining short-term interest rates and the continuing shift in the composition of deposits from higher-rate time deposits to lower-rate demand and savings deposits. Customers continued to exhibit an unwillingness to invest in certificates of deposit at the rates available, instead keeping their funds in demand and savings products.
The following table summarizes the growth in average deposits by category.
2003 | 2002 | Increase (decrease) | |||||||||||
$ | % | ||||||||||||
(dollars in thousands) | |||||||||||||
Noninterest-bearing demand | $ | 1,195,000 | $ | 1,045,000 | $ | 150,000 | 14.4 | % | |||||
Interest-bearing demand | 1,158,000 | 911,000 | 247,000 | 27.1 | |||||||||
Savings/money market | 1,655,000 | 1,517,000 | 138,000 | 9.1 | |||||||||
Time deposits | 2,496,000 | 2,579,000 | (83,000 | ) | (3.2 | ) | |||||||
Total | $ | 6,504,000 | $ | 6,052,000 | $ | 452,000 | 7.5 | % | |||||
The acquisition of Premier added $187.4 million to the total average balance of deposits in 2003. If those balances were factored out, the deposit categories would show the following increases (decreases) – noninterest-bearing demand, 12.9%, interest-bearing demand, 21.6%, savings/money market, 6.7%, and time deposits, (6.5)%.
Other borrowings increased significantly during 2003. Average short-term borrowings increased $304.1 million, or 70.0%, to $738.5 million in 2003, while average long-term debt increased $90.0 million, or 18.9%, to $566.4 million in 2003. The increase in short-term borrowings resulted primarily from certain limited strategies to manage the Corporation’s gap position and to take advantage of low wholesale fundingshort-term borrowing rates. In addition, customer cash management accounts, which are included in short-term borrowings, grew $53.8 million, or 18.1%, to reach $351.3 million in 2003.
2002 vs. 2001
In 2002, net interest income was positively impacted by the full year impact of the acquisition of 18 branches in June 2001 (Branch Acquisition), which provided approximately $300 million in deposits and $50 million in loans. Net interest income for the year was $311.1 million, a $20.4 million, or 7.0%, increase over 2001. The net interest margin for 2002 was 4.35%, an eight basis point increase from 4.27% in 2001. Average interest rates paid on interest-bearing liabilities decreased 133 basis points to 2.67% in 2002 as compared to 4.00% in 2001. This change was more pronounced than the 102 basis point decrease in yields on average interest-earning assets, resulting in the increase in the Corporation’s net interest margin.
Interest income decreased $49.4 million, or 9.5%, mainly as a result of the 102 basis point decrease in average yields that accounted for a $71.0 million decline in interest income. As previously discussed, average yields decreased during 2002 due to a general decrease in interest rates as a result of the actions of the FRB. The Corporation’s prime lending rate averaged 6.89% in 2001, dropping to an average of 4.68% during 2002. The decrease in interest income as a result of rate changes was partially offset by a $21.6 million increase due to average balance growth, primarily in investment securities.
Average loans of $5.4 billion were essentially flat for the period. This was the result of strong commercial loan and commercial mortgage growth ($241.3 million, or 8.0%, increase in average balances) being offset by decreases in residential mortgages ($166.4 million, or 18.0%) and consumer loans ($39.4 million, or 3.0%). Residential mortgages decreased as a result of the low interest rate environment generating strong refinance activity. Newly originated fixed rate mortgages were sold in the secondary market to promote liquidity and reduce interest rate risk. Consumer loans decreased mainly in direct and indirect automobile loans ($109.0 million, or 20.7%) due to the Corporation electing not to compete with manufacturer-sponsored loan rate incentives and consumers paying off such consumer debt with cash from mortgage refinances. These decreases were offset in part by an increase in home equity loans ($63.7 million, or 10.1%), as consumers took advantage of the lower rates available on these loans.
The average yield on loans during 2002 was 6.88%, a 107 basis point decline from 2001. The reduction in the Corporation’s average prime lending rate resulted in lower overall yields as compared to 2001. The Corporation also experienced a shift of approximately $450 million from fixed rate to adjustable rate commercial loan and commercial mortgage balances.
Average investment securities increased $328.2 million, or 20.3%, during 2002. The increase was mainly the result of deposit growth exceeding net increases in loans. Total average deposits increased $281.6 million, or 4.9%, during 2002. The Corporation used the excess funds to purchase investment securities, particularly mortgage-backed securities, which grew by $325.9 million, or 29.0%. The average yield on investment securities declined during 2002, although the reduction was not as pronounced as that realized on the loan portfolio. The average yield on investments was 5.03% in 2002 and 5.69% in 2001.
Interest expense decreased $69.7 million, or 30.6%, to $158.2 million in 2002 from $228.0 million in 2001. This resulted from a combination of declining interest rates and a shift in the composition of liabilities from higher-rate time deposits to lower-rate demand and savings deposits. Interest-bearing demand and savings deposits increased $369.1 million, or 17.9%, and noninterest-bearing deposits increased $119.6 million, or 12.9%, while time deposits decreased by $207.1 million, or 7.4%. The Branch Acquisition contributed $101.4 million to the increase in average deposits. The net $216.7 million, or 3.8%, increase in average interest-bearing liabilities actually resulted in a $3.9 million decrease in interest expense due to the change in the composition of these liabilities. The 133 basis point decline in the average cost of interest-bearing funds resulted in a $65.9 million decrease in interest expense.
Average short-term borrowings increased $78.4 million, or 22.0%. This additional source of funds was partially used to reduce the Corporation’s higher rate long-term borrowings in the early part of 2002. Average long-term debt decreased $23.7 million, or 4.7%, from $500.2 million in 2001 to $476.4 million in 2002.
Provision and Allowance for Loan Losses
The Corporation accounts for the credit risk associated with lending activities is accounted for by the Corporation through its allowance and provision for loan losses. The provision is the expense recognized in the income statement to adjust the allowance to its proper balance, as determined through the application of the Corporation’s allowance methodology procedures. These procedures include the evaluation of the risk characteristics of the portfolio and documentation in accordance with the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” (SAB 102). See “Critical Accounting Policies” on page 2123 for a discussion of the Corporation’s allowance for loan loss evaluation methodology.
A summary of the Corporation’s loan loss experience follows:
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 2004 | 2003 | 2002 | 2001 | 2000 | �� | ||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Loans outstanding at end of year | $ | 6,159,994 | $ | 5,317,068 | $ | 5,373,020 | $ | 5,374,659 | $ | 4,882,606 | $ | 7,584,547 | $ | 6,159,994 | $ | 5,317,068 | $ | 5,373,020 | $ | 5,374,659 | ||||||||||||||||||||
Daily average balance of loans and leases | $ | 5,589,663 | $ | 5,381,950 | $ | 5,341,497 | $ | 5,131,651 | $ | 4,601,801 | $ | 6,901,452 | $ | 5,589,663 | $ | 5,381,950 | $ | 5,341,497 | $ | 5,131,651 | ||||||||||||||||||||
Balance of allowance for loan losses at beginning of year | $ | 71,920 | $ | 71,872 | $ | 65,640 | $ | 61,538 | $ | 61,327 | $ | 77,700 | $ | 71,920 | $ | 71,872 | $ | 65,640 | $ | 61,538 | ||||||||||||||||||||
Loans charged-off: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | 6,604 | 7,203 | 6,296 | 9,242 | 4,797 | 3,482 | 6,604 | 7,203 | 6,296 | 9,242 | ||||||||||||||||||||||||||||||
Real estate – mortgage | 1,476 | 2,204 | 767 | 1,922 | 1,604 | 1,466 | 1,476 | 2,204 | 767 | 1,922 | ||||||||||||||||||||||||||||||
Consumer | 4,497 | 5,587 | 6,683 | 6,911 | 8,147 | 3,476 | 4,497 | 5,587 | 6,683 | 6,911 | ||||||||||||||||||||||||||||||
Leasing and other | 651 | 676 | 529 | 282 | 124 | 453 | 651 | 676 | 529 | 282 | ||||||||||||||||||||||||||||||
Total loans charged-off | 13,228 | 15,670 | 14,275 | 18,357 | 14,672 | 8,877 | 13,228 | 15,670 | 14,275 | 18,357 | ||||||||||||||||||||||||||||||
Recoveries of loans previously charged-off: | ||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | 1,210 | 842 | 703 | 1,518 | 2,027 | 2,042 | 1,210 | 842 | 703 | 1,518 | ||||||||||||||||||||||||||||||
Real estate – mortgage | 711 | 669 | 364 | 541 | 710 | 906 | 711 | 669 | 364 | 541 | ||||||||||||||||||||||||||||||
Consumer | 1,811 | 2,251 | 2,683 | 2,724 | 2,202 | 1,496 | 1,811 | 2,251 | 2,683 | 2,724 | ||||||||||||||||||||||||||||||
Leasing and other | 97 | 56 | 87 | 19 | 1 | 76 | 97 | 56 | 87 | 19 | ||||||||||||||||||||||||||||||
Total recoveries | 3,829 | 3,818 | 3,837 | 4,802 | 4,940 | 4,520 | 3,829 | 3,818 | 3,837 | 4,802 | ||||||||||||||||||||||||||||||
Net loans charged-off | 9,399 | 11,852 | 10,438 | 13,555 | 9,732 | 4,357 | 9,399 | 11,852 | 10,438 | 13,555 | ||||||||||||||||||||||||||||||
Provision for loan losses | 9,705 | 11,900 | 14,585 | 15,024 | 9,943 | 4,717 | 9,705 | 11,900 | 14,585 | 15,024 | ||||||||||||||||||||||||||||||
Allowance purchased | 5,474 | — | 2,085 | 2,633 | — | 11,567 | 5,474 | — | 2,085 | 2,633 | ||||||||||||||||||||||||||||||
Balance at end of year | $ | 77,700 | $ | 71,920 | $ | 71,872 | $ | 65,640 | $ | 61,538 | $ | 89,627 | $ | 77,700 | $ | 71,920 | $ | 71,872 | $ | 65,640 | ||||||||||||||||||||
Selected Asset Quality Ratios: | ||||||||||||||||||||||||||||||||||||||||
Net charge-offs to average loans | 0.17 | % | 0.22 | % | 0.20 | % | 0.26 | % | 0.21 | % | 0.06 | % | 0.17 | % | 0.22 | % | 0.20 | % | 0.26 | % | ||||||||||||||||||||
Allowance for loan losses to loans outstanding at end of year | 1.26 | % | 1.35 | % | 1.34 | % | 1.22 | % | 1.26 | % | 1.18 | % | 1.26 | % | 1.35 | % | 1.34 | % | 1.22 | % | ||||||||||||||||||||
Non-performing assets (1) to total assets | 0.33 | % | 0.47 | % | 0.44 | % | 0.41 | % | 0.49 | % | 0.30 | % | 0.33 | % | 0.47 | % | 0.44 | % | 0.41 | % | ||||||||||||||||||||
Non-accrual loans to total loans | 0.36 | % | 0.45 | % | 0.42 | % | 0.41 | % | 0.49 | % | 0.30 | % | 0.36 | % | 0.45 | % | 0.42 | % | 0.41 | % |
(1) | Includes accruing loans past due 90 days or more. |
The following table presents the aggregate amount of non-accrual and past due loans and other real estate owned (3):
December 31 | December 31 | |||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||
Non-accrual loans (1) (2) | $ | 22,422 | $ | 24,090 | $ | 22,794 | $ | 21,790 | $ | 23,989 | $ | 22,574 | $ | 22,422 | $ | 24,090 | $ | 22,794 | $ | 21,790 | ||||||||||
Accruing loans past due 90 days or more | 9,609 | 14,095 | 9,368 | 7,135 | 8,549 | 8,318 | 9,609 | 14,095 | 9,368 | 7,135 | ||||||||||||||||||||
Other real estate | 585 | 938 | 1,817 | 1,035 | 1,002 | 2,209 | 585 | 938 | 1,817 | 1,035 | ||||||||||||||||||||
Totals | $ | 32,616 | $ | 39,123 | $ | 33,979 | $ | 29,960 | $ | 33,540 | $ | 33,101 | $ | 32,616 | $ | 39,123 | $ | 33,979 | $ | 29,960 | ||||||||||
(1) | As of December 31, |
(2) | Accrual of interest is generally discontinued when a loan becomes 90 days past due as to principal and interest. When interest accruals are discontinued, interest credited to income is reversed. Nonaccrual loans are restored to accrual status when all delinquent principal and interest becomes current or the loan is considered secured and in the process of collection. Certain loans, primarily residential mortgages, that are determined to be sufficiently collateralized may continue to accrue interest after reaching 90 days past due. |
(3) | Excluded from the amounts presented at December 31, |
The following table summarizes the allocation of the allowance for loan losses by loan type:
December 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | December 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | Allowance | % of Loans in Each Category | |||||||||||||||||||||||||||||||||||||||||||||||||||
Comm’l, financial & agriculture | $ | 34,247 | 31.6 | % | $ | 33,130 | 31.6 | % | $ | 22,531 | 27.8 | % | $ | 21,193 | 25.8 | % | $ | 15,516 | 24.8 | % | $ | 43,207 | 29.9 | % | $ | 34,247 | 31.6 | % | $ | 33,130 | 31.6 | % | $ | 22,531 | 27.8 | % | $ | 21,193 | 25.8 | % | ||||||||||||||||||||
Real estate – mortgage | 14,471 | 58.8 | 13,099 | 56.8 | 19,018 | 58.9 | 14,940 | 59.1 | 17,425 | 57.4 | 19,784 | 62.5 | 14,471 | 58.8 | 13,099 | 56.8 | 19,018 | 58.9 | 14,940 | 59.1 | ||||||||||||||||||||||||||||||||||||||||
Consumer, leasing & other | 16,279 | 9.6 | 14,178 | 11.6 | 10,855 | 13.3 | 10,772 | 15.1 | 9,435 | 17.8 | 16,289 | 7.6 | 16,279 | 9.6 | 14,178 | 11.6 | 10,855 | 13.3 | 10,772 | 15.1 | ||||||||||||||||||||||||||||||||||||||||
Unallocated | 12,703 | — | 11,513 | — | 19,468 | — | 18,735 | — | 19,162 | — | 10,347 | — | 12,703 | — | 11,513 | — | 19,468 | — | 18,735 | — | ||||||||||||||||||||||||||||||||||||||||
Totals | $ | 77,700 | 100.0 | % | $ | 71,920 | 100.0 | % | $ | 71,872 | 100.0 | % | $ | 65,640 | 100.0 | % | $ | 61,538 | 100.0 | % | $ | 89,627 | 100.0 | % | $ | 77,700 | 100.0 | % | $ | 71,920 | 100.0 | % | $ | 71,872 | 100.0 | % | $ | 65,640 | 100.0 | % | ||||||||||||||||||||
Over the past several years, the procedures used by the banking industry to evaluate the allowance for loan losses have received increased attention from the SEC, regulatory bodies and the accounting industry. These groups have attempted to reconcile the accounting theory of reserving for loan losses, which requires that the allowance represent management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date, with the regulatory goals of safety and soundness.
While the resulting guidance provided by these groups has not changed the accounting, it has focused on clarifying the application of existing accounting pronouncements and improving documentation. As with others in the industry, the Corporation has used this guidance to improve its process and its documentation. The unallocated allowance for loan losses, as shown in the preceding table, remaineddecreased 16% at 16% of the total allowance, unchanged from 2002.December 31, 2003 to 12% at December 31, 2004. The Corporation continues to monitor its allowance methodology to ensure compliance with both regulatory and accounting industry policies.
The provision for loan losses decreased $5.0 million from $9.7 million in 2003 to $4.7 million in 2004, after decreasing $2.2 million or 18.4%, in 2003 and $2.7 million, or 18.4%, 2002. The decrease in 2003 was due to2003. These decreases reflect the continued improvement in the Corporation’s asset quality resultingreflected in both lower net charge-offs and a lower required provision for the year. Net charge-offs were elevated in both 2002 and 2001 related to specific credits. In 2001 the Corporation also provided an additional $2.7 million related to the July 2001 acquisition of Drovers Bancshares Corporation (Drovers).
Non-performingnon-performing assets decreased $6.5 million, or 16.6%, as compared to 2002, representing a 14 basis point decrease as a percentage of total assets (0.33% in 2003 and 0.47% in 2002).ratios. Net charge-offs as a percentage of average loans were 0.06% in 2004, an eleven basis point improvement over 0.17% in 2003, which was a five basis point decrease from 2002. Net charge-offsNon-performing assets as a percentage of total assets decreased slightly from 0.33% at December 31, 2003 to 0.30% at December 31, 2004, after decreasing 14 basis points in all loan types during 2003. The declines in both ratios reflect the improving quality of the Corporation’s portfolio during the year.years.
The provision for loan losses in 20032004 resulted from the Corporation’s allowance allocation procedures. Trends that would indicate the need for a higher provision include the general national and regional economies and theThe continued growth inof the Corporation’s commercial loan and commercial mortgage portfolios, which are inherently more risky than other loan types.types, is a trend which would indicate the need for a higher allowance balance. Offsetting these trends were the improvements in the quality of the Corporation’s portfolio, as evidenced by its improving asset quality measures over the past several years. The net result of the Corporation’s allowance allocation procedures was a provision for loan losses that was $2.2$5.0 million less than 20022003 and was comparable to total net charge-offs for the year. Management believes that the allowance balance of $77.7$89.6 million at December 31, 20032004 is sufficient to cover losses inherent in the loan portfolio on that date and is appropriate based on applicable accounting standards.
Other Income
The following table detailspresents the components of other income for each of the lastpast three years:
Year Ended December 31 | ||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||
Investment management and trust services | $ | 33,898 | $ | 29,114 | $ | 27,138 | $ | 34,817 | $ | 33,898 | $ | 29,114 | ||||||
Service charges on deposit accounts | 38,500 | 37,502 | 32,388 | 39,451 | 38,500 | 37,502 | ||||||||||||
Other service charges and fees | 18,860 | 17,743 | 15,916 | 20,494 | 18,860 | 17,743 | ||||||||||||
Mortgage banking income | 21,482 | 17,154 | 11,782 | |||||||||||||||
Gain on sale of mortgage loans | 19,262 | 18,965 | 13,941 | |||||||||||||||
Investment securities gains | 19,853 | 8,992 | 12,561 | 17,712 | 19,853 | 8,992 | ||||||||||||
Other | 4,394 | 5,278 | 2,959 | 7,128 | 4,294 | 6,720 | ||||||||||||
Total | $ | 136,987 | $ | 115,783 | $ | 102,744 | $ | 138,864 | $ | 134,370 | $ | 114,012 | ||||||
OtherTotal other income for 2003 was $137.0 million, an increase of $21.2increased $4.5 million, or 18.3%3.3%, over other income of $115.8from $134.4 million in 2003 to $138.9 million in 2004, after increasing $20.4 million, or 17.9%, from $114.0 million in 2002. Excluding investment securities gains, other income increased $10.3$6.6 million, or 9.7%5.8%, in 20032004 and $16.6$9.5 million, or 18.4%9.0%, in 2002. The2003. While the acquisition of Premier did not have a significant impact on other income growth during 2003.2003 and 2004, the acquisition of Resource Bank contributed $14.4 million to total other income in 2004.
Other than investment securities gains the most significant percentage growth in each year was realized in mortgage banking income, which increased $4.3 million, or 25.2%, to $21.5 million in 2003, following an increase of $5.4 million, or 45.6%, in 2002. The low interest rate environment over the past two years fueled significant residential mortgage refinance activity, resulting in increases in gains on sales. Mortgage banking income consists of net gains on the sales of mortgage loans and servicing income, net of the amortization of mortgage servicing rights. Net gains on sales of mortgage loans increased $5.8 million, or 37.4%, partially offset by a decrease in net servicing income of $1.5 million, or 107.0%. In 2002, net gains on sales of mortgage loans increased $5.5 million, or 53.2%, and servicing income decreased $80,000, or 5.3%. The increase in gains on sales of mortgage loans in both years was due to the historically low average rates for 30-year fixed rate mortgage loans throughout the period and to the Corporation dedicating additional resources to enhance its mortgage banking activities. The decreases in net servicing income in 2003 and 2002 resulted from increased amortization of servicing rights due to prepayments of serviced loans.
Although mortgage rates were generally low throughout 2003, an upward trend during the last six months of the year was evident. In addition, it is generally believed that the refinancing market has reached a saturation point due to the high volume of activity during the past two years. For these reasons, the Corporation expects future mortgage origination volumes to be much lower than those realized over the past two years.
Investment management and trust services income grew $919,000, or 2.7%, in 2004 and $4.8 million, or 16.4%, in 2003 and $2.0 million, or 7.3%, in 2002.2003. Trust commission income increasedwas relatively flat in 2004 after increasing $1.5 million, or 8.3%, in 2003 as improvements in the equity markets increased values of assets under management. Brokerage revenue increased $974,000, or 8.3%, in 2004 and $3.0 million, or 33.8%, in 2003 and $2.4 million, or 37.5%, in 2002 as a result of improvingthe performance of the equity markets and increased annuity sales.
Total service charges on deposit accounts increased $951,000, or 2.5%, in 2004 and $1.0 million, or 2.7%, in 2003 and $5.12003. Overdraft fees increased $1.2 million, or 15.8%7.5%, in 2002. Overdraft fees increased2004 (including $175,000 due to the Acquisitions) and $407,000, or 2.7%, in 2003 and $2.9 million, or 24.5%, in 2002.(including $46,000 due to the Acquisitions). Cash management fees increased $50,000, or 0.7%, in 2004 and $260,000, or 3.6%, in 2003, after increasing $1.2 million, or 18.8%, in 2002. While the balances of cash management accounts increased during both years, during 2003 the number of accounts actually decreased due to the2003. The low interest rates, makingrate environment has made cash management services less attractive for smaller business customers.
Other service charges and fees increased $1.6 million, or 8.7%, in 2004 (including $280,000 due to the Acquisitions) and $1.1 million, or 6.3%, in 2003 (including $53,000 due to the Acquisitions). The increase in both years was driven by growth in letter of credit fees, merchant fees and $1.8 million, or 11.5%, in 2002.debit card fees. Letter of credit fees increased $878,000,$245,000, or 37.4%7.2% in 2004 and $889,000, or 35.1%, in 2003, and $982,000, or 71.9%, in 2002, and merchant fees increased $372,000, or 8.2%, in 2004 and $491,000, or 12.2%, in 2003, and $395,000, or 10.9%, in 2002, all as a result of an increased focus on growing these business lines. Debit card revenues grew onlyfees increased $549,000, or 10.7%, in 2004 (including $55,000 due to the Acquisitions) and $122,000, or 2.4%, in 2003 after growing $938,000, or 23.2%, in 2002. Due(including $19,000 due to the legal settlements between VISA and MasterCard and a third party, effective August 1, 2003,Acquisitions). While the Corporation’s earnings rate on debit card transactions has decreased, by approximately 20%. Asthe Corporation has seen an increase in transaction volume.
Gains on sales of January 1, 2004, debit card pricing will be based on more competitive factors. The Corporation does not expect to generate growth in this categorymortgage loans increased $297,000, or 1.6%, in 2004 compared to 2003.
Other income decreased $884,000,after increasing $5.0 million, or 16.8%36.0%, in 2003 after increasing $2.3and $4.4 million, or 78.4%,45.6% in 2002. Resource Bank contributed $11.1 million to the 2004 amount and without that amount, this category would show a $10.8 million, or 57.0%, decrease. The 2002 increase includeddecrease in the reversal of $848,000 of negative goodwill upon adoption of Statement 141, which did not recur in 2003, as well as increases in gains on sale of fixed assets and earningscurrent year was expected based on the Corporation’s life insurance investments.increase in interest rates from their historic lows and the resulting reduction in the level of mortgage refinancing activity.
Investment securities gains increaseddecreased $2.1 million, or 10.8%, in 2004 after increasing $10.9 million, or 120.8%, to $19.9 million in 2003, following a decrease of $3.6 million, or 28.4%, in 2002. In 2003, investment2003. Investment securities gains included realized gains of $17.3 million on the sale of equity securities of $14.8 million and $17.3 million in 2004 and 2003, respectively, reflecting the general improvement in the equity markets and bank stocks in particular, and $3.1 million and $5.9 million in 2004 and 2003, respectively, on the sale of debt securities, which were generally sold to take advantage of the interest rate environment. These gains were offset by write-downs of $137,000 in 2004 and $3.3 million of losses recognizedin 2003 for investmentspecific equity securities exhibitingdeemed to exhibit other than temporary impairment during the early part of the year.in value. As of December 31, 2003, those individual2004, the impaired securities still being held in the portfolio had recovered approximately $2.0$1.4 million of the amount written down.original write-down amount.
Other income increased $2.8 million, or 66.0%, in 2004 after decreasing $2.4 million, or 36.1%, in 2003. The increase in 2004 is entirely due to the acquisition of Resource Bank, which generated significant fee income from its mortgage-related business. The decrease in 2003 resulted from the reversal of $848,000 of negative goodwill in 2002 and a decrease in mortgage loan servicing income as the amortization of mortgage servicing rights increased.
Other Expenses
The following table detailspresents the components of other expenses for each of the past three years:
Year Ended December 31 | ||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||
Salaries and employee benefits | $ | 138,619 | $ | 129,355 | $ | 116,907 | $ | 162,126 | $ | 136,002 | $ | 127,584 | ||||||
Net occupancy expense | 19,896 | 17,705 | 17,074 | 23,813 | 19,896 | 17,705 | ||||||||||||
Equipment expense | 10,505 | 11,295 | 12,345 | 10,769 | 10,505 | 11,295 | ||||||||||||
Data processing | 11,532 | 11,968 | 11,782 | 11,430 | 11,532 | 11,968 | ||||||||||||
Advertising | 6,039 | 6,525 | �� | 6,117 | 6,943 | 6,039 | 6,525 | |||||||||||
Merger-related expenses | — | — | 7,105 | |||||||||||||||
Goodwill and intangible amortization | 2,059 | 1,838 | 4,786 | |||||||||||||||
Intangible amortization | 4,726 | 2,059 | 1,838 | |||||||||||||||
Other | 45,526 | 46,850 | 42,805 | 53,808 | 45,526 | 46,850 | ||||||||||||
Total | $ | 234,176 | $ | 225,536 | $ | 218,921 | $ | 273,615 | $ | 231,559 | $ | 223,765 | ||||||
Total other expenses for 2003 increased $8.6$42.1 million, or 3.8%18.2%, in 2004 (including $30.0 million due to $234.2 million ($3.8the Acquisitions) and $7.8 million, or 1.7%,3.5% in 2003 (including $4.8 million due to the Acquisitions).
The following table presents the amounts included in the above totals which were contributed by the Acquisitions:
2004 | 2003 | |||||
(in thousands) | ||||||
Salaries and employee benefits | $ | 18,523 | $ | 2,121 | ||
Net occupancy expense | 2,923 | 378 | ||||
Equipment expense | 1,426 | 138 | ||||
Data processing | 936 | 387 | ||||
Advertising | 1,028 | 48 | ||||
Intangible amortization | 1,504 | 570 | ||||
Other | 8,549 | 1,183 | ||||
Total | $ | 34,889 | $ | 4,825 | ||
The following table presents the components of other expenses for each of the past three years, excluding Premier). This followed a 2002 increase of $6.6 million, or 3.0%, to $225.5 million.the amounts contributed by the Acquisitions:
2004 | 2003 | 2002 | |||||||
(in thousands) | |||||||||
Salaries and employee benefits | $ | 143,603 | $ | 133,881 | $ | 127,584 | |||
Net occupancy expense | 20,890 | 19,518 | 17,705 | ||||||
Equipment expense | 9,343 | 10,367 | 11,295 | ||||||
Data processing | 10,494 | 11,145 | 11,968 | ||||||
Advertising | 5,915 | 5,991 | 6,525 | ||||||
Intangible amortization | 3,222 | 1,489 | 1,838 | ||||||
Other | 45,259 | 44,343 | 46,850 | ||||||
Total | $ | 238,726 | $ | 226,734 | $ | 223,765 | |||
The discussion that follows addresses changes in other expenses, excluding the Acquisitions.
Salaries and employee benefits increased $9.3$9.7 million, or 7.2%7.3%, in 2003 to $138.6 million, as compared to a $12.42004 and $6.3 million, or 10.6%4.9%, increase to $129.4 million in 2002. Premier contributed $2.1 million to the total salary and benefits increase in 2003. The salary expense component increased $8.0$4.2 million, or 7.7%3.9%, in 2004 and $5.3 million, or 5.2%, in 2003, driven by salary increases for existing employees as well as an increase
in the total number of employees. Total average full-time equivalent employees were 2,950remained relatively consistent at approximately 2,900. In 2003, an increase in 2003 as comparedcommission expense related to 2,905brokerage business also contributed to the increase in 2002 and 2,761 in 2001.salary expense. Employee benefits increased $2.0$5.1 million, or 9.0%21.7%, in 2004 and $1.7 million, or 7.9%, in 2003 driven mainly by continued increases in healthcare costs and retirement plan expenses ($1.6 million, or 19.8%).
The Corporation maintains two primary retirement plans, a defined contribution Profit Sharing Plan and aexpenses. See additional discussion of the Corporations defined benefit pension plan which has been closed to new participants. In general, the expense for the Profit Sharing Plan is a function of salary expense, while the defined benefit plan expense is actuarially determined. Defined benefit plan expense increased 66.9% from $1.8 million in 2002 to $3.0 million in 2003, following an increase of 83.2% in 2002. Defined benefit plan expense is expected to level off in 2004, with total expense expected to remain at approximately $3.0 million. The sharp increases in recent years were attributable to negative returns on plan assets. In 2003, the return on plan assets improved, ending the upward trend in expense. For more details on retirement plan expense, see “NoteNote L, – Employee“Employee Benefit Plans”, in the Notes to Consolidated Financial Statements.
Net occupancy expense increased $2.1$1.4 million, or 12.4%7.0%, to $19.9$20.9 million in 2003 as a result2004 after increasing $1.8 million, or 10.2%, in 2003. The increases resulted from the expansion of additional branchesthe branch network and the addition of new office space for existing affiliates as well as the acquisition of Premier.affiliates. Equipment expense decreased $790,000,$1.0 million, or 7.0%9.9%, in 2003 following a decrease of $1.1 million,2004 after decreasing $928,000, or 8.5%8.2%, in 2002.2003. The decrease in both years was due to lower depreciation expense as certain equipment became fully depreciated. In addition, in 2002, the Corporation realized a full year’s impact of efficiencies related to the July 2001 acquisition of Drovers.
Data processing expense decreased $436,000,$651,000, or 3.6%5.8%, in 2003, compared to an increase of $186,000,2004 after decreasing $823,000, or 1.6%6.9%, in 2002.2003. The decreaseCorporation has been successful over the past few years in 2003 was due to favorable renegotiations ofrenegotiating key processing contracts with certain contracts for data processing services.vendors.
Advertising expense decreased $486,000,$76,000, or 7.4%1.3%, in 2003, following a $408,000,2004 after decreasing $534,000, or 6.7%8.2%, increase in 2002. Advertising expense in 2002 included a significant image campaign for the Corporation’s lead bank. In addition, the2003. The Corporation had made a conscious decision to control advertising spending in both 2004 and 2003.
Intangible amortization increased $221,000,$1.7 million, or 12.0%116.4%, due to the amortization of the core deposit intangible asset recorded from the Premier acquisition. Goodwill and intangiblein 2004 after decreasing $349,000, or 19.0%, in 2003. Intangible amortization consists of the amortization of goodwill (prior to January 1, 2002), unidentifiable intangible assets related to branch and loan acquisitions, and core deposit intangible assets, and other identified intangible assets. In 2002,The increase in 2004 primarily represents the amortization of intangible assets related to the acquisition of an agriculture loan portfolio in December 2003. The decrease in 2003 resulted from an accelerated amortization decreased $2.9schedule in connection with a prior branch acquisition.
Other expense increased $916,000, or 2.1%, in 2004 after decreasing $2.5 million, or 61.6%5.4%, due toin 2003. The Corporation’s costs increased as a result of complying with the non-amortizationprovisions of goodwillthe Sarbanes-Oxley Act of 2002. These costs were realized in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards Nos. 142, “Goodwill and Other Intangible Assets” (Statement 142) and 147, “Acquisitions of Certain Financial Institutions” (Statement 147). See “Note F – Goodwill and Intangible Assets” in the Notes to Consolidated Financial Statements.
Other expense decreased $1.3 million, or 2.8%,external audit fees, which increased from $363,000 in 2003 to $45.5$1.6 million followingin 2004 as well as an increase of $4.0 million, or 9.4%,additional $400,000 in 2002. In 2002, the significant increase included a $962,000 increaseconsulting expense during 2004. These cost increases were offset by reductions in operating risk loss, other real estate expenses and legal fees. In 2003, many categories of costs decreased including operating risk loss, legal fees and non-income taxes. Additionally, there were amounts accrued for leasing residual value losses related to overdrafts and robberies, a $534,000 increaseseverance in costs related to student lending due to the significant drop in interest rates, a $530,000 increase in non-income taxes due to growth and a $476,000 increase in telephone and data line expense primarily associated with connecting all locations to a wide area network. These increases2002 that did not recur in 2003 – operating risk losses actually decreased $245,000, and non-income taxes decreased $1.3 million due to both the availability of state tax credits and corporate restructurings.2003.
Income Taxes
Income taxes increased $5.9 million, or 9.9%, in 2004 and $2.9 million, or 5.1%, in 2003 to $59.4 million, following an increase of $10.1 million, or 21.8%, in 2002.2003. The Corporation’s effective tax rate (income taxes divided by income before income taxes) remained fairly stable at 30.1%29.9%, 30.1% and 29.8% in 2004, 2003 and 29.0% in 2003, 2002, and 2001, respectively. In general, the variances from the 35% Federal statutory rate consisted of tax-exempt interest income and investments in low and moderate income housing partnerships, which generate Federal tax credits. Net credits were $4.5 million, $4.0 million and $4.0 million in 2004, 2003 and 2002, and $3.6 million in 2001.respectively.
For additional information regarding income taxes, see “Note K- IncomeNote K, “Income Taxes” in the Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets increased $1.4 billion, or 16.4%14.2%, to $9.8$11.2 billion at December 31, 20032004. Excluding the Resource and First Washington acquisitions (the 2004 Acquisitions), total assets decreased $236.4 million, or 2.4%. During 2004, maturing investment securities were not reinvested, instead paying off short-term borrowings and funding loan growth, in expectation of continued increases in short-term interest rates. Total loans increased $1.4 billion, or 23.2% ($552.0 million, or 9.1%, excluding the 2004 Acquisitions), while total investments decreased $477.3 million, or 16.3% ($808.8 million, or 27.6%, excluding the 2004 Acquisitions). Total deposits increased $1.1 billion, or 16.9%, to $7.9 billion at December 31, 2004, with approximately half$1.0 billion of the increase attributable to the Premier acquisition. 2004 Acquisitions.
The increase, net of Premier, was driven by loan growth and strategies to maintain higher investment balances. Total loans increased $842.9 million, or 15.9% ($476.3 million, or 9.0%, excluding Premier), while total investments increased $510.9 million, or 21.1% ($327.1 million, or 13.5%, excluding Premier).
Asset growth was funded by both deposit growth and increases in borrowings. Total deposits increased $506.3 million, or 8.1%, to $6.8 billion at December 31, 2003. Premier contributed $434.5 million to the increase. Total borrowings increased $792.2 million, or 67.5%, with the increase primarily in Federal funds purchased. Additional borrowings, both short-tem and long-term, were used to purchase investment securities under limited strategies to take advantage of low borrowing rates. In addition,table below presents a condensed ending balance sheet for the Corporation, purchased approximately $165 million of agricultural loansadjusted for the balances recorded for the 2004 Acquisitions, in Decembercomparison to 2003 which was funded by Federal funds purchased.ending balances.
2004 | 2003 | Increase (decrease) (3) | |||||||||||||||||
Fulton Corporation | 2004 Acquisitions (1) | Fulton (2) | Fulton Financial Corporation | $ | % | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Assets: | |||||||||||||||||||
Cash and due from banks | $ | 278,065 | $ | 26,320 | $ | 251,745 | $ | 300,966 | $ | (49,221 | ) | 16.4 | % | ||||||
Other earning assets | 195,560 | 117,487 | 78,073 | 37,320 | 40,753 | 109.2 | |||||||||||||
Investment securities | 2,449,859 | 331,541 | 2,118,318 | 2,927,150 | (808,832 | ) | (27.6 | ) | |||||||||||
Loans, net allowance | 7,494,920 | 860,638 | 6,634,282 | 6,082,294 | 551,988 | 9.1 | |||||||||||||
Premises and equipment | 146,911 | 22,382 | 124,529 | 120,777 | 3,752 | 3.1 | |||||||||||||
Goodwill and intangible assets | 389,322 | 239,281 | 150,210 | 144,796 | 5,414 | 3.7 | |||||||||||||
Other assets | 203,714 | 29,779 | 173,766 | 153,985 | 19,781 | 12.9 | |||||||||||||
Total Assets | $ | 11,158,351 | $ | 1,627,428 | $ | 9,530,923 | $ | 9,767,288 | $ | (236,365 | ) | (2.4 | )% | ||||||
Liabilities and Shareholders’ Equity: | |||||||||||||||||||
Deposits | $ | 7,895,524 | $ | 1,024,863 | $ | 6,870,661 | $ | 6,751,783 | $ | 118,878 | 1.8 | % | |||||||
Short-term borrowings | 1,194,524 | 127,755 | 1,066,769 | 1,396,711 | (329,942 | ) | (23.6 | ) | |||||||||||
Long-term debt | 684,236 | 134,015 | 550,221 | 568,730 | (18,509 | ) | (3.3 | ) | |||||||||||
Other liabilities | 141,777 | 19,268 | 122,509 | 103,128 | 19,381 | 18.8 | |||||||||||||
Total Liabilities | 9,916,061 | 1,305,901 | 8,610,160 | 8,820,352 | (210,192 | ) | (2.4 | ) | |||||||||||
Shareholders’ equity | 1,242,290 | 321,527 | 920,763 | 946,936 | (26,173 | ) | (2.8 | ) | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | 11,158,351 | $ | 1,627,428 | $ | 9,530,923 | $ | 9,767,288 | $ | (236,365 | ) | (2.4 | )% | ||||||
(1) | Balances recorded on acquisition dates. |
(2) | Excluding Resource and First Washington. |
(3) | Fulton Financial Corporation, excluding Resource and First Washington as compared to the prior year. |
Loans
The following table sets forth the amount of loans outstanding as of the dates shown:
December 31 | December 31 | |||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Commercial – industrial and financial | $ | 1,594,451 | $ | 1,489,990 | $ | 1,341,280 | $ | 1,248,045 | $ | 1,092,718 | $ | 1,946,962 | $ | 1,594,451 | $ | 1,489,990 | $ | 1,341,280 | $ | 1,248,045 | ||||||||||||||||||||
Commercial – agricultural | 354,517 | 189,110 | 154,100 | 138,127 | 120,089 | 326,176 | 354,517 | 189,110 | 154,100 | 138,127 | ||||||||||||||||||||||||||||||
Real-estate – construction | 307,109 | 248,565 | 267,627 | 247,382 | 171,351 | |||||||||||||||||||||||||||||||||||
Real-estate – commercial mortgage | 2,461,016 | 1,992,650 | 1,527,143 | 1,428,066 | 1,359,715 | |||||||||||||||||||||||||||||||||||
Real-estate – commercial construction | 348,846 | 264,129 | 201,178 | 208,191 | 202,286 | |||||||||||||||||||||||||||||||||||
Real-estate – residential mortgage | 1,324,611 | 1,244,783 | 1,468,799 | 1,569,636 | 1,428,467 | 543,072 | 434,568 | 534,286 | 793,507 | 965,760 | ||||||||||||||||||||||||||||||
Real-estate – commercial mortgage | 1,992,650 | 1,527,143 | 1,428,066 | 1,359,715 | 1,204,803 | |||||||||||||||||||||||||||||||||||
Real-estate – residential construction | 277,940 | 42,979 | 47,387 | 59,436 | 45,096 | |||||||||||||||||||||||||||||||||||
Real estate – home equity | 1,108,249 | 890,044 | 710,497 | 675,292 | 603,876 | |||||||||||||||||||||||||||||||||||
Consumer | 516,587 | 543,040 | 626,985 | 738,797 | 793,776 | 506,290 | 516,587 | 543,040 | 626,985 | 738,797 | ||||||||||||||||||||||||||||||
Leasing and other | 77,646 | 84,063 | 98,823 | 87,944 | 83,576 | 77,767 | 84,056 | 89,903 | 107,054 | 97,138 | ||||||||||||||||||||||||||||||
Deferred loan fees, net of costs | (4,972 | ) | (6,410 | ) | (5,840 | ) | (8,231 | ) | (9,194 | ) | ||||||||||||||||||||||||||||||
6,167,571 | 5,326,694 | 5,385,680 | 5,389,646 | 4,894,780 | 7,591,346 | 6,167,571 | 5,326,694 | 5,385,680 | 5,389,646 | |||||||||||||||||||||||||||||||
Unearned income | (7,577 | ) | (9,626 | ) | (12,660 | ) | (14,987 | ) | (12,174 | ) | (6,799 | ) | (7,577 | ) | (9,626 | ) | (12,660 | ) | (14,987 | ) | ||||||||||||||||||||
Totals | $ | 6,159,994 | $ | 5,317,068 | $ | 5,373,020 | $ | 5,374,659 | $ | 4,882,606 | $ | 7,584,547 | $ | 6,159,994 | $ | 5,317,068 | $ | 5,373,020 | $ | 5,374,659 | ||||||||||||||||||||
Total loans, net of unearned increased $1.4 billion, or 23.1%, in 2004 ($552.5 million, or 9.0%, excluding the 2004 Acquisitions). The internal growth of $552.5 million included increases in total commercial loans ($148.5 million, or 7.6%), commercial mortgage loans ($183.8 million, or 8.1%), construction loans ($42.7 million, or 13.9%), residential mortgages ($22.6 million, or 5.2%), and home equity loans ($168.3 million, or 18.9%), offset partially by decreases in consumer loans ($16.6 million, or 3.2%) and leasing and other loans ($8.0 million, or 10.3%).
In 2003, total loans increased $842.9 million, or 15.9% in 2003 ($319.1 million, or 6.0%, excluding the Premier and the purchased agricultural loans)loan acquisitions). Excluding thethese acquisitions, increases in total commercial loans ($45.6 million, or 2.7%), commercial mortgage loans ($177.2 million, or 11.6%), construction loans ($50.6 million, or 20.4%) and residential mortgages ($76.2 million, or 6.1%), were offset by decreases in consumer loans ($27.1 million, or 5.0%) and leasing and other ($3.4 million, or 4.6%). Residential mortgage loans increased due to an increase in home equity loans and consumer loans decreased due to increased competition in indirect auto lending.
In 2002, loans decreased $56.0 million, or 1.0%. Commercial loans increased $183.7 million, or 12.3%, and commercial mortgage loans increased $99.1 million, or 6.9%. These increases were offset by decreases in residential mortgage loans ($224.0 million, or 15.3%), construction loans ($19.1 million, or 7.1%), consumer loans ($83.9 million, or 13.4%) and leasing and other loans ($11.7 million, or 13.6%).
Investment Securities
The following table sets forth the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown:
December 31 | December 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||||||||||||||||
HTM | AFS | Total | HTM | AFS | Total | HTM | AFS | Total | HTM | AFS | Total | HTM | AFS | Total | HTM | AFS | Total | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 7,728 | $ | 82,439 | $ | 90,167 | $ | 8,568 | $ | 97,304 | $ | 105,872 | $ | 8,170 | $ | 99,682 | $ | 107,852 | $ | 6,903 | $ | 128,925 | $ | 135,828 | $ | 7,728 | $ | 82,439 | $ | 90,167 | $ | 8,568 | $ | 97,304 | $ | 105,872 | ||||||||||||||||||
State and municipal | 4,462 | 298,030 | 302,492 | 4,679 | 249,866 | 254,545 | 9,840 | 218,181 | 228,021 | 10,658 | 332,455 | 343,113 | 4,462 | 298,030 | 302,492 | 4,679 | 249,866 | 254,545 | ||||||||||||||||||||||||||||||||||||
Equity securities | — | 212,352 | 212,352 | — | 155,138 | 155,138 | — | 151,333 | 151,333 | — | 170,065 | 170,065 | — | 212,352 | 212,352 | — | 155,138 | 155,138 | ||||||||||||||||||||||||||||||||||||
Corporate debt securities | 640 | 28,656 | 29,296 | 50 | 300 | 350 | 165 | 300 | 465 | 650 | 71,127 | 71,777 | 640 | 28,656 | 29,296 | 50 | 300 | 350 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 10,163 | 2,282,680 | 2,292,843 | 19,387 | 1,880,999 | 1,900,386 | 31,382 | 1,218,291 | 1,249,673 | 6,790 | 1,722,286 | 1,729,076 | 10,163 | 2,282,680 | 2,292,843 | 19,387 | 1,880,999 | 1,900,386 | ||||||||||||||||||||||||||||||||||||
Totals | $ | 22,993 | $ | 2,904,157 | $ | 2,927,150 | $ | 32,684 | $ | 2,383,607 | $ | 2,416,291 | $ | 49,557 | $ | 1,687,787 | $ | 1,737,344 | $ | 25,001 | $ | 2,424,858 | $ | 2,449,859 | $ | 22,993 | $ | 2,904,157 | $ | 2,927,150 | $ | 32,684 | $ | 2,383,607 | $ | 2,416,291 | ||||||||||||||||||
Total investment securities decreased $477.3 million, or 16.4%, ($808.8 million, or 27.6%, excluding the 2004 Acquisitions), to a balance of $2.4 billion at December 31, 2004. In 2003, investment securities increased $510.9 million, or 21.1%, ($327.1 million, or 13.5%, excluding Premier), to reach a balance of $2.9 billion at December 31, 2003. In 2002, investment securities increased $678.9 million, or 39.1%,billion. As noted above, the decrease in 2004 represented maturities and prepayments that were not reinvested due to reach a balancethe expectation of $2.4 billion. The majority of the increase in both years was in mortgage-backed securities.increasing short-term interest rates.
The Corporation classified virtually its entire investment portfolio (99.2%) as available for sale at December 31, 20032004 and, as such, these investments were recorded at their estimated fair values. As short-term interest rates continued to decrease andincreased in the Corporation reinvested funds from existing mortgage-backed securities payoffs in new mortgage-backed securities, totalsecond half of 2004, the net unrealized gainsgain on non-equity investmentsavailable for sale investment securities decreased $46.7$24.8 million tofrom a net unrealized gain of $3.8 million at December 31, 2003.2003 to a net unrealized loss of $21.1 million at December 31, 2004.
At December 31, 2003,2004, equity investmentssecurities consisted of FHLB and other government agency stock ($52.163.4 million), stocks of other financial institutions ($86.569.2 million) and mutual funds and other ($73.837.4 million). The bank stock portfolio has historically been a source of capital appreciation and realized gains ($17.514.8 million in 2004, $17.3 million in 2003 and $7.4 million in 2002 and $9.5 million in 2001)2002). Management periodically sells bank stocks when, in its opinion, valuations and market conditions warrant such sales.
Other Assets
Premises and equipment decreased $2.7 million, or 2.2%, in 2003 to $120.8 million, following a $2.2 million, or 1.7%, decrease in 2002. The decrease in both years was mainly due to excess branch and other properties disposed of during 2003 and 2002 and depreciation of existing property.
Cash and due from banks decreased $22.9 million, or 7.6% ($49.2 million, or 16.4%, excluding the 2004 Acquisitions), in 2004, following a $13.9 million, or 4.4%, to $301.0 million in 2003, following a $41.7 million, or 11.7%, decrease in 2002.2003. Because of the daily fluctuations that result in the normal course of business, cash is more appropriately analyzed in terms of average balances. On an average balance basis, cash and due from banks increased $36.2 million, or 12.9%, from $280.0 million in 2003 to $316.2 million in 2004, following a $26.5 million, or 10.4%, from $253.5 million in 2002 to $280.0 million in 2003 following an $11.8 million, or 4.9%, increase in 2002. Excluding the impact of Premier, the increases2003. The increase in both years resulted from acquisitions and growth in the Corporation’s branch network.
Other assets, including accrued interest receivablePremises and goodwill,equipment increased $89.0$26.1 million, or 42.5%21.6%, in 20032004 to $298.7$146.9 million, which included $22.4 as a result of the 2004 Acquisitions. The remaining increase reflects additions of $16.2 million primarily for the construction of various new branch and office facilities, partially offset by current year depreciation expense.
Goodwill and intangible assets increased $244.5 million, or 168.9%, in 2004, following a $15.1$72.5 million, or 6.7%100.3%, decrease in 2002. The net increase in 2003, was primarily dueas a result of acquisitions. Other assets increased $49.7 million, or 32.3%, in 2004 to $203.7 million, including $29.8 million as a $73.9 million increase in goodwill and intangible assets recorded for Premier andresult of the 2004 Acquisitions, an $8.7 million increase in the net deferred tax asset mainly as a result of a decrease in the unrealized gains on investment securities. The net decrease in 2002 resulted mainly from an $11.8 million decrease in the net deferred tax asset due to an increasedecreases in unrealized gains on investment securities.
The Corporation continued tosecurities, and an $11.9 million increase its participation in affordable housing projects through investments in partnerships. Equitylow-income housing projects. During 2004, equity investments of $8.4$17.5 million were made to fiveeight new partnerships in 2003.partnerships. The Corporation made its initial investment of this type during 1989 and is now involved in 5658 partnerships, located in the communities served by its subsidiary banks. The carrying value of these investments was approximately $40.0$52.0 million at December 31, 2003.2004. With these investments, the Corporation not only improves the quantity and quality of available housing for low income individuals in support of its banks’ Community Reinvestment Act compliance efforts, but also becomes eligible for tax credits under Federal and, in some cases state, programs.
Deposits and Borrowings
Deposits increased $1.1 billion, or 16.9%, to $7.9 billion at December 31, 2004 ($118.9 million, or 1.8%, excluding the 2004 Acquisitions). This compares to an increase of $506.3 million, or 8.1%, to $6.8 billion at December 31,in 2003, ($71.8 million, or 1.1%, excluding Premier)the Premier acquisition). This compares to an increase of $258.7 million, or 4.3%, in 2002. The recent trend has been moderate internalstrong growth in deposit funding, supplementedcore demand and savings accounts, offset by acquisitions. The relatively poor performance of the equity marketsdeclines in 2001 and 2002 led consumerstime deposits. Consumers have continued to favor banks over the equity investments.markets, even though market performance has recovered some of its decline from the past few years. In addition, the relatively low interest rate environment resulted in consumers favoringcontinuing to favor demand and savings products over time deposits. Although short-term rates have increased in 2004, longer-term rate increases have not been as significant. If longer-term rates increase significantly in the future, consumers may shift their deposit products.funds to higher cost time deposits.
During 2004, demand deposits increased $457.1 million, or 17.9% ($234.6 million, or 10.8%, excluding the 2004 Acquisitions), savings deposits increased $165.7 million, or 9.5% ($58.7 million, or 3.8%, excluding the 2004 Acquisitions) and time deposits increased $521,000 , or 21.3% (decrease of $174.5 million, or 7.2%, excluding the 2004 Acquisitions).
During 2003, demand deposits increased $372.7 million, or 17.1% ($220.8 million, or 10.1%, excluding Premier), savings deposits increased $222.4 million, or 14.5%, ($139.0 million, or 9.1%, excluding Premier), while time deposits decreased $88.8 million, or 3.5%, ($287.9 million, or 11.3%, excluding Premier).
During 2002, demand deposits increased $260.3 million, savings deposits increased $106.7 million and time deposits decreased $108.2 million. Many of the trends experienced during 20022003 began in 2001 when the FRB started its series of rate cuts.
Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management accounts, increaseddecreased $202.2 million, or 14.5% ($329.9 million, or 23.6%, excluding the 2004 Acquisitions), in 2004 after increasing $764.5 million, or 120.9% ($703.6 million, or 111.3%, excluding Premier), during 2003 after increasing $231.9 million, or 57.9%, in 2002. In
both years2003. The decrease in 2004 was due to strategies to reduce overnight Federal funds purchased in the recent rising rate environment. In 2003, the increase resulted from the actions taken to manage the gap position and to take advantage of low fundingshort-term borrowing rates. Long-term debt increased $115.5 million, or 20.3% (decrease of $18.5 million, or 3.3%, excluding the 2004 Acquisitions). The decrease in 2004 was due to a decrease in Federal Home Loan Bank advances. Long-term debt increased $33.2 million, or 6.2%, during 2003 after increasing $78.8 million, or 17.2%, during 2002. The increase in 2003 was mainly due to the $25.0 million of junior subordinated debentures assumed from Premier.
Other Liabilities
Other liabilities increased $38.6 million, or 37.5% ($19.4 million, or 18.8%, excluding the 2004 Acquisitions), following a $2.1 million, or 2.0%, decrease in 2003. The increase in 2002 resulted from the Corporation taking advantage of the lower rates available2004 was primarily attributable to additional equity commitments for low-income housing projects ($9.2 million increase), an increase in accrued retirement benefits ($2.4 million) and increasing its borrowings from the Federal Home Loan Bank.an increase in dividends payable to shareholders ($2.5 million).
Shareholders’ Equity
Total shareholders’ equity of $946.9 million,$1.2 billion, or 9.7%11.1% of ending total assets, increased $83.2$295.4 million, or 9.6%31.2%, fromsince December 31, 2002. Growth2003. This growth reflected the issuance of stock to effect the 2004 Acquisitions in shareholders’ equity generally results from comprehensive income during the period,amount of $311.1 million, offset by dividends paid to shareholders, which have historically amounted to 40-50%treasury stock purchases of current period net income.$79.0 million. Shareholders’ equity was also increased $88.2 million as a resultby retained earnings of stock issued for the Premier acquisition. This increase was somewhat offset by the purchase of $59.7 million of treasury stock. In 2002, shareholders’ equity increased $52.3 million, or 6.4%. This higher growth rate in 2002 reflects fewer treasury stock purchases.$75.7 million.
The Corporation periodically implements stock repurchase plans for various corporate purposes. In addition to evaluating the financial benefits of implementing repurchase plans, management also considers liquidity needs, the current market price per share and relevant accounting and regulatory issues. Repurchase plans were significantly limited during periods whenlimitations. In 2002, the Corporation accounted for acquisitions using poolingBoard of interests accounting. While Statement 142 removed these accounting restraints by requiring the use of purchase accounting, recent SEC rules have placed additional restrictions on stock repurchases.
The Corporation hasDirectors approved a stock repurchase plan thatfor 5.8 million shares, which was originally approved byextended through June 30, 2004. During 2004, 1.3 million shares were repurchased under this plan. On June 15, 2004, the Board of Directors in December 2002 and is currently scheduled to terminate in June 2004. Thisapproved a stock repurchase plan allows for the repurchase of up to 5.84.0 million shares of the Corporation’s common stock to be used for general corporate purposes. Throughthrough December 31, 2003 approximately 795,0002004. During 2004, 2.5 million shares had beenwere repurchased under this plan.plan, including 1.0 million shares acquired under an accelerated share repurchase program. On December 21, 2004, the Board of Directors extended the stock repurchase plan through June 30, 2005 and increased the total number of shares that could be repurchased to 4.0 million. No shares were purchased under this extended plan in 2004.
The Corporation and its subsidiary banks are subject to various regulatory capital requirements administered by various banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the Corporation’s financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of December 31, 2003,2004, the Corporation and each of its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each of its bank subsidiaries’ capital ratios exceeded the amounts required to be considered “well-capitalized” as defined in the regulations. See also Note J, “Regulatory Matters”, in the Notes to Consolidated Financial Statements.
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that may require future cash payments. These obligations include the payment of liabilities recorded on the Corporation’s balance sheet as well as contractual obligations for purchased services or for operating leases. The following table summarizes significant contractual obligations to third parties, by type, that are fixed and determinable at December 31, 2003:2004:
Payments Due In | Payments Due In | |||||||||||||||||||||||||||||
One Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total | One Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total | |||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||
Deposits with no stated maturity (a) | $ | 4,303,635 | $ | — | $ | — | $ | — | $ | 4,303,635 | $ | 4,926,478 | $ | — | $ | — | $ | — | $ | 4,926,478 | ||||||||||
Time deposits (b) | 1,273,905 | 762,022 | 305,984 | 106,237 | 2,448,148 | 1,503,631 | 982,014 | 173,822 | 309,579 | 2,969,046 | ||||||||||||||||||||
Short-term borrowings (c) | 1,396,711 | — | — | — | 1,396,711 | 1,194,524 | — | — | — | 1,194,524 | ||||||||||||||||||||
Long-term debt (c) | 5,000 | 100,180 | 261,169 | 199,504 | 565,853 | 126,230 | 104,008 | 281,347 | 172,651 | 684,236 | ||||||||||||||||||||
Operating leases (d) | 5,713 | 9,672 | 7,100 | 15,916 | 38,401 | 8,051 | 13,961 | 8,592 | 19,752 | 50,356 | ||||||||||||||||||||
Purchase obligations (e) | 5,831 | 7,750 | 3,661 | — | 17,242 | 11,438 | 6,675 | 3,411 | — | 21,524 |
(a) | Includes demand deposits and savings accounts, which can be withdrawn by customers at any time. |
(b) | See additional information regarding time deposits in |
(c) | See additional information regarding borrowings in |
(d) | See additional information regarding operating leases in |
(e) | Includes significant information technology, telecommunication and data processing outsourcing contracts. Variable obligations, such as those based on transaction volumes, are not included. |
In addition to the contractual obligations listed in the preceding table, Thethe Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the Consolidated Balance Sheets.consolidated balance sheets. 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. Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. Commitments and standby letters of credit do not necessarily represent future cash needs as they may expire without being drawn.
The following table summarizespresents the Corporation’s commitments to extend credit and letters of credit as of December 31, 20032004 (in thousands):
Commercial mortgage, construction and land development | $ | 297,156 | $ | 689,818 | ||
Home equity | 333,139 | 412,790 | ||||
Credit card | 314,532 | 384,504 | ||||
Commercial and other | 1,617,108 | 1,851,159 | ||||
Total commitments to extend credit | $ | 2,561,935 | $ | 3,338,271 | ||
Standby letters of credit | 510,806 | $ | 533,094 | |||
Commercial letters of credit | 16,992 | 24,312 | ||||
Total letters of credit | $ | 527,798 | $ | 557,406 | ||
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most important to the portrayal of its financial condition and results of operations as they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Allowance and Provision for Loan Losses-– The Corporation accounts for the credit risk associated with its lending activities through the allowance and provision for loan losses. The allowance is an estimate of the losses inherent in the loan portfolio as of the balance sheet date. The provision is the periodic charge to earnings, which is necessary to adjust the allowance to its proper balance. On a quarterly basis, the Corporation assesses the adequacy of its allowance through a methodology that consists of the following:
The allowance review methodology is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results.
GoodwillAccounting for Business Combinations – WithThe Corporation accounts for all business acquisitions using the adoptionpurchase method of Statementsaccounting as required by Statement of Financial Accounting Standards No. 141, “Business Combinations” (Statement 141). Purchase accounting requires the purchase price to be allocated to the estimated fair values of the assets acquired and liabilities assumed. It also requires assessing the existence of and, if necessary, assigning a value to certain intangible assets. The remaining excess purchase price over the fair value of net assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash consideration paid and certain acquisition-related expenses. The fair values of assets acquired and liabilities assumed are typically established through appraisals, observable market values or discounted cash flows. Management has engaged independent third-party valuation experts to assist in valuing certain assets, particularly intangibles. Other assets and liabilities are generally valued using the Corporation’s internal asset/liability modeling system. The assumptions used and the final valuations, whether prepared internally or by a third party, are reviewed by management. Due to the complexity of purchase accounting, final determinations of values can be time consuming and, occasionally, amounts included in the Corporation’s consolidated balance sheets and consolidated statements of income are based on preliminary estimates of value.
Goodwill and Intangible Assets – Statement of Financial Accounting Standards No. 142, “Goodwill and 147, effective on January 1, 2002,Other Intangible Assets” (Statement 142) addresses the Corporation discontinuedaccounting for goodwill and intangible assets subsequent to acquisition. Intangible assets are amortized over their estimated lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All intangible assets must be evaluated for impairment if certain events occur. Any impairment write-downs are recognized as expense in the amortization of goodwill associated with qualifying acquisitions. As of January 1, 2002, andconsolidated income statement.
Goodwill is not amortized to expense, but is evaluated at least annually thereafter, recorded goodwill is subject to impairment testing to determine whether write-downs of the recorded balances are necessary.for impairment. The Corporation performscompletes its annual goodwill impairment test as of October 31stof each year.
The Corporation tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional test is necessary to assess the proper carrying value of the goodwill. The Corporation determined that no impairment write-offs were necessary during 2004, 2003 and 2002.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments. Among these are future growth rates for the reporting units, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges in the future.
Income Taxes – The provision for income taxes is based upon the results of operations,income before income taxes, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are not likely to be recovered, a valuation allowance must be recognized. The Corporation has determined that a valuation allowance is not required for deferred tax assets as of December 31, 2003.2004, except in the case of deferred tax benefits related to state income tax net operating losses. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Corporation’s financial statements. See also Note K, “Income Taxes”, in the Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
Note A, “Summary of Significant Accounting Policies”, in the Notes to Consolidated Financial Statements discusses the expected impact of recently issued accounting standards which have not yet been adopted by the Corporation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include interest rate risk, equity market price risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Corporation. The Corporation’s equity investments consist primarily of common stocks of publicly traded financial institutions, (costU.S. Government and agency stocks and money market mutual funds. The equity investments most susceptible to equity market price risk are the financial institutions stocks, which had a cost basis of approximately $71.3$56.9 million and a fair value of $86.1$64.3 million at December 31, 2003). The Corporation’s financial institutions stock had gross2004. Gross unrealized gains ofin this portfolio were approximately $15.4$7.8 million at December 31, 2003.2004.
Although the carrying value of the financial institutions stockstocks accounted only for less than 1.0%0.6% of the Corporation’s total assets, the unrealized gains on the portfolio represent a potential source of revenue. The Corporation has a history of periodically realizing gains from this portfolio and, if values were to decline significantly, this revenue source could be lost.
Management continuously monitors the fair value of its equity investments and evaluates current market conditions and operating results of the companies. Periodic sale and purchase decisions are made based on this monitoring process. None of the Corporation’s equity securities are classified as trading. Future cash flows from these investments are not provided in the table on page 2629 as such investments do not have maturity dates.
Through early 2003, certain of the Corporation’s equity investments had shown negative returns in tandem with the general performance of equity markets. The Corporation hadhas evaluated, based on existing accounting guidance, whether the decreases in value of any of theseunrealized losses on individual equity investments constituted “other than temporary” impairment, which would require a write-down through a charge to earnings. In 2003,Based on the results of such evaluations, the Corporation recorded write-downs of $137,000 in 2004 and $3.3 million in 2003 for specific equity securities which were deemed to exhibit “otherother than temporary”temporary impairment in value. AsThrough December 31, 2004, gains of approximately $1.7 million had been realized on the sale of investments previously written down and, as of December 31, 2003, those individual2004, the impaired securities still held in the portfolio had recovered approximately $2.0$1.4 million of the amount written down.original write-down amount. Additional impairment charges may be necessary depending upon the performance of the equity markets in general and the performance of the individual investments held by the Corporation. See also Note C, “Investment Securities”, in the Notes to Consolidated Financial Statements.
In addition to the risk of changes in the value of its equity portfolio, the Corporation’s investment management and trust services revenue could also be impacted by fluctuations in the securities markets. A portion of the Corporation’s trust revenue is based on the value of the underlying investment portfolios. If securities markets contract, the Corporation’s revenue could be negatively impacted. In addition, the ability of the Corporation to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in the outlook for rising securities prices.
Interest Rate Risk, and Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Corporation’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Corporation’s net interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior management personnel, meets on a weekly basis. The ALCO is responsible for reviewing the interest rate sensitivity position of the Corporation, approving asset and liability management policies, and overseeing the formulation and implementation of strategies regarding balance sheet positions and earnings. The primary goal of asset/liability management is to address the liquidity and net interest income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to meet the ongoing cash flow requirements of customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Liquidity sources are found on both sides of the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled principal reductions and interest payments on outstanding loans and investments. Liquidity is also provided through the availability of deposits and borrowings.
The Corporation’s sources and uses of cash were discussed in general terms in the “Net Interest Income”“Overview” section of Management’s Discussion. The Consolidated Statementsconsolidated statements of Cash Flowscash flows provide additional information. The Corporation generated $187.9$145.9 million in cash from operating activities during 2003,2004, mainly due to net income. Investing activities resulted in a net cash outflowinflow of $825.9$215.8 million, compared to a net cash outflow of $604.4$825.9 million in 2002, as2003. In 2004, proceeds from salesmaturities and maturitiessales of investment securities decreasedexceeded reinvestments in proportionthe portfolio and the net increase in the loan portfolio. In 2003, funds provided by investment maturities and increased borrowings were used to purchases in both periods. Finally, financingpurchase additional investment securities. Financing activities resulted in a net cash outflow of $384.5 million in 2004, compared to a net cash inflow of $624.0 million$623.3 in 2003 and $468.0 million in 2002 as excess funds from net deposit growth and borrowings exceeded net common stock activity in both periodsprovided by maturing investments were used to reduce short-term borrowings.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these limitations are based on the subsidiary banks’ regulatory capital levels and their net income. TheUntil 2004, the Parent Company has historically been able to meet its cash needs through normal, allowable dividends and loans. If additionalHowever, as a result of increased acquisition activity and stock repurchase plans, the Parent Company’s cash needs arise that cannot be met through such dividends and loans,have increased, requiring additional sources of funds in 2004.
In 2004, the Parent Company may needentered into a revolving line of credit agreement with an unaffiliated bank. Under the terms of the agreement, the Parent Company can borrow up to pursue alternative funding sources, including stock or debt issuances.$50.0 million (may be increased to $100.0 million upon request) with interest calculated at the one-month London Interbank Offering Rate (LIBOR) plus 0.625%. The credit agreement requires the Corporation to maintain certain financial ratios related to capital strength and earnings. The Corporation was in compliance with all required covenants under the credit agreement as of December 31, 2004.
This borrowing arrangement supplements the liquidity available from subsidiaries through dividends and borrowings and provides some flexibility in Parent Company cash management. As of December 31, 2004, $11.9 million had been borrowed on this line. Management continues to monitor the liquidity and capital needs of the Parent Company and will implement appropriate strategies, as necessary, to remain well-capitalized and to meet its cash needs.
In addition to its normal recurring and operating cash needs, the Parent Company will also pay cash for a portion of the SVB acquisition, which is expected to be completed in the third quarter of 2005. Based on the terms of the merger agreement, the Parent Company will pay a minimum of approximately $17.0 million and a maximum of approximately $34.0 million to consummate the acquisition. See Note Q, “Mergers and Acquisitions” in the Notes to Consolidated Financial Statements for a summary of the terms of this transaction.
At December 31, 2003,2004, liquid assets (defined as cash and due from banks, short-term investments, Federal funds sold, mortgages available for sale, securities available for sale, and non-mortgage-backed securities held to maturity due in one year or less) totaled $2.9 billion, or 26.1% of total assets. This compares to $3.2 billion, or 33.2% of total assets. This compares to $2.8 billion, or 33.1% of total assets, at December 31, 2002.2003.
The following tables set forth the maturities of investment securities at December 31, 20032004 and the weighted average yields of such securities (calculated based on historical cost).:
HELD TO MATURITY(at (at amortized cost)
MATURING | ||||||||||||||||||||||||
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | |||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Government and agency securities | $ | 675 | 6.13 | % | $ | 4,516 | 3.61 | % | $ | 2,221 | 4.93 | % | $ | 316 | 7.61 | % | ||||||||
State and municipal (1) | 2,488 | 4.52 | 560 | 4.41 | 1,414 | 7.85 | — | — | ||||||||||||||||
Other securities | 90 | 3.07 | 550 | 2.79 | — | — | — | — | ||||||||||||||||
Totals | $ | 3,253 | 4.81 | % | $ | 5,626 | 3.61 | % | $ | 3,635 | 6.06 | % | $ | 316 | 7.61 | % | ||||||||
Mortgage-backed securities (2) | $ | 10,163 | 6.05 | % | ||||||||||||||||||||
AVAILABLE FOR SALE(at estimated fair value)
MATURING | MATURING | |||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | |||||||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 53,205 | 1.36 | % | $ | 29,234 | 2.07 | % | $ | — | — | % | $ | — | — | % | $ | 862 | 2.25 | % | $ | 3,549 | 4.13 | % | $ | 2,179 | 4.29 | % | $ | 313 | 7.61 | % | ||||||||||||||||
State and municipal (1) | 10,167 | 6.15 | 129,610 | 6.05 | 129,786 | 4.77 | 28,467 | 8.22 | 8,893 | 2.98 | 1,110 | 6.32 | 655 | 8.00 | — | — | ||||||||||||||||||||||||||||||||
Other securities | 13,136 | 5.00 | 3,660 | 5.95 | — | — | 11,860 | 3.74 | 50 | 6.91 | 600 | 4.13 | — | — | — | — | ||||||||||||||||||||||||||||||||
Totals | $ | 76,508 | 2.62 | % | $ | 162,504 | 5.33 | % | $ | 129,786 | 4.77 | % | $ | 40,327 | 6.90 | % | $ | 9,805 | 2.93 | % | $ | 5,259 | 4.59 | % | $ | 2,834 | 5.15 | % | $ | 313 | 7.61 | % | ||||||||||||||||
Mortgage-backed securities (2) | $ | 2,282,680 | 3.64 | % | $ | 6,790 | 6.04 | % | ||||||||||||||||||||||||||||||||||||||||
AVAILABLE FOR SALE (at estimated fair value) | ||||||||||||||||||||||||||||||||||||||||||||||||
MATURING | ||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | |||||||||||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 82,954 | 1.97 | % | $ | 29,884 | 3.15 | % | $ | 11,934 | 5.04 | % | $ | 4,153 | 3.39 | % | ||||||||||||||||||||||||||||||||
State and municipal (1) | 30,570 | 4.52 | 161,760 | 5.17 | 98,740 | 5.09 | 41,385 | 8.67 | ||||||||||||||||||||||||||||||||||||||||
Other securities | 3,327 | 6.28 | 378 | 5.01 | 2,962 | 7.19 | 64,460 | 7.24 | ||||||||||||||||||||||||||||||||||||||||
Totals | $ | 116,851 | 2.76 | % | $ | 192,022 | 4.85 | % | $ | 113,636 | 5.14 | % | $ | 109,998 | 7.63 | % | ||||||||||||||||||||||||||||||||
Mortgage-backed securities (2) | $ | 1,722,286 | 3.45 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1) | Weighted average yields on tax-exempt securities have been computed on a fully tax-equivalent basis assuming a tax rate of 35 percent. |
(2) | Maturities for mortgage-backed securities are dependent upon the interest rate environment and prepayments on the underlying loans. For the purpose of this table, the entire balance and weighted average rate is shown in one period. |
The Corporation’s investment portfolio consists mainly of mortgage-backed securities which do not have stated maturities. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans, and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans slow.decrease. As rates decrease, cash flows generally increase as prepayments increase. The Corporation invests primarily in five and seven year balloon mortgage-backed securities.securities to limit interest rate risk and promote liquidity.
The following table summarizespresents the approximate contractual maturity and sensitivity of certain loan types, excluding consumer loans and leases, to changes in interest rates as of December 31, 2003:2004:
One Year or Less | One Through Five Years | More Than Five Years | Total | One Year or Less | One Through Five Years | More Than Five Years | Total | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Commercial, financial and agricultural: | ||||||||||||||||||||||||
Floating rate | $ | 366,215 | $ | 342,417 | $ | 550,201 | $ | 1,258,833 | $ | 523,570 | $ | 518,874 | $ | 770,183 | $ | 1,812,627 | ||||||||
Fixed rate | 195,872 | 361,347 | 132,916 | 690,135 | 139,925 | 243,802 | 76,784 | 460,511 | ||||||||||||||||
Total | $ | 562,087 | $ | 703,764 | $ | 683,117 | $ | 1,948,968 | $ | 663,495 | $ | 762,676 | $ | 846,967 | $ | 2,273,138 | ||||||||
Real-estate – mortgage: | ||||||||||||||||||||||||
Floating rate | $ | 457,781 | $ | 278,817 | $ | 182,811 | $ | 919,409 | $ | 480,490 | $ | 1,222,487 | $ | 882,216 | $ | 2,585,193 | ||||||||
Fixed rate | 537,162 | 1,165,663 | 695,027 | 2,397,852 | 744,984 | 671,297 | 110,863 | 1,527,144 | ||||||||||||||||
Total | $ | 994,943 | $ | 1,444,480 | $ | 877,838 | $ | 3,317,261 | $ | 1,225,474 | $ | 1,893,784 | $ | 993,079 | $ | 4,112,337 | ||||||||
Real-estate – construction: | ||||||||||||||||||||||||
Floating rate | $ | 57,172 | $ | 35,465 | $ | 48,016 | $ | 140,653 | $ | 292,368 | $ | 108,896 | $ | 72,776 | $ | 474,040 | ||||||||
Fixed rate | 63,302 | 41,564 | 61,590 | 166,456 | 87,020 | 28,631 | 37,095 | 152,746 | ||||||||||||||||
Total | $ | 120,474 | $ | 77,029 | $ | 109,606 | $ | 307,109 | $ | 379,388 | $ | 137,527 | $ | 109,871 | $ | 626,786 | ||||||||
From a funding standpoint, the Corporation has been able to rely over the years on a stable base of “core” deposits. Even though the Corporation has experienced notable changes in the composition and interest sensitivity of this deposit base, it has been able to rely on this base to provide needed liquidity.
The Corporation also has access to sources of large denomination or jumbo time deposits and repurchase agreements as potential sources of liquidity. However, the Corporation has attempted to minimize its reliance upon these more volatile short-term funding sources and to use them primarily to meet the requirements of its existing customer base or when it is profitable to do so.
MaturitiesContractual maturities of time deposits of $100,000 or more outstanding at December 31, 20032004 are summarized as follows (in thousands):
Three months or less | $ | 84,457 | $ | 114,859 | ||
Over three through six months | 70,390 | 77,021 | ||||
Over six through twelve months | 75,759 | 95,626 | ||||
Over twelve months | 220,360 | 248,458 | ||||
Total | $ | 450,966 | $ | 535,964 | ||
Each of the Corporation’s subsidiary banks is a member of the FHLB and has access to FHLB overnight and term credit facilities. At December 31, 2003,2004, the Corporation had $532.3$645.5 million in term advances from the FHLB with an additional $1.1$1.3 billion of borrowing capacity (including both short-term funding on its lines of credit and long-term borrowings). This availability, along with Federal funds lines at various correspondent commercial banks, provides the Corporation with additional liquidity.
The following table provides information about the Corporation’s interest rate sensitive financial instruments. The table providespresents expected cash flows and weighted average rates for each significant interest rate sensitive financial instrument, by expected maturity period (dollars in thousands).
Expected Maturity Period | Total | Estimated Fair Value | Expected Maturity Period | Total | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | Beyond | 2005 | 2006 | 2007 | 2008 | 2009 | Beyond | |||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate loans (1) | $ | 937,942 | $ | 645,389 | $ | 501,262 | $ | 387,986 | $ | 253,538 | $ | 799,059 | $ | 3,525,176 | $ | 3,629,973 | $ | 747,825 | $ | 486,830 | $ | 402,921 | $ | 261,533 | $ | 161,706 | $ | 325,429 | $ | 2,386,244 | $ | 2,480,958 | ||||||||||||||||||||||||||||||
Average rate | 6.41 | % | 6.50 | % | 6.43 | % | 6.55 | % | 6.48 | % | 6.63 | % | 6.49 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Floating rate loans (1) | 977,191 | 275,959 | 224,287 | 180,395 | 131,338 | 845,648 | 2,634,818 | 2,634,818 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 4.59 | % | 4.63 | % | 4.54 | % | 4.61 | % | 4.74 | % | 4.16 | % | 4.46 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Average rate (2) | 6.07 | % | 6.15 | % | 6.08 | % | 6.05 | % | 6.31 | % | 6.38 | % | 6.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Floating rate loans (1) (3) | 1,362,108 | 685,031 | 538,425 | 442,696 | 391,812 | 1,778,231 | 5,198,303 | 5,188,778 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average rate (2) | 5.97 | % | 5.83 | % | 6.02 | % | 6.11 | % | 5.70 | % | 4.83 | % | 5.56 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate investments | 736,832 | 520,542 | 345,357 | 253,552 | 363,757 | 486,125 | 2,706,165 | 2,710,626 | 577,487 | 367,723 | 295,099 | 429,357 | 193,217 | 428,146 | 2,291,029 | 2,270,383 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 3.96 | % | 3.66 | % | 3.77 | % | 3.85 | % | 3.79 | % | 3.56 | % | 3.77 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Average rate (2) | 3.41 | % | 3.77 | % | 4.06 | % | 3.85 | % | 4.07 | % | 4.05 | % | 3.81 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Floating rate investments | 344 | — | — | — | — | 4,523 | 4,867 | 4,867 | — | — | — | 141 | — | 9,681 | 9,822 | 9,823 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 5.85 | % | — | — | — | — | 2.94 | % | 3.15 | % | — | — | — | 5.85 | % | — | 3.40 | % | 3.44 | % | ||||||||||||||||||||||||||||||||||||||||||
Other interest-earning assets | 37,320 | — | — | — | — | — | 37,320 | 37,320 | 195,560 | — | — | — | — | — | 195,560 | 195,560 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 5.37 | % | — | — | — | — | — | 5.37 | % | 6.09 | % | — | — | — | — | — | 6.09 | % | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,689,629 | $ | 1,441,890 | $ | 1,070,906 | $ | 821,933 | $ | 748,633 | $ | 2,135,355 | $ | 8,908,346 | $ | 9,017,604 | $ | 2,882,980 | $ | 1,539,584 | $ | 1,236,445 | $ | 1,133,727 | $ | 746,735 | $ | 2,541,487 | $ | 10,080,958 | $ | 10,145,502 | ||||||||||||||||||||||||||||||
Average rate | 5.06 | % | 5.11 | % | 5.18 | % | 5.29 | % | 4.87 | % | 4.95 | % | 5.06 | % | 5.40 | % | 5.44 | % | 5.57 | % | 5.24 | % | 5.41 | % | 4.90 | % | 5.29 | % | ||||||||||||||||||||||||||||||||||
Fixed rate deposits | $ | 1,204,082 | $ | 443,872 | $ | 185,566 | $ | 211,655 | $ | 70,873 | $ | 74,420 | $ | 2,190,468 | $ | 2,223,109 | $ | 1,521,075 | $ | 556,945 | $ | 409,100 | $ | 96,606 | $ | 64,590 | $ | 281,729 | $ | 2,930,045 | $ | 2,935,643 | ||||||||||||||||||||||||||||||
Average rate | 2.24 | % | 3.15 | % | 3.71 | % | 4.66 | % | 3.37 | % | 4.68 | % | 2.90 | % | 2.25 | % | 2.97 | % | 3.93 | % | 3.29 | % | 3.82 | % | 4.26 | % | 2.88 | % | ||||||||||||||||||||||||||||||||||
Floating rate deposits | 2,002,702 | 156,046 | 156,046 | 156,046 | 156,046 | 1,934,429 | 4,561,315 | 4,561,315 | 1,978,454 | 192,717 | 192,717 | 192,717 | 192,717 | 2,216,157 | 4,965,479 | 4,965,384 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 0.91 | % | 0.16 | % | 0.16 | % | 0.16 | % | 0.16 | % | 0.13 | % | 0.48 | % | 1.03 | % | 0.27 | % | 0.27 | % | 0.27 | % | 0.27 | % | 0.19 | % | 0.54 | % | ||||||||||||||||||||||||||||||||||
Fixed rate borrowings | 66,360 | 83,250 | 15,265 | 55,414 | 206,286 | 176,952 | 603,527 | 595,496 | 154,728 | 37,874 | 87,487 | 221,671 | 42,405 | 140,071 | 684,236 | 710,215 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 1.58 | % | 6.29 | % | 3.24 | % | 3.46 | % | 4.95 | % | 5.41 | % | 4.72 | % | 4.37 | % | 3.36 | % | 3.80 | % | 5.01 | % | 4.80 | % | 5.38 | % | 4.68 | % | ||||||||||||||||||||||||||||||||||
Floating rate borrowings | 1,346,914 | — | — | 15,000 | — | — | 1,361,914 | 1,361,914 | 1,194,524 | — | — | — | — | — | 1,194,524 | 1,194,524 | ||||||||||||||||||||||||||||||||||||||||||||||
Average rate | 0.95 | % | — | — | 4.89 | % | — | — | 0.99 | % | 1.54 | % | — | — | — | — | — | 1.54 | % | |||||||||||||||||||||||||||||||||||||||||||
Total | $ | 4,620,058 | $ | 683,168 | $ | 356,877 | $ | 438,115 | $ | 433,205 | $ | 2,185,801 | $ | 8,717,224 | $ | 8,741,834 | $ | 4,848,781 | $ | 787,536 | $ | 689,304 | $ | 510,994 | $ | 299,712 | $ | 2,637,957 | $ | 9,774,284 | $ | 9,805,766 | ||||||||||||||||||||||||||||||
Average rate | 1.28 | % | 2.85 | % | 2.14 | % | 2.91 | % | 2.96 | % | .71 | % | 1.46 | % | 1.75 | % | 2.33 | % | 2.89 | % | 2.89 | % | 1.67 | % | 0.91 | % | 1.71 | % | ||||||||||||||||||||||||||||||||||
Assumptions:
(1) | Amounts are based on contractual payments and maturities, adjusted for expected prepayments. |
(2) | Average rates are shown on a fully taxable equivalent basis using an effective tax rate of 35%. |
(3) | Floating rate loans include adjustable rate commercial loans and mortgages which may not reprice immediately upon a change in interest rates. |
(4) | Amounts are based on contractual maturities of fixed rate time deposits. |
Money market, Super NOW, NOW and savings accounts are placed based on history of deposit flows. |
Amounts are based on contractual maturities of Federal Home Loan Bank advances, adjusted for possible calls. |
Amounts |
The preceding table and discussion addressed the liquidity implications of interest rate risk and focused on expected contractual cash flows from financial instruments. Expected maturities, however, do not necessarily estimatereflect the net interest income impact of interest rate changes. Certain financial instruments, such as adjustable rate loans, have repricing periods that differ from expected cash flows.
In addition to the interest rate sensitive instruments included in the preceding table, the Corporation also had interest rate swaps with a notional amount of $220 million as of December 31, 2004. These swaps were used to hedge certain long-term fixed rate certificates of deposit held at one of the Corporation’s affiliate banks. The terms of the certificates of deposit and the interest rate swaps mirror each other and were committed to simultaneously. Under the terms of the agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The combination of the interest rate swaps and the issuance of the certificates of deposit generates long-term floating rate funding for the Corporation.
The Corporation uses three complementary methods to measure and manage interest rate risk. They are static gap analysis, simulation of earnings, and estimates of economic value of equity. Using these measurements in tandem provides a reasonably comprehensive summary of the magnitude of interest rate risk in the Corporation, level of risk as time evolves, and exposure to changes in interest rates.
Static gap provides a measurement of repricing risk in the Corporation’s balance sheet as of a point in time. This measurement is accomplished through stratification of the Corporation’s assets and liabilities into repricing periods. The assets and liabilities in each of these periods are compared for mismatches within that maturity segment. Core deposits not having a contractual maturity are placed into repricing periods based upon historical balance performance. Repricing for mortgage loans and for mortgage-backed securities
includes the effect of expected cash flows. Estimated prepayment effects are applied to these balances based upon industry projections for prepayment speeds. The Corporation’s policy limits the cumulative 6-month gap to plus or minus 15% of total earning assets. The cumulative 6-month gap as of December 31, 20032004 was 0.88.1.00. The following is a summary of the interest sensitivity gaps for various time intervals as of December 31, 2003:2004:
0-90 Days | 91-180 Days | 181-365 Days | 0-90 Days | 91-180 Days | 181-365 Days | |||||||
GAP | 0.85 | 1.14 | 1.35 | 1.00 | 0.97 | 1.08 | ||||||
CUMULATIVE GAP | 0.85 | 0.88 | 0.95 | 1.00 | 1.00 | 1.01 |
Simulation of net interest income is performed for the next twelve-month period. A variety of interest rate scenarios are used to measure the effects of sudden and gradual movements upward and downward in the yield curve. These results are compared to the results obtained in a flat or unchanged interest rate scenario. Simulation of earnings is used primarily to measure the Corporation’s short-term earnings exposure to rate movements. The Corporation’s policy limits the potential exposure of net interest income to 10% of the base case net interest income for every 100 basis point “shock” in interest rates. A “shock” is an immediate upward or downward movement of short-term interest rates with changes across the yield curve based upon changes in the prime rate.industry projections. The following table summarizes the expected impact of interest rate shocks on net interest income (due to the current low rates, only the 100 basis shock in a downward scenario is shown):
Rate Shock | Annual change in net interest
| % Change | |||
+300 bp | + | + | % | ||
+200 bp | + | + | % | ||
+100 bp | + | + | % | ||
-100 bp | - | % |
Economic value of equity estimates the discounted present value of asset cash flows and liability cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and downward shocks of interest rates are used to determine the comparative effect of such interest rate movements relative to the unchanged environment. This measurement tool is used primarily to evaluate the longer term repricing risks and options in the Corporation’s balance sheet. A policy limit of 10% of economic equity may be at risk for every 100 basis point “shock” movement in interest rates. The following table summarizes the expected impact of interest rate shocks on economic value of equity (due to the current low rates, only the 100 basis shock in a downward scenario is shown):
Rate Shock | Change in
of equity | % Change | |||
+300 bp | + $36.0 million | +2.3 | % | ||
+200 bp | + $23.0 million | +1.4 | % | ||
+100 bp | + $34.2 million | +2.1 | % | ||
-100 bp | - |
| |||
| |||||
| |||||
|
As with any modeling system, the results of the static gap and simulation of net interest income and economic value of equity are a function of the assumptions and projections built into the model. The actual behavior of the financial instruments could differ from these assumptions and projections.
Common Stock
As of December 31, 2003,2004, the Corporation had 108.3125.7 million shares of $2.50 par value common stock outstanding held by 34,32845,440 shareholders. The common stock of the Corporation is traded on the national market system of the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporation’s common stock and per-share cash dividends declared for each of the quarterly periods in 20032004 and 2002.2003. Per-share amounts have been retroactively adjusted to reflect the effect of stock dividends.
Price Range | Per-Share Dividend | Price Range | Per-Share Dividend | |||||||||||||||
High | Low | |||||||||||||||||
2004 | ||||||||||||||||||
First Quarter | $ | 21.70 | $ | 19.86 | $ | 0.152 | ||||||||||||
Second Quarter | 21.64 | 19.14 | 0.165 | |||||||||||||||
Third Quarter | 21.90 | 20.00 | 0.165 | |||||||||||||||
Fourth Quarter | 23.60 | 21.05 | 0.165 | |||||||||||||||
High | Low | Per-Share Dividend | ||||||||||||||||
2003 | ||||||||||||||||||
First Quarter | $ | 18.19 | $ | 16.69 | $ | 0.143 | $ | 17.32 | $ | 15.89 | $ | 0.136 | ||||||
Second Quarter | 21.00 | 17.86 | 0.160 | 20.00 | 17.01 | 0.152 | ||||||||||||
Third Quarter | 21.50 | 19.25 | 0.160 | 20.48 | 18.33 | 0.152 | ||||||||||||
Fourth Quarter | 22.00 | 19.75 | 0.160 | 20.95 | 18.81 | 0.152 | ||||||||||||
2002 | ||||||||||||||||||
First Quarter | $ | 19.28 | $ | 16.11 | $ | 0.130 | ||||||||||||
Second Quarter | 19.41 | 17.36 | 0.143 | |||||||||||||||
Third Quarter | 18.66 | 15.91 | 0.143 | |||||||||||||||
Fourth Quarter | 18.21 | 16.11 | 0.143 |
On June 15, 2004 the Board of Directors approved a stock repurchase plan to repurchase up to 4.0 million shares through December 31, 2004. As of November 30, 2004, the Corporation repurchased approximately 2.5 million of these shares leaving approximately 1.5 million shares still available for repurchase. On December 21, 2004 the Board of Directors approved an extension of the program through June 30, 2005, and increased the total number of shares that could be repurchased to 4.0 million. As of December 31, 2004, no additional shares were repurchased subsequent to the extension of the program. No stock repurchases were made outside publicly announced plans and all were made under the guidelines of Rule 10b-18 and in compliance with Regulation M. The following table presents information related to shares repurchased during the fourth quarter ended December 31, 2004:
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of a publicly announced plan or program | Maximum number of shares that may yet be purchased under the plan or program | ||||
(10/01/04 – 10/31/04) | 68,000 | 21.63 | 68,000 | 2,566,301 | ||||
(11/01/04 – 11/30/04) | 1,076,000 | 21.97 | 1,076,000 | 1,490,301 | ||||
(12/01/04 – 12/31/04) | — | — | — | 4,000,000 | ||||
Total | 1,144,000 | 21.95 | 1,144,000 | 4,000,000 |
Item 8. Financial Statements and Supplementary Data
(Dollarsdollars in thousands, except per-share data)
December 31 | December 31 | |||||||||||||||
2003 | 2002 | 2004 | 2003 | |||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 300,966 | $ | 314,857 | $ | 278,065 | $ | 300,966 | ||||||||
Interest-bearing deposits with other banks | 4,559 | 7,899 | 4,688 | 4,559 | ||||||||||||
Federal funds sold | 32,000 | — | ||||||||||||||
Mortgage loans held for sale | 32,761 | 70,475 | 158,872 | 32,761 | ||||||||||||
Investment securities: | ||||||||||||||||
Held to maturity (estimated fair value of $23,739 in 2003 and $34,135 in 2002) | 22,993 | 32,684 | ||||||||||||||
Held to maturity (estimated fair value of $25,413 in 2004 and $23,739 in 2003) | 25,001 | 22,993 | ||||||||||||||
Available for sale | 2,904,157 | 2,383,607 | 2,424,858 | 2,904,157 | ||||||||||||
Loans, net of unearned income | 6,159,994 | 5,317,068 | 7,584,547 | 6,159,994 | ||||||||||||
Less: Allowance for loan losses | (77,700 | ) | (71,920 | ) | (89,627 | ) | (77,700 | ) | ||||||||
Net Loans | 6,082,294 | 5,245,148 | 7,494,920 | 6,082,294 | ||||||||||||
Premises and equipment | 120,777 | 123,450 | 146,911 | 120,777 | ||||||||||||
Accrued interest receivable | 34,407 | 42,675 | 40,633 | 34,407 | ||||||||||||
Goodwill | 127,202 | 61,048 | 364,019 | 127,202 | ||||||||||||
Intangible assets | 25,303 | 17,594 | ||||||||||||||
Other assets | 137,172 | 105,935 | 163,081 | 119,578 | ||||||||||||
Total Assets | $ | 9,767,288 | $ | 8,387,778 | $ | 11,158,351 | $ | 9,767,288 | ||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Noninterest-bearing | $ | 1,262,214 | $ | 1,118,227 | $ | 1,507,799 | $ | 1,262,214 | ||||||||
Interest-bearing | 5,489,569 | 5,127,301 | 6,387,725 | 5,489,569 | ||||||||||||
Total Deposits | 6,751,783 | 6,245,528 | 7,895,524 | 6,751,783 | ||||||||||||
Short-term borrowings: | ||||||||||||||||
Federal funds purchased | 933,000 | 330,000 | 676,922 | 933,000 | ||||||||||||
Other short-term borrowings | 463,711 | 302,194 | 517,602 | 463,711 | ||||||||||||
Total Short-Term Borrowings | 1,396,711 | 632,194 | 1,194,524 | 1,396,711 | ||||||||||||
Accrued interest payable | 24,579 | 27,608 | 27,279 | 24,579 | ||||||||||||
Other liabilities | 78,549 | 77,651 | 114,498 | 78,549 | ||||||||||||
Federal Home Loan Bank advances and long-term debt | 568,730 | 535,555 | 684,236 | 568,730 | ||||||||||||
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust | — | 5,500 | ||||||||||||||
Total Liabilities | 8,820,352 | 7,524,036 | 9,916,061 | 8,820,352 | ||||||||||||
Shareholders’ Equity | ||||||||||||||||
Common stock, $2.50 par value, 400 million shares authorized, 113.8 million shares issued in 2003 and 109.2 million shares issued in 2002 | 284,480 | 259,943 | ||||||||||||||
Common stock, $2.50 par value, 400 million shares authorized, 134.2 million shares issued in 2004 and 119.5 million shares issued in 2003 | 335,604 | 284,480 | ||||||||||||||
Additional paid-in capital | 633,588 | 481,028 | 1,000,111 | 633,588 | ||||||||||||
Retained earnings | 117,373 | 138,501 | 77,419 | 117,373 | ||||||||||||
Accumulated other comprehensive income | 12,267 | 34,801 | ||||||||||||||
Treasury stock (5.4 million shares in 2003 and 3.1 million shares in 2002) | (100,772 | ) | (50,531 | ) | ||||||||||||
Accumulated other comprehensive (loss) income | (10,133 | ) | 12,267 | |||||||||||||
Treasury stock (8.5 million shares in 2004 and 5.8 million shares in 2003), at cost | (160,711 | ) | (100,772 | ) | ||||||||||||
Total Shareholders’ Equity | 946,936 | 863,742 | 1,242,290 | 946,936 | ||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 9,767,288 | $ | 8,387,778 | $ | 11,158,351 | $ | 9,767,288 | ||||||||
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(Dollarsdollars in thousands, except per-share data)
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
Interest Income | ||||||||||||||||||
Loans, including fees | $ | 341,393 | $ | 370,318 | $ | 424,527 | $ | 396,731 | $ | 341,393 | $ | 370,318 | ||||||
Investment securities: | ||||||||||||||||||
Taxable | 77,450 | 84,139 | 77,701 | 76,792 | 77,450 | 84,139 | ||||||||||||
Tax-exempt | 10,436 | 9,835 | 9,465 | 9,553 | 10,436 | 9,835 | ||||||||||||
Dividends | 4,076 | 4,066 | 5,097 | 4,023 | 4,076 | 4,066 | ||||||||||||
Other interest income | 2,176 | 930 | 1,890 | 6,544 | 2,176 | 930 | ||||||||||||
Total Interest Income | 435,531 | 469,288 | 518,680 | 493,643 | 435,531 | 469,288 | ||||||||||||
Interest Expense | ||||||||||||||||||
Deposits | 94,198 | 125,394 | 186,969 | 89,779 | 94,198 | 125,394 | ||||||||||||
Short-term borrowings | 7,373 | 6,598 | 13,150 | 15,182 | 7,373 | 6,598 | ||||||||||||
Long-term debt | 29,523 | 26,227 | 27,843 | 31,033 | 29,523 | 26,227 | ||||||||||||
Total Interest Expense | 131,094 | 158,219 | 227,962 | 135,994 | 131,094 | 158,219 | ||||||||||||
Net Interest Income | 304,437 | 311,069 | 290,718 | 357,649 | 304,437 | 311,069 | ||||||||||||
Provision for Loan Losses | 9,705 | 11,900 | 14,585 | 4,717 | 9,705 | 11,900 | ||||||||||||
Net Interest Income After Provision for Loan Losses | 294,732 | 299,169 | 276,133 | 352,932 | 294,732 | 299,169 | ||||||||||||
Other Income | ||||||||||||||||||
Investment management and trust services | 33,898 | 29,114 | 27,138 | 34,817 | 33,898 | 29,114 | ||||||||||||
Service charges on deposit accounts | 38,500 | 37,502 | 32,388 | 39,451 | 38,500 | 37,502 | ||||||||||||
Other service charges and fees | 18,860 | 17,743 | 15,916 | 20,494 | 18,860 | 17,743 | ||||||||||||
Mortgage banking income | 21,482 | 17,154 | 11,782 | |||||||||||||||
Gain on sale of mortgage loans | 19,262 | 18,965 | 13,941 | |||||||||||||||
Investment securities gains | 19,853 | 8,992 | 12,561 | 17,712 | 19,853 | 8,992 | ||||||||||||
Other | 4,394 | 5,278 | 2,959 | 7,128 | 4,294 | 6,720 | ||||||||||||
136,987 | 115,783 | 102,744 | ||||||||||||||||
Total Other Income | 138,864 | 134,370 | 114,012 | |||||||||||||||
Other Expenses | ||||||||||||||||||
Salaries and employee benefits | 138,619 | 129,355 | 116,907 | 162,126 | 136,002 | 127,584 | ||||||||||||
Net occupancy expense | 19,896 | 17,705 | 17,074 | 23,813 | 19,896 | 17,705 | ||||||||||||
Equipment expense | 10,505 | 11,295 | 12,345 | 10,769 | 10,505 | 11,295 | ||||||||||||
Data processing | 11,532 | 11,968 | 11,782 | 11,430 | 11,532 | 11,968 | ||||||||||||
Advertising | 6,039 | 6,525 | 6,117 | 6,943 | 6,039 | 6,525 | ||||||||||||
Merger-related expenses | — | — | 7,105 | |||||||||||||||
Goodwill and intangible amortization | 2,059 | 1,838 | 4,786 | |||||||||||||||
Intangible amortization | 4,726 | 2,059 | 1,838 | |||||||||||||||
Other | 45,526 | 46,850 | 42,805 | 53,808 | 45,526 | 46,850 | ||||||||||||
234,176 | 225,536 | 218,921 | ||||||||||||||||
Total Other Expenses | 273,615 | 231,559 | 223,765 | |||||||||||||||
Income Before Income Taxes | 197,543 | 189,416 | 159,956 | 218,181 | 197,543 | 189,416 | ||||||||||||
Income Taxes | 59,363 | 56,468 | 46,367 | 65,264 | 59,363 | 56,468 | ||||||||||||
Net Income | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 152,917 | $ | 138,180 | $ | 132,948 | ||||||
Per-Share Data: | ||||||||||||||||||
Net Income (Basic) | $ | 1.29 | $ | 1.23 | $ | 1.05 | $ | 1.28 | $ | 1.23 | $ | 1.17 | ||||||
Net Income (Diluted) | 1.28 | 1.23 | 1.04 | 1.27 | 1.22 | 1.17 | ||||||||||||
Cash Dividends | 0.623 | 0.558 | 0.505 | 0.647 | 0.593 | 0.531 |
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except per-share data)
Number of Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehen- sive Income (Loss) | Treasury Stock | Total | Number of Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated (Loss) Income | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2001 | 107,584,000 | $ | 198,612 | $ | 472,829 | $ | 76,615 | $ | 1,148 | $ | (18,033 | ) | $ | 731,171 | ||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2002 | 113,850,000 | $ | 207,962 | $ | 536,235 | $ | 65,649 | $ | 12,970 | $ | (11,362 | ) | $ | 811,454 | ||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 113,589 | 113,589 | 132,948 | 132,948 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other – unrealized gain on securities (net of $10.8 million tax effect) | 19,987 | 19,987 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less – reclassification adjustment for gains included in net income (net of $4.4 million tax expense) | (8,165 | ) | (8,165 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 125,411 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock dividend – 5% | 9,103 | 61,377 | (70,554 | ) | (74 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock issued | 1,325,000 | 247 | 2,029 | 14,593 | 16,869 | |||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury stock | (480,000 | ) | (7,922 | ) | (7,922 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends - $0.505 per share | (54,001 | ) | (54,001 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2001 | 108,429,000 | 207,962 | 536,235 | 65,649 | 12,970 | (11,362 | ) | 811,454 | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 132,948 | 132,948 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other – unrealized gain on securities (net of $14.9 million tax effect) | 27,676 | 27,676 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less – reclassification adjustment for gains included in net income (net of $4.4 million tax expense) | (5,845 | ) | (5,845 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on securities (net of $14.9 million tax effect) | 27,676 | 27,676 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less – reclassification adjustment for gains included in net income (net of $3.1 million tax expense) | (5,845 | ) | (5,845 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 154,779 | 154,779 | ||||||||||||||||||||||||||||||||||||||||||||||||||
5 for 4 stock split paid in the form of a 25% stock dividend | 51,981 | (52,050 | ) | (69 | ) | 51,981 | (52,050 | ) | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||
Stock issued | 353,000 | (3,157 | ) | 6,964 | 3,807 | 371,000 | (3,157 | ) | 6,964 | 3,807 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury stock | (2,620,000 | ) | (46,133 | ) | (46,133 | ) | (2,751,000 | ) | (46,133 | ) | (46,133 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends - $0.558 per share | (60,096 | ) | (60,096 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends – $0.531 per share | (60,096 | ) | (60,096 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 | 106,162,000 | 259,943 | 481,028 | 138,501 | 34,801 | (50,531 | ) | 863,742 | 111,470,000 | 259,943 | 481,028 | 138,501 | 34,801 | (50,531 | ) | 863,742 | ||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 138,180 | 138,180 | 138,180 | 138,180 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other – unrealized loss on securities (net of $5.2 million tax effect) | (9,630 | ) | (9,630 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Less — reclassification adjustment for gains included in net income (net of $6.9 million tax expense) | (12,904 | ) | (12,904 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities (net of $5.2 million tax effect) | (9,630 | ) | (9,630 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Less – reclassification adjustment for gains included in net income (net of $6.9 million tax expense) | (12,904 | ) | (12,904 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 115,646 | 115,646 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Stock dividend – 5% | 12,998 | 79,491 | (92,526 | ) | (37 | ) | 12,998 | 79,491 | (92,526 | ) | (37 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock issued | 539,000 | (3,570 | ) | 9,458 | 5,888 | 566,000 | (3,570 | ) | 9,458 | 5,888 | ||||||||||||||||||||||||||||||||||||||||||
Stock issued for acquisition of Premier Bancorp, Inc. | 4,615,000 | 11,539 | 76,639 | 88,178 | 4,846,000 | 11,539 | 76,639 | 88,178 | ||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury stock | (3,061,000 | ) | (59,699 | ) | (59,699 | ) | (3,214,000 | ) | (59,699 | ) | (59,699 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends - $0.623 per share | (66,782 | ) | (66,782 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends – $0.593 per share | (66,782 | ) | (66,782 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | 108,255,000 | $ | 284,480 | $ | 633,588 | $ | 117,373 | $ | 12,267 | $ | (100,772 | ) | $ | 946,936 | 113,668,000 | 284,480 | 633,588 | 117,373 | 12,267 | (100,772 | ) | 946,936 | ||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 152,917 | 152,917 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on securities (net of $5.6 million tax effect) | (10,329 | ) | (10,329 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Less – reclassification adjustment for gains included in net income (net of $6.2 million tax expense) | (11,513 | ) | (11,513 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment (net of $300,000 tax effect) | (558 | ) | (558 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 130,517 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock dividend – 5% | 15,278 | 100,247 | (115,615 | ) | (90 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock issued | 1,048,000 | (8,966 | ) | 19,027 | 10,061 | |||||||||||||||||||||||||||||||||||||||||||||||
Stock issued for acquisition of Resource Bankshares Corporation. | 9,030,000 | 21,498 | 164,365 | 185,863 | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock issued for acquisition of First Washington FinancialCorp. | 5,739,000 | 14,348 | 110,877 | 125,225 | ||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of treasury stock | (3,765,000 | ) | (78,966 | ) | (78,966 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends – $0.647 per share | (77,256 | ) | (77,256 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 | 125,720,000 | $ | 335,604 | $ | 1,000,111 | $ | 77,419 | $ | (10,133 | ) | $ | (160,711 | ) | $ | 1,242,290 | |||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Inin thousands)
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
Cash Flows from Operating Activities: | ||||||||||||||||||||||||
Net income | $ | 138,180 | $ | 132,948 | $ | 113,589 | ||||||||||||||||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||||||
Net Income | $ | 152,917 | $ | 138,180 | $ | 132,948 | ||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
Provision for loan losses | 9,705 | 11,900 | 14,585 | 4,717 | 9,705 | 11,900 | ||||||||||||||||||
Depreciation and amortization of premises and equipment | 12,379 | 12,786 | 12,990 | 12,409 | 12,379 | 12,786 | ||||||||||||||||||
Net amortization of investment security premiums/ discounts | 19,243 | 3,974 | 147 | |||||||||||||||||||||
Net amortization of investment security premiums | 9,906 | 19,243 | 3,974 | |||||||||||||||||||||
Deferred income tax expense | 4,709 | 1,955 | 1,520 | 1,232 | 4,709 | 1,955 | ||||||||||||||||||
Gain on sale of investment securities | (19,853 | ) | (8,992 | ) | (12,561 | ) | (17,712 | ) | (19,853 | ) | (8,992 | ) | ||||||||||||
Gain on sale of mortgage loans | (21,582 | ) | (15,712 | ) | (10,260 | ) | (19,262 | ) | (18,965 | ) | (13,941 | ) | ||||||||||||
Proceeds from sales of mortgage loans held for sale | 871,447 | 609,726 | 420,220 | 1,475,000 | 871,447 | 609,726 | ||||||||||||||||||
Originations of mortgage loans held for sale | (810,859 | ) | (646,115 | ) | (423,093 | ) | (1,487,303 | ) | (813,476 | ) | (647,886 | ) | ||||||||||||
Amortization of intangible assets | 2,059 | 1,838 | 4,786 | 4,726 | 2,059 | 1,838 | ||||||||||||||||||
Decrease in accrued interest receivable | 11,333 | 713 | 1,359 | 22 | 11,333 | 713 | ||||||||||||||||||
Increase in other assets | (15,325 | ) | (347 | ) | (5,448 | ) | ||||||||||||||||||
Decrease (increase) in other assets | 6,895 | (14,595 | ) | 87 | ||||||||||||||||||||
Decrease in accrued interest payable | (6,136 | ) | (8,318 | ) | (11,787 | ) | (759 | ) | (6,136 | ) | (8,318 | ) | ||||||||||||
Decrease in other liabilities | (7,370 | ) | (1,580 | ) | (1,640 | ) | ||||||||||||||||||
Increase (decrease) in other liabilities | 3,089 | (7,370 | ) | (1,580 | ) | |||||||||||||||||||
Total adjustments | 49,750 | (38,172 | ) | (9,182 | ) | (7,040 | ) | 50,480 | (37,738 | ) | ||||||||||||||
Net cash provided by operating activities | 187,930 | 94,776 | 104,407 | 145,877 | 188,660 | 95,210 | ||||||||||||||||||
Cash Flows from Investing Activities: | ||||||||||||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||||||
Proceeds from sales of securities available for sale | 521,520 | 67,633 | 206,688 | 235,332 | 521,520 | 67,633 | ||||||||||||||||||
Proceeds from maturities of securities held to maturity | 18,146 | 21,247 | 42,342 | 8,870 | 18,146 | 21,247 | ||||||||||||||||||
Proceeds from maturities of securities available for sale | 1,543,992 | 807,980 | 478,310 | 816,834 | 1,543,992 | 807,980 | ||||||||||||||||||
Purchase of securities held to maturity | (8,514 | ) | (5,654 | ) | (7,200 | ) | (11,402 | ) | (8,514 | ) | (5,654 | ) | ||||||||||||
Purchase of securities available for sale | (2,445,592 | ) | (1,528,199 | ) | (970,779 | ) | (269,776 | ) | (2,445,592 | ) | (1,528,199 | ) | ||||||||||||
Decrease (increase) in short-term investments | 19,248 | (931 | ) | 1,449 | ||||||||||||||||||||
(Increase) decrease in short-term investments | (9,188 | ) | 19,248 | (931 | ) | |||||||||||||||||||
Net (increase) decrease in loans | (487,147 | ) | 44,098 | (6,714 | ) | (546,565 | ) | (487,147 | ) | 44,098 | ||||||||||||||
Net cash received from (paid for) acquisitions | 17,222 | — | (45,044 | ) | ||||||||||||||||||||
Purchase of premises and equipment, net | (4,730 | ) | (10,619 | ) | (22,200 | ) | ||||||||||||||||||
Net cash received from acquisitions | 7,810 | 17,222 | — | |||||||||||||||||||||
Net purchase of premises and equipment | (16,161 | ) | (4,730 | ) | (10,619 | ) | ||||||||||||||||||
Net cash used in investing activities | (825,855 | ) | (604,445 | ) | (323,148 | ) | ||||||||||||||||||
Net cash provided by (used in) investing activities | 215,754 | (825,855 | ) | (604,445 | ) | |||||||||||||||||||
Cash Flows from Financing Activities: | ||||||||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||||||
Net increase in demand and savings deposits | 347,665 | 366,981 | 516,439 | 293,331 | 347,665 | 366,981 | ||||||||||||||||||
Net decrease in time deposits | (295,760 | ) | (108,257 | ) | (32,337 | ) | (174,453 | ) | (295,760 | ) | (108,257 | ) | ||||||||||||
Addition to long-term debt | 90,000 | 100,406 | — | 45,000 | 90,000 | 100,406 | ||||||||||||||||||
Repayment of long-term debt | (157,360 | ) | (21,653 | ) | (102,701 | ) | (63,509 | ) | (157,360 | ) | (21,653 | ) | ||||||||||||
Increase (decrease) increase in short-term borrowings | 757,964 | 231,859 | (46,094 | ) | ||||||||||||||||||||
Decrease (increase) in short-term borrowings | (338,845 | ) | 757,964 | 231,859 | ||||||||||||||||||||
Dividends paid | (64,628 | ) | (58,954 | ) | (51,486 | ) | (74,802 | ) | (64,628 | ) | (58,954 | ) | ||||||||||||
Net proceeds from issuance of common stock | 5,852 | 3,738 | 16,795 | 7,712 | 5,122 | 3,304 | ||||||||||||||||||
Acquisition of treasury stock | (59,699 | ) | (46,133 | ) | (7,922 | ) | (78,966 | ) | (59,699 | ) | (46,133 | ) | ||||||||||||
Net cash provided by financing activities | 624,034 | 467,987 | 292,694 | |||||||||||||||||||||
Net cash (used in) provided by financing activities | (384,532 | ) | 623,304 | 467,553 | ||||||||||||||||||||
Net (Decrease) Increase in Cash and Due From Banks | (13,891 | ) | (41,682 | ) | 73,953 | |||||||||||||||||||
Net Decrease in Cash and Due From Banks | (22,901 | ) | (13,891 | ) | (41,682 | ) | ||||||||||||||||||
Cash and Due From Banks at Beginning of Year | 314,857 | 356,539 | 282,586 | 300,966 | 314,857 | 356,539 | ||||||||||||||||||
Cash and Due From Banks at End of Year | $ | 300,966 | $ | 314,857 | $ | 356,539 | $ | 278,065 | $ | 300,966 | $ | 314,857 | ||||||||||||
Cash paid during the year for: | ||||||||||||||||||||||||
Supplemental Disclosures of Cash Flow Information | ||||||||||||||||||||||||
Cash paid during period for: | ||||||||||||||||||||||||
Interest | $ | 137,230 | $ | 166,537 | $ | 239,749 | $ | 136,753 | $ | 137,230 | $ | 166,537 | ||||||||||||
Income taxes | 48,924 | 49,621 | 46,633 | 54,457 | 48,924 | 49,621 |
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company which provides a full range of banking and financial services to businesses and consumers through its wholly-owned banking subsidiaries: Fulton Bank, Lebanon Valley Farmers Bank, Swineford National Bank, Lafayette Ambassador Bank, FNB Bank N.A., Hagerstown Trust, Delaware National Bank, The Bank, The Peoples Bank of Elkton, Skylands Community Bank, Premier Bank, Resource Bank and PremierFirst Washington State Bank as well as its financial services subsidiaries: Fulton Financial Advisors, N.A., and Fulton Insurance Services Group, Inc. In addition, the Parent Company owns fivethe following other non-bankingnon-bank subsidiaries: Fulton Financial Realty Company, Fulton Reinsurance Company, LTD, Central Pennsylvania Financial Corp., FFC Management, Inc. and FFC Penn Square, Inc. Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Its expenses consist of interest expense on deposits and borrowed funds, provision for loan losses, other operating expenses and income taxes. The Corporation’s primary competition is other financial services providers operating in its region. Competitors also include financial services providers located outside the Corporation’s geographical market aswith the growth in electronic delivery systems have become more prominent.systems. The Corporation is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial banking services throughout central and eastern Pennsylvania, Maryland, Delaware, New Jersey and New Jersey.Virginia. Industry diversity is the key to the economic well being of these markets and the Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of the Parent Company and all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements as well as revenues and expenses during the period. Actual results could differ from those estimates.
Scope of Management’s Report on Internal Control Over Financial Reporting:Management’s report on internal control over financial reporting includes controls at all consolidated entities, except for First Washington FinancialCorp (First Washington) which was acquired on December 31, 2004. Management has not evaluated the internal controls over financial reporting of First Washington and management’s conclusion regarding the effectiveness of internal control over financial reporting does not extend to the internal controls of First Washington. See Note Q, “Mergers and Acquisitions”, for a summary of the account balances of First Washington included in the consolidated balance sheet of December 31, 2004.
Investments: Debt securities are classified as held to maturity at the time of purchase when the Corporation has both the intent and ability to hold these investments until they mature. Such debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the effective yield method. The Corporation does not engage in trading activities, however, since the investment portfolio serves as a source of liquidity, most debt securities and all marketable equity securities are classified as available for sale. Securities available for sale are carried at estimated fair value with the related unrealized holding gains and losses reported in shareholders’ equity as a component of other comprehensive income, net of tax. Realized security gains and losses are computed using the specific identification method and are recorded on a trade date basis.
Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Declines in value that are determined to be other than temporary are recorded as realized losses.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal amount outstanding, except for mortgage loans held for sale which are carried at the lower of aggregate cost or market value. Interest income on loans is accrued as earned. Unearned income on lease financing receivables is recognized on a basis which approximates the effective yield method. Premiums and discounts on purchased loans are amortized as an adjustment to interest income using the effective yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest, except for adequately collateralized residential mortgage loans. When interest accruals are discontinued, unpaid interest credited to income is reversed. Nonaccrual loans are restored to accrual status when all delinquent principal and interest become current or the loan is considered secured and in the process of collection.
Interest Rate Swaps: As of December 31, 2004, interest rate swaps with a notional amount of $220 million were used to hedge certain long-term fixed rate certificate of deposit liabilities held at one of the Corporation’s affiliate banks. The terms of the certificates of deposit and the interest rate swaps mirror each other and were committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate receiver and the floating rate payer (generally tied to the three month London Interbank Offering Rate, or LIBOR, a common index used for setting rates between financial institutions). The combination of the interest rate swaps and the issuance of the certificates of deposit generates long-term floating rate funding for the Corporation. Both the interest rate swaps and the certificates of deposit are recorded at fair value, with changes in fair value included in the consolidated statements of income as interest expense. Risk management results indicate that the hedges were 98.3% effective as of December 31, 2004, resulting in a favorable adjustment to interest expense to reflect hedge ineffectiveness of $14,000 for the year ended December 31, 2004.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs are offset and the net amount is deferred and amortized over the life of the loan using the effective interest method as an adjustment to interest income. For mortgage loans sold, the net amount is included in gain or loss upon the sale of the related mortgage loan.
Allowance for Loan Losses: The allowance for loan losses is increased by charges to expense and decreased by charge-offs, net of recoveries. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated fair value of the underlying collateral, and current economic conditions. Management believes that the allowance for loan losses is adequate, however, future changes to the allowance may be necessary based on changes in any of these factors.
ImpairedThe allowance for loan losses consists of two components – specific allowances allocated to individually impaired loans, as defined by Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (Statement 114), and allowances calculated for pools of loans under Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (Statement 5).
Commercial loans and commercial mortgages are reviewed for impairment under Statement 114 if they are both greater than $100,000 and are rated less than “satisfactory” based upon the Corporation’s internal credit-rating process. A satisfactory loan does not present more than a normal credit risk based on the strength of the borrower’s management, financial condition and trends, and the type and sufficiency of underlying collateral. It is expected that the borrower will be able to satisfy the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent. AAn allowance is allocated to an impaired loan if the carrying value exceeds the calculated estimated fair value.
All loans not reviewed for impairment are evaluated under Statement 5. In addition to commercial loans and mortgages not meeting the impairment evaluation criteria discussed above, these include residential mortgages, consumer loans, installment loans and lease receivables. These loans are segmented into groups with similar characteristics and an allowance for loan losses is consideredallocated to be impaired when,each segment based on current informationquantitative factors such as recent loss history and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement.qualitative factors such as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against the allowance for loan losses. Consumer loans are generally charged off when they become 120 days past due if they are not adequately secured by real estate. All other loans are evaluated for possible charge-off when they reach 90 days past due. Such loans or portions thereof are charged-off when it is probable that the balance will not be collected, based on the ability of the borrower to pay and the value of the underlying collateral. Recoveries of loans previously charged off are recorded as an increase to the allowance for loan losses. Past due status is determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles and equipment. Residual values are set at the inception of the lease and are reviewed periodically for impairment. If the impairment is considered to be other than temporary, the resulting reduction in the net investment in the lease is recognized as a loss in the period.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is generally computed using the straight-line method over the estimated useful lives of the related assets, which are a maximum of 50 years for buildings and improvements and eight years for furniture and equipment. Leasehold improvements are amortized over the shorter of 15 years or the noncancelable lease term. Interest costs incurred during the construction of major bank premises are capitalized. During 2001 the Corporation capitalized approximately $390,000 in interest expense related to the construction of new office space at its headquarters location.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned and are included in other assets initially at the lower of the estimated fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses on sales are included in other income and other expense.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSR’s) related to loans sold is recorded as an asset upon the sale of such loans. MSR’s are amortized as a reduction to servicing income over the estimated lives of the underlying loans. In addition, MSR’s are evaluated quarterly for impairment based on prepayment experience and, if necessary, additional amortization is recorded.
Income Taxes: The provision for income taxes is based upon the results of operations,income before income taxes, adjusted primarily for the effect of tax-exempt income and net credits received from investments in low income housing partnerships. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.
Stock-Based Compensation: The Corporation accounts for its stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). As such, no compensation expense has been recognized as stock options are granted with an exercise price equal to the fair market value of the Corporation’s stock. Pro-forma disclosures of the impact of stock option grants on the Corporation’s net income and net income per share, had compensation expense been recognized, are provided in Note M, “Stock-based Compensation Plans and Shareholders’ Equity”, as required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (Statement 123).
In December 2002,2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”123r, “Share-Based Payment” (Statement 148)123r). Statement 148 clarifies123r is a revision to the original Statement 123 which disallows the APB 25 method of accounting for stock options issuedand requires public companies to recognize compensation expense related to stock options in their income statements. Companies can adopt Statement 123r using either “modified prospective application” or “modified retrospective application”. Modified prospective application requires expense to be recognized for all options granted or vested after June 15, 2005. Modified retrospective application also results in restatement of prior period results, based on the amounts previously disclosed in prior periods when a company elects to transition from APB 25 accounting toperiod financial statements. Management is in the process of evaluating the adoption alternatives. The impact of adopting Statement 123 accounting. It also requires additional disclosures with respect to accounting for stock-based compensation. The Corporation has elected to continue application of APB 25 in accounting for its stock-based compensation plans and, accordingly, the transition accounting provided by Statement 148 had no impact123r on the Corporation’s results of operations and financial statements. All required disclosures have been providedcondition is illustrated in the pro-forma information presented in Note M.
Net Income Per Share: The Corporation’s basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Corporation’s common stock equivalents consist solely of outstanding stock options. Excluded from the calculation were anti-dilutive options totaling 456,000479,000 in 2002 and 2001.2002.
A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows. There were no adjustments to net income to arrive at diluted net income per share.
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||
(in thousands) | (in thousands) | |||||||||||
Weighted average shares outstanding (basic) | 106,922 | 107,768 | 108,408 | 119,435 | 112,268 | 113,156 | ||||||
Impact of common stock equivalents | 826 | 707 | 728 | 1,206 | 867 | 742 | ||||||
Weighted average shares outstanding (diluted) | 107,748 | 108,475 | 109,136 | 120,641 | 113,135 | 113,898 | ||||||
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have any operating segments which require disclosure of additional information. While the Corporation owns eleventhirteen separate banks, each engages in similar activities, provides similar products and services, and operates in the same general geographical area. The Corporation’s non-banking activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, consistingwhich consist primarily of standby and commercial letters of credit, are accounted for by recognizing a liability equal to the fair value of the guarantees and crediting the liability to income over the term of the guarantee. Fair value is estimated using the fees currently charged to enter into similar agreements with similar terms.
Business Combinations and Intangible Assets: In June 2001,The Corporation accounts for its acquisitions using the FASB issued Statementspurchase accounting method as required by Statement of Financial Accounting Standards Nos.No. 141, “Business Combinations” (Statement 141). Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Typically, this results in a residual amount in excess of the net fair values, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations and eliminated the use of pooling of interests for transactions initiated subsequent to June 30, 2001. Statement 142 eliminated the amortization, goodwill is not amortized to expense, of goodwill recorded as a result of such combinations, but requires goodwill to be evaluatedis tested for impairment at least annually. Write-downs of the balance, if necessary as a result of the impairment test, are to be charged to the results of operations in the period in which the impairment is determined. Goodwill existing prior to the issuance of the statement was required to be amortized through December 31, 2001.
The Corporation performed its initial test of goodwill impairment upon adoption of Statement 142 on January 1, 2002 and its annual tests of goodwill impairment on October 31 2003 and 2002.of each year. Based on the results of these tests the Corporation concluded that there was no impairment and no write-downs were recorded. As a result adopting Statement 142,If certain events occur which might indicate goodwill has been impaired, the Corporation was not required to recognize $2.7 million of goodwill amortization in 2002, for a net benefit of $0.03 per share (basic and diluted).is tested when such events occur.
In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions”, (Statement 147) which allowed the excess purchase price recorded in qualifying branch acquisitions to be treated in the same manner as Statement 142 goodwill. Upon adoption of Statement 147, its provisions were applied retroactively to the January 1, 2002 adoption date for Statement 142. As a result of adopting Statement 147, the Corporation was not required to recognize $1.0 million of goodwill amortization in 2002 ($677,000, net of taxes), for a net benefit of $0.01 per share (basic and diluted). See Note F, “Goodwill and Intangible Assets” for additional disclosures.
Variable Interest Entities: In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (FIN 46), which was revised in December 2003 (FIN-46). FIN-46 provides guidance on when to consolidate certain Variable Interest Entities (VIE’s) in the financial statements of the Corporation.
VIE’s are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance activities without additional financial support from other parties. Under FIN-46,FIN 46, a company must consolidate a VIE if the company has a variable interest that will absorb a majority of the VIE’s losses, if they occur, and/or receive a majority of the VIE’s residual returns, if they occur. For the Corporation, FIN-46FIN 46 affects corporation-obligated mandatorily redeemable capital securities of subsidiary trust (Trust Preferred Securities) and its investments in low and moderate income housing partnerships.
Trust Preferred Securities had historically been presented as minority interests in the Corporation’s Consolidated Balance Sheet.consolidated balance sheet. With the adoption of the related FIN-46FIN 46 provisions, as interpreted by the Securities and Exchange Commission, Trust Preferred Securities were deconsolidated from the Consolidated Balance Sheetconsolidated balance sheet as of December 31, 2003, with no restatement of prior periods.2004 and 2003. The impact of this deconsolidation was to increase long-term debt and reduce corporation-obligated mandatorily redeemable capital securities of subsidiary trust by $33.5$34.0 million. There was no impact of the deconsolidation on net income or net income per share. Prospectively, expense related to these issuances will be recorded as interest expense on long-term debt rather than minority interest expense.
Current regulatory capital rules allow Trust Preferred Securities to be included as a component of regulatory capital. This treatment has continued despite the deconsolidation of these instruments for financial reporting purposes. If banking regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Corporation may redeem them. See additional disclosures in Note I, “Short-Term Borrowings and Long-term Debt”.
Investments in low and moderate income partnerships (LIH investments)Investments) are amortized under the effective interest method over the life of the Federal income tax credits generated as a result of such investments, generally ten years. At December 31, 20032004 and 2002,2003, the Corporation’s LIH Investments totaled $40.0$52.0 million and $38.6$40.0 million, respectively. The net income tax benefit associated with these investments was $4.5 million in 2004, $4.0 million in 2003 and 2002 and $3.6 million in 2001.
FIN-46 was effective2002. Based on its review of FIN 46, the Corporation did not consolidate any of its LIH Investments as of December 31, 2004 or 2003.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer: In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), “Accounting for new LIH Investments made by the Corporation onCertain Loans or after January 31, 2003Debt Securities Acquired in a Transfer”. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer, including business combinations, if those differences are attributable, at least in part, to credit quality.
SOP 03-3 is effective March 31, 2004 for all other partnerships. No LIH Investments were consolidated as ofloans or debt securities acquired in fiscal years beginning after December 31, 2003.15, 2004. The Corporation is currently reviewing allintends to adopt the provisions of its LIH InvestmentsSOP 03-3 effective January 1, 2005, and does not expect the initial implementation to determine whether any or all must be consolidated inhave a material effect on the Corporation’s financial statements incondition or results of operations.
Other-Than-Temporary Impairment: In the future. Management cannot reasonably estimatesecond quarter of 2004, the impactEmerging Issues Task Force (EITF) released EITF Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (EITF 03-01), which provides guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments.
In September 2004, the FASB delayed the effective date of the potential consolidationmeasurement and recognition guidance of LIH InvestmentsEITF 03-01 from the third calendar quarter of 2004 to a date to be determined upon the issuance of a final FASB Staff Position. The Corporation continues to apply the measurement and recognition criteria of existing authoritative literature in evaluating its investments for other than temporary impairment. Management does not expect EITF 03-01 to have a material impact on theits financial statementscondition or results of the Corporation at this time.operations.
Reclassifications and Restatements: Certain amounts in the 20022003 and 20012002 consolidated financial statements and notes have been reclassified to conform to the 20032004 presentation. All share and per-share data have been restated to reflect the impact of the 5% stock dividend paid in May 2003.June 2004.
NOTE B -– RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation’s subsidiary banks are required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against their deposit liabilities. The average amount of such reserves during 20032004 and 20022003 was approximately $94.4$100.8 million and $64.8$94.4 million, respectively.
NOTE C -– INVESTMENT SECURITIES
The following tables summarizepresent the amortized cost and estimated fair values of investment securities as of December 31:
2003 Held to Maturity | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
2004 Held to Maturity | ||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 7,728 | $ | 158 | $ | (41 | ) | $ | 7,845 | $ | 6,903 | $ | 78 | $ | (55 | ) | $ | 6,926 | ||||||||
State and municipal securities | 4,462 | 87 | — | 4,549 | 10,658 | 65 | — | 10,723 | ||||||||||||||||||
Corporate debt securities | 640 | 1 | — | 641 | 650 | 1 | — | 651 | ||||||||||||||||||
Mortgage-backed securities | 10,163 | 541 | — | 10,704 | 6,790 | 323 | — | 7,113 | ||||||||||||||||||
$ | 25,001 | $ | 467 | $ | (55 | ) | $ | 25,413 | ||||||||||||||||||
2004 Available for Sale | ||||||||||||||||||||||||||
Equity securities | $ | 163,249 | $ | 7,822 | $ | (1,006 | ) | $ | 170,065 | |||||||||||||||||
U.S. Government and agency securities | 128,829 | 144 | (48 | ) | 128,925 | |||||||||||||||||||||
State and municipal securities | 328,726 | 4,350 | (621 | ) | 332,455 | |||||||||||||||||||||
Corporate debt securities | 68,215 | 3,053 | (141 | ) | 71,127 | |||||||||||||||||||||
Mortgage-backed securities | 1,750,080 | 1,427 | (29,221 | ) | 1,722,286 | |||||||||||||||||||||
$ | 2,439,099 | $ | 16,796 | $ | (31,037 | ) | $ | 2,424,858 | ||||||||||||||||||
2003 Held to Maturity | ||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 7,728 | $ | 158 | $ | (41 | ) | $ | 7,845 | |||||||||||||||||
State and municipal securities | 4,462 | 87 | — | 4,549 | ||||||||||||||||||||||
Corporate debt securities | 640 | 1 | — | 641 | ||||||||||||||||||||||
Mortgage-backed securities | 10,163 | 541 | — | 10,704 | ||||||||||||||||||||||
$ | 22,993 | $ | 787 | $ | (41 | ) | $ | 23,739 | ||||||||||||||||||
$ | 22,993 | $ | 787 | $ | (41 | ) | $ | 23,739 | ||||||||||||||||||
2003 Available for Sale | ||||||||||||||||||||||||||
Equity securities | $ | 197,262 | $ | 15,597 | $ | (507 | ) | $ | 212,352 | $ | 197,262 | $ | 15,597 | $ | (507 | ) | $ | 212,352 | ||||||||
U.S. Government and agency securities | 82,178 | 261 | — | 82,439 | 82,178 | 261 | — | 82,439 | ||||||||||||||||||
State and municipal securities | 291,244 | 7,115 | (329 | ) | 298,030 | 291,244 | 7,115 | (329 | ) | 298,030 | ||||||||||||||||
Corporate debt securities | 28,772 | 292 | (408 | ) | 28,656 | 28,772 | 292 | (408 | ) | 28,656 | ||||||||||||||||
Mortgage-backed securities | 2,285,845 | 9,109 | (12,274 | ) | 2,282,680 | 2,285,845 | 9,109 | (12,274 | ) | 2,282,680 | ||||||||||||||||
$ | 2,885,301 | $ | 32,374 | $ | (13,518 | ) | $ | 2,904,157 | $ | 2,885,301 | $ | 32,374 | $ | (13,518 | ) | $ | 2,904,157 | |||||||||
2002 Held to Maturity | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 8,568 | $ | 259 | $ | — | $ | 8,827 | ||||||||||||||||||
State and municipal securities | 4,679 | 123 | — | 4,802 | ||||||||||||||||||||||
Debt securities issued by foreign governments | 50 | — | — | 50 | ||||||||||||||||||||||
Mortgage-backed securities | 19,387 | 1,069 | 20,456 | |||||||||||||||||||||||
$ | 32,684 | $ | 1,451 | $ | — | $ | 34,135 | |||||||||||||||||||
2002 Available for Sale | ||||||||||||||||||||||||||
Equity securities | $ | 152,985 | $ | 8,948 | $ | (6,795 | ) | $ | 155,138 | |||||||||||||||||
U.S. Government and agency securities | 96,112 | 1,196 | (4 | ) | 97,304 | |||||||||||||||||||||
State and municipal securities | 241,451 | 8,422 | (7 | ) | 249,866 | |||||||||||||||||||||
Other debt securities | 300 | — | — | 300 | ||||||||||||||||||||||
Mortgage-backed securities | 1,839,240 | 41,810 | (51 | ) | 1,880,999 | |||||||||||||||||||||
$ | 2,330,088 | $ | 60,376 | $ | (6,857 | ) | $ | 2,383,607 | ||||||||||||||||||
The amortized cost and estimated fair value of debt securities at December 31, 20032004 by contractual maturity are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity | Available for Sale | Held to Maturity | Available for Sale | |||||||||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Due in one year or less | $ | 3,253 | $ | 3,281 | $ | 76,203 | $ | 76,509 | $ | 9,805 | $ | 9,804 | $ | 116,720 | $ | 116,851 | ||||||||
Due from one year to five years | 5,626 | 5,670 | 158,600 | 162,503 | 5,259 | 5,308 | 190,051 | 192,022 | ||||||||||||||||
Due from five years to ten years | 3,635 | 3,684 | 128,164 | 129,786 | 2,834 | 2,798 | 112,882 | 113,636 | ||||||||||||||||
Due after ten years | 316 | 400 | 39,227 | 40,327 | 313 | 390 | 106,117 | 109,998 | ||||||||||||||||
12,830 | 13,035 | 402,194 | 409,125 | 18,211 | 18,300 | 525,770 | 532,507 | |||||||||||||||||
Mortgage-backed securities | 10,163 | 10,704 | 2,285,845 | 2,282,680 | 6,790 | 7,113 | 1,750,080 | 1,722,286 | ||||||||||||||||
$ | 22,993 | $ | 23,739 | $ | 2,688,039 | $ | 2,691,805 | $ | 25,001 | $ | 25,413 | $ | 2,275,850 | $ | 2,254,793 | |||||||||
Gains totaling $14.8 million, $17.3 million $7.4 million and $9.6$7.4 million were realized on the sale of equity securities during 2004, 2003 2002 and 2001,2002, respectively. Gains totaling $3.1 million, $5.9 million $1.6 million and $3.0$1.6 million were realized on the sale of available for sale debt securities during 2004, 2003 2002 and 2001,2002, respectively. Losses of $137,000, and $3.3 million and $340,000 were recognized in 20032004 and 20022003 respectively, for equity investments exhibiting other than temporary impairment.
Securities carried at $1.2 billion and $937.1 million at December 31, 20032004 and 2002, respectively,2003 were pledged as collateral to secure public and trust deposits and for other purposes.customer and brokered repurchase agreements.
The following table presents the gross unrealized losses and fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003:2004:
Less Than 12 months | 12 Months or Longer | Total | Less Than 12 months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||
U.S. Government and agency securities | $ | 1,112 | $ | (37 | ) | $ | 254 | $ | (4 | ) | $ | 1,366 | $ | (41 | ) | $ | 67,763 | $ | (103 | ) | $ | — | $ | — | $ | 67,763 | $ | (103 | ) | |||||||||||||
State and municipal securities | 30,558 | (329 | ) | — | — | 30,558 | (329 | ) | 66,794 | (554 | ) | 2,392 | (67 | ) | 69,186 | (621 | ) | |||||||||||||||||||||||||
Corporate debt securities | — | — | 7,959 | (408 | ) | 7,959 | (408 | ) | 2,296 | (15 | ) | 8,118 | (126 | ) | 10,414 | (141 | ) | |||||||||||||||||||||||||
Mortgage-backed securities | 1,289,116 | (12,274 | ) | — | — | 1,289,116 | (12,274 | ) | 896,845 | (13,498 | ) | 632,216 | (15,723 | ) | 1,529,061 | (29,221 | ) | |||||||||||||||||||||||||
Total debt securities | 1,320,786 | (12,640 | ) | 8,213 | (412 | ) | 1,328,999 | (13,052 | ) | 1,033,698 | (14,170 | ) | 642,726 | (15,916 | ) | 1,676,424 | (30,086 | ) | ||||||||||||||||||||||||
Equity securities | 5,081 | (255 | ) | 3,067 | (252 | ) | 8,148 | (507 | ) | 13,063 | (810 | ) | 10,469 | (196 | ) | 23,532 | (1,006 | ) | ||||||||||||||||||||||||
Total | $ | 1,325,867 | $ | (12,895 | ) | $ | 11,280 | $ | (664 | ) | $ | 1,337,147 | $ | (13,559 | ) | $ | 1,046,761 | $ | (14,980 | ) | $ | 653,195 | $ | (16,112 | ) | $ | 1,699,956 | $ | (31,092 | ) | ||||||||||||
Mortgage-backed securities consist of five and seven-year balloon pools issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA). The majority of the securities shown in the above table were purchased during 2003 when mortgage rates were at historical lows. Unrealized losses on these securities at December 31, 20032004 resulted from an increase in market rates duringsince the third and fourth quarters of 2003.securities were purchased. Because FHLMC and FNMA guarantee the payment of principal, the credit risk for these securities is minimal and, as such, no impairment write-offs were considered to be necessary.
NOTE D -– LOANS AND ALLOWANCE FOR LOAN LOSSES
Gross loans are summarized as follows as of December 31:
2003 | 2002 | |||||||
(in thousands) | ||||||||
Commercial, financial and agricultural | $ | 1,948,968 | $ | 1,679,100 | ||||
Real estate-construction | 307,109 | 248,565 | ||||||
Real estate-mortgage: | ||||||||
First and second-residential | 1,324,611 | 1,244,783 | ||||||
Commercial | 1,992,650 | 1,527,143 | ||||||
Consumer | 516,587 | 543,040 | ||||||
Leasing and other | 77,646 | 84,063 | ||||||
6,167,571 | 5,326,694 | |||||||
Unearned income | (7,577 | ) | (9,626 | ) | ||||
$ | 6,159,994 | $ | 5,317,068 | |||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Commercial - industrial and financial | $ | 1,946,962 | $ | 1,594,451 | ||||
Commercial - agricultural | 326,176 | 354,517 | ||||||
Real-estate - commercial mortgage | 2,461,016 | 1,992,650 | ||||||
Real-estate - commercial construction | 348,846 | 264,129 | ||||||
Real-estate - residential mortgage | 543,072 | 434,568 | ||||||
Real-estate - residential construction | 277,940 | 42,979 | ||||||
Real estate - home equity | 1,108,249 | 890,044 | ||||||
Consumer | 506,290 | 516,587 | ||||||
Leasing and other | 77,767 | 84,056 | ||||||
Deferred loan fees, net of costs | (4,972 | ) | (6,410 | ) | ||||
7,591,346 | 6,167,571 | |||||||
Unearned income | (6,799 | ) | (7,577 | ) | ||||
$ | 7,584,547 | $ | 6,159,994 | |||||
Changes in the allowance for loan losses were as follows for the years ended December 31:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Balance at January 1 | $ | 71,920 | $ | 71,872 | $ | 65,640 | ||||||||||||||||||
Balance at beginning of year | $ | 77,700 | $ | 71,920 | $ | 71,872 | ||||||||||||||||||
Loans charged off | (13,228 | ) | (15,670 | ) | (14,275 | ) | (8,877 | ) | (13,228 | ) | (15,670 | ) | ||||||||||||
Recoveries of loans previously charged off | 3,829 | 3,818 | 3,837 | 4,520 | 3,829 | 3,818 | ||||||||||||||||||
Net loans charged off | (9,399 | ) | (11,852 | ) | (10,438 | ) | (4,357 | ) | (9,399 | ) | (11,852 | ) | ||||||||||||
Provision for loan losses | 9,705 | 11,900 | 14,585 | 4,717 | 9,705 | 11,900 | ||||||||||||||||||
Allowance purchased | 5,474 | — | 2,085 | 11,567 | 5,474 | — | ||||||||||||||||||
Balance at December 31 | $ | 77,700 | $ | 71,920 | $ | 71,872 | ||||||||||||||||||
Balance at end of year | $ | 89,627 | $ | 77,700 | $ | 71,920 | ||||||||||||||||||
The following table summarizespresents non-performing assets as of December 31:
2003 | 2002 | 2004 | 2003 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Nonaccrual loans | $ | 22,422 | $ | 24,090 | $ | 22,574 | $ | 22,422 | ||||
Accruing loans greater than 90 days past due | 9,609 | 14,095 | 8,318 | 9,609 | ||||||||
Other real estate owned | 585 | 938 | 2,209 | 585 | ||||||||
$ | 32,616 | $ | 39,123 | $ | 33,101 | $ | 32,616 | |||||
Interest of approximately $1.5 million, $1.8 million $1.7 million and $1.9$1.7 million was not recognized as interest income due to the non-accrual status of loans during 2004, 2003 2002 and 2001,2002, respectively.
The recorded investment in loans that were considered to be impaired as defined by Statement 114 was $65.7$130.6 million and $42.8$78.2 million at December 31, 20032004 and 2002,2003, respectively. At December 31, 2004 and 2003, $6.6 million and 2002, $8.9 million of impaired loans were included in non-accrual loans.loans, respectively. At December 31, 20032004 and 2002,2003, impaired loans had related allowances for loan losses of $21.2$41.6 million and $9.0$25.8 million, respectively. There were no impaired loans in 2004 and 2003 that did not have a related allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 2004, 2003 2002 and 20012002 was approximately $57.6$108.0 million, $40.2$78.4 million, and $21.1$40.2 million, respectively.
The Corporation applies all payments received on non-accruing impaired loans to principal until such time as the principal is paid off, after which time any additional payments received are recognized as interest income. Payments received on accruing impaired loans are applied to principal and interest according to the original terms of the loan. The Corporation recognized interest income of approximately $2.4$5.6 million, $1.7$3.9 million and $980,000$1.7 million on impaired loans in 2004, 2003 2002 and 2001,2002, respectively.
The Corporation has extended credit to the officers and directors of the Corporation and to their associates. Related-party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of these loans, including unadvanced commitments, was $169.9$209.8 million and $147.8$170.1 million at December 31, 20032004 and 2002,2003, respectively. During 2003, $47.32004, $48.4 million of new advances were made and repayments totaled $25.2$18.7 million. First Washington and Resource added $10.0 million to related party loans.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was $1.1 billion at December 31, 20032004 and 2002 was $1.1 billion and $1.0 billion, respectively.2003.
NOTE E -– PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2003 | 2002 | 2004 | 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Land | $ | 18,626 | $ | 16,635 | $ | 25,253 | $ | 18,626 | ||||||||
Buildings and improvements | 131,971 | 133,173 | 149,700 | 131,971 | ||||||||||||
Furniture and equipment | 92,468 | 87,567 | 105,406 | 92,468 | ||||||||||||
Other | 1,909 | 2,722 | ||||||||||||||
Construction in progress | 10,967 | 1,909 | ||||||||||||||
244,974 | 240,097 | 291,326 | 244,974 | |||||||||||||
Less: Accumulated depreciation and amortization | (124,197 | ) | (116,647 | ) | (144,415 | ) | (124,197 | ) | ||||||||
$ | 120,777 | $ | 123,450 | $ | 146,911 | $ | 120,777 | |||||||||
NOTE F -– GOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill and intangible assets at December 31:
2003 | 2002 | |||||||
(in thousands) | ||||||||
Core deposit intangible assets | $ | 19,546 | $ | 11,146 | ||||
Unidentifiable intangible assets | 5,082 | 5,082 | ||||||
Accumulated amortization | (7,034 | ) | (4,979 | ) | ||||
Total Intangible Assets | 17,594 | 11,249 | ||||||
Goodwill | 127,202 | 61,048 | ||||||
Total Goodwill and Intangible Assets | $ | 144,796 | $ | 72,297 | ||||
The following table summarizes the changes in goodwill:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | ||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||||
Balance at beginning of year | $ | 61,048 | $ | 38,900 | $ | 25,764 | $ | 127,202 | $ | 61,048 | $ | 38,900 | |||||||
Goodwill acquired | 66,154 | — | 15,863 | 236,817 | 66,154 | — | |||||||||||||
Reclassified goodwill | — | 21,300 | — | — | — | 21,300 | |||||||||||||
Reversal of negative goodwill | — | 848 | — | — | — | 848 | |||||||||||||
Amortization expense | — | — | (2,727 | ) | |||||||||||||||
Balance at end of year | $ | 127,202 | $ | 61,048 | $ | 38,900 | $ | 364,019 | $ | 127,202 | $ | 61,048 | |||||||
Reclassified goodwill consists of certain branch acquisition unidentifiable intangible assets that were accounted for as unidentifiable intangible assets prior to the adoption of Statement 147. Upon adoption of Statement 147, previous acquisitions giving rise to unidentifiable intangible assets were reviewed to determine if they constituted the acquisition of a business. The June 2001 acquisition of 18 branches was determined to be a business combination based upon the existence of the necessary inputs, processes and outputs. Upon adoption of Statement 147 retroactively to January 1, 2002, certain of these assets were reclassified to goodwill. Amortization expense of $483,000, or $314,000, net of taxes, was recognized for these assets in 2001. See Note Q, “Mergers and Acquisitions” for information regarding goodwill acquired in 2004 and 2003.
The cumulative effect of adopting Statement 142 was $848,000, representing the reversal of negative goodwill balances existing at January 1, 2002. This has been presented as other income in the Consolidated Statementsconsolidated statement of Income.income. The following table adjusts net income and net income per share for the amortization expense related to Statements 142 and 147 goodwill that is no longer being amortizedthis amount (in thousands, except per-share amounts):
2003 | 2002 | 2001 | ||||||||
Net income, as reported | $ | 138,180 | $ | 132,948 | $ | 113,589 | ||||
Amortization of goodwill, net of taxes | — | — | 3,041 | |||||||
Reversal of negative goodwill | — | (848 | ) | — | ||||||
Net income, as adjusted | $ | 138,180 | $ | 132,100 | $ | 116,630 | ||||
Basic net income per share, as reported | $ | 1.29 | $ | 1.23 | $ | 1.05 | ||||
Amortization of goodwill, net of taxes | — | — | 0.03 | |||||||
Reversal of negative goodwill | — | (0.01 | ) | — | ||||||
Basic net income per share, as adjusted | $ | 1.29 | $ | 1.23 | $ | 1.08 | ||||
Diluted net income per share, as reported | $ | 1.28 | $ | 1.23 | $ | 1.04 | ||||
Amortization of goodwill, net of taxes | — | — | 0.03 | |||||||
Reversal of negative goodwill | — | (0.01 | ) | — | ||||||
Diluted net income per share, as adjusted | $ | 1.28 | $ | 1.22 | $ | 1.07 | ||||
2004 | 2003 | 2002 | ||||||||
Net income, as reported | $ | 152,917 | $ | 138,180 | $ | 132,948 | ||||
Amortization of goodwill, net of taxes | — | — | — | |||||||
Reversal of negative goodwill | — | — | (848 | ) | ||||||
Net income, as adjusted | $ | 152,917 | $ | 138,180 | $ | 132,100 | ||||
Basic net income per share, as reported | $ | 1.28 | $ | 1.23 | $ | 1.17 | ||||
Amortization of goodwill, net of taxes | — | — | — | |||||||
Reversal of negative goodwill | — | — | (0.01 | ) | ||||||
Basic net income per share, as adjusted | $ | 1.28 | $ | 1.23 | $ | 1.17 | ||||
Diluted net income per share, as reported | $ | 1.27 | $ | 1.22 | $ | 1.17 | ||||
Amortization of goodwill, net of taxes | — | — | — | |||||||
Reversal of negative goodwill | — | — | (0.01 | ) | ||||||
Diluted net income per share, as adjusted | $ | 1.27 | $ | 1.22 | $ | 1.16 | ||||
Note: | Adjusted per share amounts do not sum in all cases due to rounding. |
The following table summarizes intangible assets at December 31:
2004 | 2003 | |||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Amortizing: | ||||||||||||||||||||
Core deposit | $ | 27,678 | $ | (7,418 | ) | $ | 20,260 | $ | 19,540 | $ | (4,320 | ) | $ | 15,220 | ||||||
Non-compete | 475 | (40 | ) | 435 | — | — | — | |||||||||||||
Unidentifiable | 7,706 | (3,998 | ) | 3,708 | 4,784 | (2,410 | ) | 2,374 | ||||||||||||
Total amortizing | 35,859 | (11,456 | ) | 24,403 | 24,324 | (6,730 | ) | 17,594 | ||||||||||||
Non-amortizing - Trade name | 900 | — | 900 | — | — | — | ||||||||||||||
$ | 36,759 | $ | (11,456 | ) | $ | 25,303 | $ | 24,324 | $ | (6,730 | ) | $ | 17,594 | |||||||
Core deposit intangible assets are amortized using an accelerated method over the estimated remaining life of the acquired core deposits. As of December 31, 2003,2004, these assets had a weighted average remaining life of approximately eight years. Unidentifiable intangible assets related to branch acquisitions are amortized on a straight-line basis over ten years. Non-compete intangible assets are being amortized on a straight-line basis over five years, which is the term of the underlying contracts. Amortization expense related to intangible assets totaled $4.7 million, $2.1 million and $1.8 million in 2004, 2003 and $2.1 million in 2003, 2002, and 2001, respectively.
Amortization expense for the next five years is expected to be as follows (in thousands):
Year | ||||||
2004 | $ | 2,852 | ||||
2005 | 2,614 | $ | 4,639 | |||
2006 | 2,433 | 4,266 | ||||
2007 | 2,308 | 3,663 | ||||
2008 | 2,160 | 3,081 | ||||
2009 | 2,791 |
NOTE G -– MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights (MSR’s), which are included in other assets in the Consolidated Balance Sheets:consolidated balance sheets:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Balance at beginning of year | $ | 6,233 | $ | 3,271 | $ | 540 | $ | 8,396 | $ | 6,233 | $ | 3,271 | ||||||||||||
Originations of mortgage servicing rights | 4,992 | 3,839 | 3,158 | 2,138 | 4,992 | 3,839 | ||||||||||||||||||
Amortization expense | (2,829 | ) | (877 | ) | (427 | ) | (2,377 | ) | (2,829 | ) | (877 | ) | ||||||||||||
Balance at end of year | $ | 8,396 | $ | 6,233 | $ | 3,271 | $ | 8,157 | $ | 8,396 | $ | 6,233 | ||||||||||||
MSR’s represent the economic value to be derived by the Corporation based upon its existing contractual rights to service mortgage loans that have been sold and are outstanding.sold. Accordingly, to the extent mortgage loan prepayments occur the value of MSR’s can be impacted. As a result
The Corporation estimates the fair value of its MSR’s by discounting the estimated cash flows of servicing revenue, net of costs, over the expected life of the declining interestunderlying loans at a discount rate environment,commensurate with the risk associated with these assets. Expected life is based on industry prepayment experience has been higher than expectedprojections for mortgage-backed securities with rates and terms comparable to the carryingloans underlying the Corporation’s MSR’s. The estimated fair value of the Corporation’s MSR’s has been reduced accordingly through additional amortization.was approximately $8.5 million and $8.4 million at December 31, 2004 and 2003, respectively.
Expected MSREstimated MSR’s amortization expense for the next five years, based on balances at December 31, 20032004 and the expected remaining lives of the underlying loans follows (in thousands):
Year | ||||||
2004 | $ | 1,986 | ||||
2005 | 1,780 | $ | 1,931 | |||
2006 | 1,543 | 1,730 | ||||
2007 | 1,273 | 1,499 | ||||
2008 | 966 | 1,236 | ||||
2009 | 938 |
NOTE H -– DEPOSITS
Deposits consisted of the following as of December 31:
2003 | 2002 | 2004 | 2003 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Noninterest-bearing demand | $ | 1,262,214 | $ | 1,118,227 | $ | 1,507,799 | $ | 1,262,214 | ||||
Interest-bearing demand | 1,289,946 | 1,061,277 | 1,501,476 | 1,289,946 | ||||||||
Savings and money market accounts | 1,751,475 | 1,529,117 | 1,917,203 | 1,751,475 | ||||||||
Time deposits | 2,448,148 | 2,536,907 | 2,969,046 | 2,448,148 | ||||||||
$ | 6,751,783 | $ | 6,245,528 | $ | 7,895,524 | $ | 6,751,783 | |||||
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $451.0$536.0 million and $420.2$451.0 million at December 31, 20032004 and 2002,2003, respectively. The scheduled maturities of time deposits as of December 31, 20032004 were as follows (in thousands):
Year | ||||||
2004 | $ | 1,273,905 | ||||
2005 | 531,108 | $ | 1,503,631 | |||
2006 | 230,914 | 555,230 | ||||
2007 | 228,162 | 426,784 | ||||
2008 | 77,822 | 103,273 | ||||
2009 | 70,549 | |||||
Thereafter | 106,237 | 309,579 | ||||
$ | 2,448,148 | $ | 2,969,046 | |||
NOTE I -– SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at December 31, 2004, 2003, 2002, and 20012002 and the related maximum amounts outstanding at the end of any month in each of the three years are presented below. The securities underlying the repurchase agreements remain in available for sale investment securities.
December 31 | Maximum Outstanding | December 31 | Maximum Outstanding | |||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||
Federal funds purchased | $ | 933,000 | $ | 330,000 | $ | 105,000 | $ | 933,000 | $ | 330,000 | $ | 248,500 | $ | 676,922 | $ | 933,000 | $ | 330,000 | $ | 849,200 | $ | 933,000 | $ | 330,000 | ||||||||||||
Securities sold under repurchase agreements | 408,697 | 297,556 | 289,659 | 429,819 | 347,248 | 342,079 | ||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 500,206 | 408,697 | 297,556 | 708,830 | 429,819 | 347,248 | ||||||||||||||||||||||||||||||
FHLB overnight repurchase agreements | 50,000 | — | — | 50,000 | — | — | — | 50,000 | — | — | 50,000 | — | ||||||||||||||||||||||||
Revolving line of credit | 11,930 | — | — | 26,000 | — | — | ||||||||||||||||||||||||||||||
Other | 5,014 | 4,638 | 5,676 | 6,387 | 5,640 | 5,676 | 5,466 | 5,014 | 4,638 | 5,807 | 6,387 | 5,640 | ||||||||||||||||||||||||
$ | 1,396,711 | $ | 632,194 | $ | 400,335 | $ | 1,194,524 | $ | 1,396,711 | $ | 632,194 | |||||||||||||||||||||||||
In 2004, the Corporation entered into a $50.0 million revolving line of credit agreement with an unaffiliated bank that provides for interest to be paid on outstanding balances at the one-month London Interbank Offering Rate (LIBOR) plus 0.625%. The credit agreement requires the Corporation to maintain certain financial ratios related to capital strength and earnings. The Corporation was in compliance with all required covenants under the credit agreement as of December 31, 2004.
The following table presents information related to short-term borrowings.securities sold under agreements to repurchase:
December 31 | December 31 | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Amount outstanding at December 31 | $ | 1,396,711 | $ | 632,194 | $ | 400,335 | $ | 500,206 | $ | 408,697 | $ | 297,556 | ||||||||||||
Weighted average interest rate at year end | 0.92 | % | 1.16 | % | 1.75 | % | 1.03 | % | 0.72 | % | 1.43 | % | ||||||||||||
Average amount outstanding during the year | $ | 738,527 | $ | 434,402 | $ | 355,953 | $ | 531,196 | $ | 351,302 | $ | 297,453 | ||||||||||||
Weighted average interest rate during the year | 1.00 | % | 1.52 | % | 3.68 | % | 0.97 | % | 0.83 | % | 1.43 | % |
Federal Home Loan Bank Advancesadvances and long-term debt included the following as of December 31:
2003 | 2002 | 2004 | 2003 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Federal Home Loan Bank advances | $ | 532,344 | $ | 531,478 | $ | 645,461 | $ | 532,344 | ||||
Junior subordinated deferrable interest debentures | 33,509 | — | 34,022 | 33,509 | ||||||||
Other long-term debt | 2,877 | 4,077 | 4,753 | 2,877 | ||||||||
$ | 568,730 | $ | 535,555 | $ | 684,236 | $ | 568,730 | |||||
The Parent Company owns all of the common stock of threefour Delaware business trusts, which have issued Trust Preferred Securities in conjunction with the Parent Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the junior subordinated deferrable interest debentures are the same as the terms of the Trust Preferred Securities. The Parent Company’s obligations under the debentures constitute a full and unconditional guarantee by the Parent Company of the obligations of the trusts. The preferredTrust Preferred securities are redeemable on specified dates, or earlier if the deduction of interest for Federal income taxes is prohibited, the Trust Preferred Securities no longer qualify as Tier I capital, or if certain other contingencies arise. The Trust Preferred Securities must be redeemed upon maturity.
As a result of the deconsolidation of the trusts upon adoption of FIN-46 on December 31, 2003, the Trust Preferred Securities are no longer shown as minority interests in the Consolidated Balance Sheets and the junior subordinated deferrable interest debentures are included in long-term debt. The following table details the terms of the debentures (dollars in thousands):
Debentures Issued to | Rate | Amount | Maturity | Callable | Fixed/ Variable | Rate at December 31, 2004 | Amount | Maturity | Callable | |||||||||||||
Drovers Capital Trust I | 9.25 | % | $ | 7,735 | 9/30/29 | 9/30/04 | ||||||||||||||||
Premier Capital Trust | 8.57 | 10,310 | 8/15/28 | 8/15/08 | Fixed | 8.57 | % | $ | 10,310 | 8/15/28 | 8/15/08 | |||||||||||
PBI Capital Trust II | Variable | 15,464 | 11/7/32 | 11/7/07 | Variable | 5.73 | % | 15,464 | 11/7/32 | 11/7/07 | ||||||||||||
Resource Capital Trust II | Variable | 5.61 | % | 5,155 | 12/8/31 | 12/8/06 | ||||||||||||||||
Resource Capital Trust III | Variable | 5.73 | % | 3,093 | 11/7/32 | 11/7/07 | ||||||||||||||||
$ | 33,509 | $ | 34,022 | |||||||||||||||||||
Federal Home Loan Bank advances mature through May 2014 and carry a weighted average interest rate of 4.95%4.61%. As of December 31, 2003,2004, the Corporation had an additional borrowing capacity of approximately $1.1$1.3 billion with the Federal Home Loan Bank. Advances from the Federal Home Loan Bank are secured by Federal Home Loan Bank stock, qualifying residential mortgages, investments and other assets.
The following table summarizes the scheduled maturity periodsmaturities of Federal Home Loan Bank advances and junior subordinated deferrable interest debentureslong-term debt as of December 31, 20032004 (in thousands):
Year | ||||||
2004 | $ | 5,000 | ||||
2005 | 85,180 | $ | 126,230 | |||
2006 | 15,000 | 33,706 | ||||
2007 | 55,169 | 70,302 | ||||
2008 | 206,000 | 212,359 | ||||
2009 | 68,988 | |||||
Thereafter | 199,504 | 172,651 | ||||
$ | 565,853 | $ | 684,236 | |||
NOTE J -– REGULATORY MATTERS
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations. Under such limitations, the total amount available for payment of dividends by subsidiary banks was approximately $160$230 million at December 31, 2003.2004.
Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of each bank subsidiary’s regulatory capital. At December 31, 2003,2004, the maximum amount available for transfer from the subsidiary banks to the Parent Company in the form of loans and dividends was approximately $220$310 million.
Regulatory Capital Requirements
The Corporation’s subsidiary banks are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary banks must meet specific capital guidelines that involve quantitative measures of the subsidiary banks’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The subsidiary banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2003,2004, that all of its bank subsidiaries meet the capital adequacy requirements to which they are subject.
As of December 31, 20032004 and 2002,2003, the Corporation’s fiveseven significant subsidiaries, Fulton Bank, Lebanon Valley Farmers Bank, Lafayette Ambassador Bank, The Bank, Premier Bank, Resource Bank and PremierFirst Washington State Bank were well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized,well-capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 20032004 that management believes have changed the institutions’ categories.
The following tables present the total risk-based, Tier I risk-based and Tier I leverage requirements for the Corporation and its significant subsidiaries.
As of December 31, 2003 | Actual | For Capital Adequacy Purposes | Well-Capitalized | |||||||||||||||||||||||||||||||||
Actual | For Capital Adequacy Purposes | Well-Capitalized | ||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||
As of December 31, 2004 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 899,512 | 12.7 | % | $ | 564,986 | 8.0 | % | $ | 706,233 | 10.0 | % | $ | 979,203 | 11.7 | % | $ | 667,377 | 8.0 | % | $ | 834,222 | 10.0 | % | ||||||||||||
Fulton Bank | 363,827 | 10.4 | 278,843 | 8.0 | 348,553 | 10.0 | 401,961 | 11.2 | 286,697 | 8.0 | 358,372 | 10.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 60,714 | 11.4 | 42,428 | 8.0 | 53,035 | 10.0 | 59,860 | 11.6 | 41,254 | 8.0 | 51,567 | 10.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 89,046 | 10.7 | 66,405 | 8.0 | 83,007 | 10.0 | 95,631 | 11.4 | 67,124 | 8.0 | 83,905 | 10.0 | ||||||||||||||||||||||||
The Bank | 78,769 | 11.1 | 56,583 | 8.0 | 70,729 | 10.0 | 89,891 | 11.1 | 64,969 | 8.0 | 81,211 | 10.0 | ||||||||||||||||||||||||
Premier Bank | 40,582 | 11.4 | 29,223 | 8.0 | 36,529 | 10.0 | 45,770 | 13.0 | 28,218 | 8.0 | 35,272 | 10.0 | ||||||||||||||||||||||||
Resource Bank | 83,274 | 11.1 | 60,241 | 8.0 | 75,302 | 10.0 | ||||||||||||||||||||||||||||||
First Washington State Bank | 38,183 | 12.7 | 24,142 | 8.0 | 30,177 | 10.0 | ||||||||||||||||||||||||||||||
Tier I Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 815,021 | 11.5 | % | $ | 282,493 | 4.0 | % | $ | 423,740 | 6.0 | % | $ | 886,729 | 10.6 | % | $ | 333,689 | 4.0 | % | $ | 500,533 | 6.0 | % | ||||||||||||
Fulton Bank | 328,868 | 9.4 | 139,421 | 4.0 | 209,132 | 6.0 | 366,633 | 10.2 | 143,349 | 4.0 | 215,023 | 6.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 55,142 | 10.4 | 21,214 | 4.0 | 31,821 | 6.0 | 55,051 | 10.7 | 20,627 | 4.0 | 30,940 | 6.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 79,810 | 9.6 | 33,203 | 4.0 | 49,804 | 6.0 | 86,456 | 10.3 | 33,562 | 4.0 | 50,343 | 6.0 | ||||||||||||||||||||||||
The Bank | 71,506 | 10.1 | 28,292 | 4.0 | 42,437 | 6.0 | 81,252 | 10.0 | 32,485 | 4.0 | 48,727 | 6.0 | ||||||||||||||||||||||||
Premier Bank | 34,515 | 9.7 | 14,612 | 4.0 | 21,917 | 6.0 | 39,858 | 11.3 | 14,109 | 4.0 | 21,163 | 6.0 | ||||||||||||||||||||||||
Resource Bank | 75,503 | 10.0 | 30,121 | 4.0 | 45,181 | 6.0 | ||||||||||||||||||||||||||||||
First Washington State Bank | 34,729 | 11.5 | 12,071 | 4.0 | 18,106 | 6.0 | ||||||||||||||||||||||||||||||
Tier I Capital (to Average Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 815,021 | 8.8 | % | $ | 279,565 | 3.0 | % | $ | 465,941 | 5.0 | % | $ | 886,729 | 8.7 | % | $ | 304,337 | 3.0 | % | $ | 507,228 | 5.0 | % | ||||||||||||
Fulton Bank | 328,868 | 8.3 | 119,252 | 3.0 | 198,753 | 5.0 | 366,633 | 8.4 | 130,290 | 3.0 | 217,150 | 5.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 55,142 | 6.9 | 24,058 | 3.0 | 40,096 | 5.0 | 55,051 | 7.2 | 23,048 | 3.0 | 38,413 | 5.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 79,810 | 6.6 | 36,102 | 3.0 | 60,171 | 5.0 | 86,456 | 7.4 | 35,166 | 3.0 | 58,609 | 5.0 | ||||||||||||||||||||||||
The Bank | 71,506 | 6.9 | 30,931 | 3.0 | 51,551 | 5.0 | 81,252 | 7.7 | 31,762 | 3.0 | 52,937 | 5.0 | ||||||||||||||||||||||||
Premier Bank | 34,515 | 6.6 | 15,589 | 3.0 | 25,981 | 5.0 | 39,858 | 8.6 | 13,903 | 3.0 | 23,172 | 5.0 | ||||||||||||||||||||||||
Resource Bank | 75,503 | 7.7 | 29,304 | 3.0 | 48,839 | 5.0 | ||||||||||||||||||||||||||||||
First Washington State Bank | 34,729 | 7.2 | 14,564 | 3.0 | 24,273 | 5.0 |
As of December 31, 2002 | Actual | For Capital Adequacy Purposes | Well-Capitalized | |||||||||||||||||||||||||||||||||
Actual | For Capital Adequacy Purposes | Well-Capitalized | ||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||
As of December 31, 2003 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
�� | (dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 837,645 | 13.8 | % | $ | 485,112 | 8.0 | % | $ | 606,390 | 10.0 | % | $ | 899,512 | 12.7 | % | $ | 564,986 | 8.0 | % | $ | 706,233 | 10.0 | % | ||||||||||||
Fulton Bank | 353,258 | 11.6 | 243,538 | 8.0 | 304,422 | 10.0 | 363,827 | 10.4 | 278,843 | 8.0 | 348,553 | 10.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 64,582 | 12.5 | 41,398 | 8.0 | 51,747 | 10.0 | 60,714 | 11.4 | 42,428 | 8.0 | 53,035 | 10.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 84,129 | 12.0 | 56,107 | 8.0 | 70,134 | 10.0 | 89,046 | 10.7 | 66,405 | 8.0 | 83,007 | 10.0 | ||||||||||||||||||||||||
The Bank | 79,632 | 12.0 | 53,284 | 8.0 | 66,605 | 10.0 | 78,769 | 11.1 | 56,583 | 8.0 | 70,729 | 10.0 | ||||||||||||||||||||||||
Premier Bank | 40,582 | 11.4 | 29,223 | 8.0 | 36,529 | 10.0 | ||||||||||||||||||||||||||||||
Tier I Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 764,325 | 12.6 | % | $ | 242,556 | 4.0 | % | $ | 363,834 | 6.0 | % | $ | 815,021 | 11.5 | % | $ | 282,493 | 4.0 | % | $ | 423,740 | 6.0 | % | ||||||||||||
Fulton Bank | 320,362 | 10.5 | 121,769 | 4.0 | 182,653 | 6.0 | 328,868 | 9.4 | 139,421 | 4.0 | 209,132 | 6.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 58,763 | 11.4 | 20,699 | 4.0 | 31,048 | 6.0 | 55,142 | 10.4 | 21,214 | 4.0 | 31,821 | 6.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 75,539 | 10.8 | 28,053 | 4.0 | 42,080 | 6.0 | 79,810 | 9.6 | 33,203 | 4.0 | 49,804 | 6.0 | ||||||||||||||||||||||||
The Bank | 72,201 | 10.8 | 26,642 | 4.0 | 39,963 | 6.0 | 71,506 | 10.1 | 28,292 | 4.0 | 42,437 | 6.0 | ||||||||||||||||||||||||
Premier Bank | 34,515 | 9.7 | 14,612 | 4.0 | 21,917 | 6.0 | ||||||||||||||||||||||||||||||
Tier I Capital (to Average Assets): | ||||||||||||||||||||||||||||||||||||
Corporation | $ | 764,325 | 9.4 | % | $ | 243,068 | 3.0 | % | $ | 405,113 | 5.0 | % | $ | 815,021 | 8.8 | % | $ | 279,565 | 3.0 | % | $ | 465,941 | 5.0 | % | ||||||||||||
Fulton Bank | 320,362 | 8.8 | 108,685 | 3.0 | 181,142 | 5.0 | 328,868 | 8.3 | 119,252 | 3.0 | 198,753 | 5.0 | ||||||||||||||||||||||||
Lebanon Valley Farmers Bank | 58,763 | 7.7 | 22,910 | 3.0 | 38,183 | 5.0 | 55,142 | 6.9 | 24,058 | 3.0 | 40,096 | 5.0 | ||||||||||||||||||||||||
Lafayette Ambassador Bank | 75,539 | 7.1 | 31,957 | 3.0 | 53,262 | 5.0 | 79,810 | 6.6 | 36,102 | 3.0 | 60,171 | 5.0 | ||||||||||||||||||||||||
The Bank | 72,201 | 7.3 | 29,767 | 3.0 | 49,612 | 5.0 | 71,506 | 6.9 | 30,931 | 3.0 | 51,551 | 5.0 | ||||||||||||||||||||||||
Premier Bank | 34,515 | 6.6 | 15,589 | 3.0 | 25,981 | 5.0 |
NOTE K -– INCOME TAXES
The components of the provision for income taxes are as follows:
Year ended December 31 | Year ended December 31 | |||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||
Current tax expense: | ||||||||||||||||||
Federal | $ | 53,377 | $ | 52,749 | $ | 44,625 | $ | 63,615 | $ | 53,377 | $ | 52,749 | ||||||
State | 1,277 | 1,764 | 222 | 417 | 1,277 | 1,764 | ||||||||||||
54,654 | 54,513 | 44,847 | 64,032 | 54,654 | 54,513 | |||||||||||||
Deferred tax expense | 4,709 | 1,955 | 1,520 | 1,232 | 4,709 | 1,955 | ||||||||||||
$ | 59,363 | $ | 56,468 | $ | 46,367 | $ | 65,264 | $ | 59,363 | $ | 56,468 | |||||||
The differences between the effective income tax rate and the Federal statutory income tax rate are as follows:
Year ended December 31 | Year ended December 31 | |||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Effect of tax-exempt income | (3.2 | ) | (3.2 | ) | (3.4 | ) | (2.8 | ) | (3.2 | ) | (3.2 | ) | ||||||
Effect of low income housing investments | (2.0 | ) | (2.1 | ) | (2.6 | ) | (2.1 | ) | (2.0 | ) | (2.1 | ) | ||||||
State income taxes, net of Federal benefit | 0.4 | 0.6 | 0.1 | 0.1 | 0.4 | 0.6 | ||||||||||||
Other | (0.1 | ) | (0.5 | ) | (0.1 | ) | (0.3 | ) | (0.1 | ) | (0.5 | ) | ||||||
Effective income tax rate | 30.1 | % | 29.8 | % | 29.0 | % | 29.9 | % | 30.1 | % | 29.8 | % | ||||||
The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences at December 31:
2003 | 2002 | 2004 | 2003 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Deferred tax assets: | ||||||||||||
Allowance for loan losses | $ | 27,195 | $ | 25,172 | $ | 31,370 | $ | 27,195 | ||||
Deferred compensation | 3,776 | 3,638 | 6,072 | 3,776 | ||||||||
Investments in low income housing | 2,951 | 3,063 | 2,724 | 2,951 | ||||||||
Post-retirement benefits | 3,318 | 3,266 | 3,403 | 3,318 | ||||||||
Other accrued expenses | 1,406 | 1,671 | 1,549 | 1,406 | ||||||||
Fixed asset depreciation | — | 809 | ||||||||||
Other than temporary impairment writedown of investments | 1,285 | — | ||||||||||
Unrealized holding losses on securities available for sale | 5,155 | — | ||||||||||
Other than temporary impairment of investments | 1,022 | 1,285 | ||||||||||
Other | 767 | 1,144 | 1,541 | 767 | ||||||||
Total gross deferred tax assets | 40,698 | 38,763 | 52,836 | 40,698 | ||||||||
Deferred tax liabilities: | ||||||||||||
Direct leasing | 9,877 | 8,759 | 10,038 | 9,877 | ||||||||
Unrealized holding gains on securities available for sale | 6,620 | 18,732 | — | 6,620 | ||||||||
Mortgage servicing rights | 2,939 | 2,181 | 2,855 | 2,939 | ||||||||
Fixed asset depreciation | 1,304 | — | ||||||||||
Premises and equipment | 2,003 | 1,304 | ||||||||||
Intangible assets | 1,811 | — | 5,014 | 2,723 | ||||||||
Other | 1,240 | 876 | 2,522 | 328 | ||||||||
Total gross deferred tax liabilities | 23,791 | 30,548 | 22,432 | 23,791 | ||||||||
Net deferred tax asset | $ | 16,907 | $ | 8,215 | $ | 30,404 | $ | 16,907 | ||||
The Corporation has net operating losses (NOL’s) for income taxes in certain states that are eligible for carryforward credit against future taxable income for a specific number of years. The Corporation does not anticipate generating taxable income in these states during the carryforward years and, as such, deferred tax assets have not been recognized for these NOL’s.
As of December 31, 20032004 and 2002,2003, the Corporation had not established any valuation allowance against net Federal deferred tax assets since these tax benefits are realizable either through carry-backcarryback availability against prior years’ taxable income or the reversal of existing deferred tax liabilities. Income tax benefits arising from the exercise of non-qualified stock options totaling $2.3 million in 2004, $730,000 in 2003 and $434,000 in 2002 are included in shareholders’ equity.
NOTE L -– EMPLOYEE BENEFIT PLANS
Substantially all eligible employees of the Corporation are covered by one of the following plans or combination of plans:
Profit Sharing Plan – A noncontributory defined contribution plan where employer contributions are based on a formula providing for an amount not to exceed 15% of each eligible employee’s annual salary (10% for employees hired subsequent to January 1, 1996). Participants are 100% vested in balances after five years of eligible service. In addition, the profit sharing plan includes a 401(k) feature which allows employees to defer a portion of their pre-tax salary on an annual basis, with no employer match. Contributions under this feature are 100% vested.
Defined Benefit Pension Plans and 401(k) Plans – The Corporation maintains two defined benefit plans, the Fulton Financial Affiliates’ Defined Benefit Pension Plan and the Drovers & Mechanics Pension Plan (Pension Plans). Contributions to the Pension PlansCorporation’s defined benefit pension plan (Pension Plan) are actuarially determined and funded annually. Pension Plan assets are invested in money markets, fixed income securities, including corporate bonds, U.S. Treasury securities and common trust funds, and equity securities, including common stocks and common stock mutual funds. The Pension Plans havePlan has been closed to new participants, but existing participants continue to accrue benefits according to the terms of the plan. As of January 1, 2004, the Pension Plans were merged into one plan.
Employees covered under the Pension PlansPlan are also eligible to participate in the Fulton Financial Affiliates 401(k) Savings Plan. The 401(k) Plan, generallywhich allows employees to defer up to $11,000a portion of their pre-tax salary on an annual basis. At its discretion, the Corporation may also make a matching contribution up to 3%.
The following summarizes the Corporation’s expense under the above plans for the years ended December 31:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||
Profit Sharing Plan | $ | 6,606 | $ | 6,220 | $ | 5,050 | $ | 8,251 | $ | 6,606 | $ | 6,220 | ||||||
Pension Plans | 3,025 | 1,812 | 989 | |||||||||||||||
Pension Plan | 3,072 | 3,025 | 1,812 | |||||||||||||||
401(k) Plan | 596 | 667 | 597 | 967 | 596 | 667 | ||||||||||||
$ | 10,227 | $ | 8,699 | $ | 6,636 | $ | 12,290 | $ | 10,227 | $ | 8,699 | |||||||
The net periodic pension cost for the Corporation’s Pension Plans,Plan, as determined by consulting actuaries, consisted of the following components for the years ended December 31:
2003 | 2002 | 2001 | ||||||||||
(in thousands) | ||||||||||||
Service cost – benefits earned during period | $ | 2,178 | $ | 1,954 | $ | 1,873 | ||||||
Interest cost on projected benefit obligation | 2,952 | 2,653 | 2,472 | |||||||||
Actual return on assets | (4,337 | ) | 2,086 | 3,103 | ||||||||
Net amortization and deferral | 2,232 | (4,881 | ) | (6,459 | ) | |||||||
Net periodic pension cost | $ | 3,025 | $ | 1,812 | $ | 989 | ||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Service cost | $ | 2,307 | $ | 2,178 | $ | 1,954 | ||||||
Interest cost | 3,102 | 2,952 | 2,653 | |||||||||
Expected return on assets | (3,001 | ) | (2,631 | ) | (2,835 | ) | ||||||
Net amortization and deferral | 664 | 526 | 40 | |||||||||
Net periodic pension cost | $ | 3,072 | $ | 3,025 | $ | 1,812 | ||||||
The measurement date for the Pension PlansPlan is September 30. The following table summarizes the changes in the projected benefit obligation and fair value of plan assets for the indicated periods:
Plan Year Ended September 30 | Plan Year Ended September 30 | |||||||||||||||
2003 | 2002 | 2004 | 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Projected benefit obligation, beginning | $ | 43,886 | $ | 37,207 | $ | 52,282 | $ | 43,886 | ||||||||
Service cost | 2,178 | 1,954 | 2,307 | 2,178 | ||||||||||||
Interest cost | 2,952 | 2,653 | 3,102 | 2,952 | ||||||||||||
Benefit payments | (1,666 | ) | (1,699 | ) | (1,270 | ) | (1,666 | ) | ||||||||
Actuarial loss | 5,309 | 3,644 | 2,552 | 5,309 | ||||||||||||
Amendments | — | 93 | ||||||||||||||
Experience (gain) loss | (377 | ) | 34 | |||||||||||||
Experience loss (gain) | 292 | (377 | ) | |||||||||||||
Projected benefit obligation, ending | $ | 52,282 | $ | 43,886 | $ | 59,265 | $ | 52,282 | ||||||||
Fair value of plan assets, beginning | $ | 33,288 | $ | 35,433 | $ | 37,980 | $ | 33,288 | ||||||||
Employer contributions | 2,021 | 1,640 | 2,622 | 2,021 | ||||||||||||
Actual return on assets | 4,337 | (2,086 | ) | 2,136 | 4,337 | |||||||||||
Benefit payments | (1,666 | ) | (1,699 | ) | (1,270 | ) | (1,666 | ) | ||||||||
Fair value of plan assets, ending | $ | 37,980 | $ | 33,288 | $ | 41,468 | $ | 37,980 | ||||||||
The funded status of the Pension PlansPlan and the amounts included in other liabilities as of December 31 follows:
2003 | 2002 | 2004 | 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Projected benefit obligation | $ | (52,282 | ) | $ | (43,886 | ) | $ | (59,265 | ) | $ | (52,282 | ) | ||||
Fair value of plan assets | 37,980 | 33,288 | 41,468 | 37,980 | ||||||||||||
Funded status | (14,302 | ) | (10,598 | ) | (17,797 | ) | (14,302 | ) | ||||||||
Unrecognized net transition asset | (64 | ) | (77 | ) | (51 | ) | (64 | ) | ||||||||
Unrecognized prior service cost | 93 | 109 | 82 | 93 | ||||||||||||
Unrecognized net loss | 12,645 | 9,942 | 15,687 | 12,645 | ||||||||||||
Intangible asset | (82 | ) | — | |||||||||||||
Accumulated other comprehensive loss | (858 | ) | — | |||||||||||||
Pension liability recognized in the | ||||||||||||||||
consolidated balance sheets | $ | (1,628 | ) | $ | (624 | ) | ||||||||||
Pension liability recognized in the consolidated balance sheets | $ | (3,019 | ) | $ | (1,628 | ) | ||||||||||
Accumulated benefit obligation | $ | 39,124 | $ | 31,868 | $ | 44,487 | $ | 39,124 | ||||||||
Accumulated other comprehensive income was reduced by $858,000 ($558,000, net of tax) as of December 31, 2004 to increase the pension liability to an amount equal to the difference between the accumulated benefit obligation and the fair value of plan assets.
The following rates were used to calculate net periodic pension cost and the present value of benefit obligations:
2004 | 2003 | 2002 | |||||||
Discount rate-projected benefit obligation | 5.75 | % | 6.00 | % | 6.75 | % | |||
Rate of increase in compensation level | 4.50 | 4.50 | 5.00 | ||||||
Expected long-term rate of return on plan assets | 8.00 | 8.00 | 8.00 |
2003 | 2002 | 2001 | |||||||
Discount rate-projected benefit obligation | 6.00 | % | 6.75 | % | 7.25 | % | |||
Rate of increase in compensation level | 4.50 | 5.00 | 5.00 | ||||||
Expected long-term rate of return on plan assets | 8.00 | 8.00 | 8.00 |
The 8.0% long-term rate of return on plan assets used to calculate the net periodic pension cost and present value of benefit obligations is based on historical returns. Although plan assets generated a negative return in 2002, total returns for 2004 and 2003 approximated this rate. The expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
The following table summarizes the weighted average asset allocations as of September 30:
2003 | 2002 | 2004 | 2003 | |||||||||
Cash and equivalents | 9.0 | % | 9.0 | % | 6.0 | % | 9.0 | % | ||||
Equity securities | 51.0 | 45.0 | 50.0 | 51.0 | ||||||||
Fixed income securities | 40.0 | 46.0 | 44.0 | 40.0 | ||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Equity securities consist mainly of equity common trust and mutual funds. Fixed income securities consist mainly of fixed income common trust funds. Defined benefit plan assets are invested with a balanced growth objective, with target asset allocations between 40 and 70 percent for equity securities and 30 to 60 percent for fixed income securities. The Corporation expects to contribute $2.6$2.3 million to the pension plan in 2004.2005. Estimated future benefit payments are as follows (in thousands):
The 8.0% long-term rate of return on plan assets used to calculate the net periodic pension cost and present value of benefit obligations is based on historical returns. Although plan assets generated a negative return in 2002 and 2001, the expected long-term return is considered to be appropriate based on the asset mix and the historical returns realized.
Year | |||
2005 | $ | 1,217 | |
2006 | 1,370 | ||
2007 | 1,411 | ||
2008 | 1,583 | ||
2009 | 1,761 | ||
2010 - 2014 | 13,376 | ||
$ | 20,718 | ||
Post-retirement Benefits
The Corporation currently provides medical benefits and life insurance benefitsa death benefit to retired full-time employees who were employees of the Corporation prior to January 1, 1998. Full-time employees may become eligible for these discretionary benefits if they reach retirement while working for the Corporation. Benefits are based on a graduated scale for years of service after attaining the age of 40.
The components of the expense for post-retirement benefits other than pensions are as follows:
2003 | 2002 | 2001 | ||||||||||
(in thousands) | ||||||||||||
Service cost-benefits earned during the period | $ | 281 | $ | 260 | $ | 240 | ||||||
Interest cost on accumulated post-retirement benefit obligation | 446 | 444 | 393 | |||||||||
Actual return on plan assets | (2 | ) | (3 | ) | (7 | ) | ||||||
Net amortization and deferral | (287 | ) | (298 | ) | (375 | ) | ||||||
Net nonpension post-retirement benefit cost | $ | 438 | $ | 403 | $ | 251 | ||||||
2004 | 2003 | 2002 | ||||||||||
(in thousands) | ||||||||||||
Service cost | $ | 364 | $ | 281 | $ | 260 | ||||||
Interest cost | 474 | 446 | 444 | |||||||||
Expected return on plan assets | (2 | ) | (2 | ) | (3 | ) | ||||||
Net amortization and deferral | (230 | ) | (287 | ) | (298 | ) | ||||||
Net post-retirement benefit cost | $ | 606 | $ | 438 | $ | 403 | ||||||
The following table summarizes the changes in the accumulated post-retirement benefit obligation and fair value of plan assets for the years ended December 31:
2003 | 2002 | 2004 | 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Accumulated post-retirement benefit obligation, beginning | $ | 7,104 | $ | 5,798 | $ | 7,815 | $ | 7,104 | ||||||||
Service cost | 281 | 260 | 364 | 281 | ||||||||||||
Interest cost | 446 | 444 | 474 | 446 | ||||||||||||
Benefit payments | (324 | ) | (263 | ) | (268 | ) | (324 | ) | ||||||||
Change due to change in experience | (301 | ) | 509 | 296 | (301 | ) | ||||||||||
Change due to change in assumptions | 609 | 356 | 248 | 609 | ||||||||||||
Accumulated post-retirement benefit obligation, ending | $ | 7,815 | $ | 7,104 | $ | 8,929 | $ | 7,815 | ||||||||
Fair value of plan assets, beginning | $ | 171 | $ | 185 | $ | 165 | $ | 171 | ||||||||
Employer contributions | 316 | 246 | 251 | 316 | ||||||||||||
Actual return on assets | 2 | 3 | 2 | 2 | ||||||||||||
Benefit payments | (324 | ) | (263 | ) | (268 | ) | (324 | ) | ||||||||
Fair value of plan assets, ending | $ | 165 | $ | 171 | $ | 150 | $ | 165 | ||||||||
The funded status of the plan and the amounts included in other liabilities as of December 31 follows:
2003 | 2002 | 2004 | 2003 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Accumulated post-retirement benefit obligation | $ | (7,815 | ) | $ | (7,104 | ) | $ | (8,929 | ) | $ | (7,815 | ) | ||||
Fair value of plan assets | 165 | 171 | 150 | 165 | ||||||||||||
Funded status | (8,779 | ) | (7,650 | ) | ||||||||||||
Funded status | (7,650 | ) | (6,933 | ) | ||||||||||||
Unrecognized prior service cost | (905 | ) | (1,132 | ) | (679 | ) | (905 | ) | ||||||||
Unrecognized net gain | (586 | ) | (955 | ) | (39 | ) | (586 | ) | ||||||||
Post-retirement benefits liability recognized in the consolidated balance sheets | $ | (9,141 | ) | $ | (9,020 | ) | $ | (9,497 | ) | $ | (9,141 | ) | ||||
For measuring the post-retirement benefit obligation, the annual increase in the per capita cost of health care benefits was assumed to be 9.0%8.5% in year one, declining to an ultimate rate of 4.5% by year nine. This health care cost trend rate has a significant impact on the amounts reported. Assuming a 1.0% increase in the health care cost trend rate above the assumed annual increase, the accumulated post-retirement benefit obligation would increase by approximately $929,000$1.1 million and the current period expense would increase by approximately $99,000.$123,000. Conversely, a 1% decrease in the health care cost trend rate would decrease the accumulated post-retirement benefit obligation by approximately $777,000$904,000 and the current period expense by approximately $82,000.
The discount rate used in determining the accumulated post-retirement benefit obligation was 5.75% at December 31, 2004 and 6.00% at December 31, 2003 and 6.75% at December 31, 2002.2003. The expected long-term rate of return on plan assets was 3.00% at December 31, 20032004 and 2002.2003.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Bill”)(Medicare Bill) was signed into law. The Medicare Bill expands Medicare benefits, primarily by adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” permits deferring the recognition of the new Medicare provisions’ impact due to lack of specific authoritative guidance on accounting for the Federal subsidy. The Corporation has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the post-retirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. Adoption of this standard when final guidance is issued is not expected to have a material impactbenefit on the Corporation’s financial statements.post-retirement benefit obligation was a reduction of $143,000 at December 31, 2004.
NOTE M -– STOCK-BASED COMPENSATION PLANS AND SHAREHOLDERS’ EQUITY
Incentive Stock Option and Compensation Plan and Employee Stock Purchase Plan
The Corporation has an Incentivea Stock Option and Compensation Plan (Option Plan) and an Employee Stock Purchase Plan (ESPP). Under the Option Plan, options are granted to key personnel for terms of up to 10 years at option prices equal to the fair market value of the Corporation’s stock on the date of grant. Options arehave been 100% vested immediately upon grant. The Plan has reserved 232,00012.8 million additional shares for future grant through 2006.2013. The number of options granted in any year is dependent upon the Corporation’s performance relative to that of a self-defined peer group. A summary of stock option activity under the current and prior planplans follows:
Stock Options | Option Price Per Share | Option Price Per Share | ||||||||||||||
Range | Weighted Average | Stock Options | Range | Weighted Average | ||||||||||||
Balance at January 1, 2001 | 2,987,301 | $ 2.40 - $ 15.60 | $ | 10.65 | ||||||||||||
Granted | 455,306 | 15.60 | 15.60 | |||||||||||||
Exercised | (492,899 | ) | 2.40 - 15.60 | 8.11 | ||||||||||||
Canceled | (26,274 | ) | 10.13 - 15.60 | 14.92 | ||||||||||||
Balance at December 31, 2001 | 2,923,434 | 2.40 - 15.60 | 11.80 | |||||||||||||
Balance at January 1, 2002 | 3,069,606 | $2.29 - $14.85 | $ | 11.24 | ||||||||||||
Granted | 455,228 | 18.41 | 18.41 | 477,989 | 17.53 | 17.53 | ||||||||||
Exercised | (375,470 | ) | 5.38 - 15.60 | 9.17 | (394,244 | ) | 5.12 - 14.86 | 8.73 | ||||||||
Canceled | (6,454 | ) | 9.96 - 15.60 | 12.52 | (6,777 | ) | 9.49 - 14.86 | 11.93 | ||||||||
Balance at December 31, 2002 | 2,996,738 | 2.40 - 18.41 | 13.13 | 3,146,574 | 2.29 - 17.53 | 12.51 | ||||||||||
Granted | 458,850 | 19.90 - 20.16 | 19.90 | 481,793 | 18.95 - 19.20 | 18.95 | ||||||||||
Exercised | (403,821 | ) | 2.40 - 19.90 | 7.80 | (424,006 | ) | 2.29 - 18.95 | 7.43 | ||||||||
Canceled | (32,192 | ) | 13.64 - 18.40 | 14.87 | (33,802 | ) | 12.99 - 17.52 | 14.16 | ||||||||
Assumed from Premier | 311,747 | 2.49 - 8.71 | 4.47 | 327,334 | 2.37 - 8.30 | 4.26 | ||||||||||
Balance at December 31, 2003 | 3,331,322 | 2.49 - 20.16 | 13.88 | 3,497,893 | 2.37 - 19.20 | 13.22 | ||||||||||
Granted | 1,043,800 | 20.19 | 20.19 | |||||||||||||
Exercised | (1,110,991 | ) | 2.37 - 20.19 | 8.39 | ||||||||||||
Canceled | (2,544 | ) | 4.23 - 18.95 | 15.62 | ||||||||||||
Assumed from Resource | 941,183 | 2.70 - 18.23 | 6.08 | |||||||||||||
Assumed from First Washington | 903,350 | 3.52 - 21.46 | 7.87 | |||||||||||||
Exercisable at December 31, 2003 | 3,290,958 | 2.49 - 20.16 | 13.96 | |||||||||||||
Balance at December 31, 2004 | 5,272,691 | 2.37 - 21.46 | 13.43 | |||||||||||||
Exercisable at December 31, 2004 | 5,244,437 | $2.37 - $21.46 | $ | 13.46 | ||||||||||||
The following table summarizes information concerning options outstanding at December 31, 2003:2004:
Range of Exercise Prices | Total Unexercised Stock Options | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Exercisable Stock Options | Total Unexercised Stock Options | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Exercisable Stock Options | ||||||||||
$ 0.00 - $ 5.00 | 202,504 | 3.02 | $ | 3.39 | 202,504 | 520,661 | 2.77 | $ | 3.39 | 520,661 | ||||||||
$ 5.00 - $10.00 | 694,909 | 1.29 | 8.06 | 654,545 | 1,245,227 | 4.54 | 7.74 | 1,216,973 | ||||||||||
$10.00 - $15.00 | 807,045 | 4.67 | 14.10 | 807,045 | 1,581,091 | 5.37 | 14.08 | 1,581,091 | ||||||||||
$15.00 - $20.00 | 1,624,864 | 7.86 | 17.57 | 1,624,864 | 894,911 | 8.11 | 18.25 | 894,911 | ||||||||||
$20.00 - $25.00 | 2,000 | 9.67 | 20.16 | 2,000 | 1,030,801 | 9.58 | 20.19 | 1,030,801 | ||||||||||
3,331,322 | 5.42 | $ | 13.88 | 3,290,958 | 5,272,691 | 6.21 | $ | 13.43 | 5,244,437 | |||||||||
The ESPP allows eligible employees to purchase stock of the Corporation at 85% of the fair market value of the stock on the date of exercise. Under the terms of the ESPP, 83,00084,000 shares, 87,00085,000 shares and 93,00092,000 shares were issued in 2004, 2003 2002 and 2001,2002, respectively. A total of 1.51.6 million shares have been issued since the inception of the ESPP in 1986. As of December 31, 2003, 383,0002004, 318,000 shares have been reserved for future issuances under the ESPP.
The Corporation accounts for both the Option Plan and the ESPP under APB 25 and, accordingly, no compensation expense is reflected in net income. Had compensation cost for these plans been recorded consistent with the fair value provisions of StatementsStatement 123, and 148, the Corporation’s net income and net income per share would have been reduced to the following pro-forma amounts:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | ||||||||||||||||
(in thousands, except per-share data) | (in thousands, except per-share data) | ||||||||||||||||||||
Net income as reported | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 152,917 | $ | 138,180 | $ | 132,948 | |||||||||
Stock-based employee compensation expense under the fair value method, net of tax | 1,813 | 1,993 | 1,828 | (3,309 | ) | (1,813 | ) | (1,993 | ) | ||||||||||||
Pro-forma net income | $ | 136,367 | $ | 130,955 | $ | 117,761 | $ | 149,608 | $ | 136,367 | $ | 130,955 | |||||||||
Net income per share (basic) | $ | 1.29 | $ | 1.23 | $ | 1.05 | $ | 1.28 | $ | 1.23 | $ | 1.17 | |||||||||
Pro-forma net income per share (basic) | 1.28 | 1.22 | 1.03 | 1.25 | 1.21 | 1.16 | |||||||||||||||
Net income per share (diluted) | $ | 1.28 | $ | 1.23 | $ | 1.04 | $ | 1.27 | $ | 1.22 | $ | 1.17 | |||||||||
Pro-forma net income per share (diluted) | 1.27 | 1.21 | 1.02 | 1.24 | 1.21 | 1.15 | |||||||||||||||
Weighted average fair value of options granted | $ | 4.03 | $ | 4.48 | $ | 4.00 | $ | 3.48 | $ | 3.84 | $ | 4.26 |
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and the following assumptions:
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||
Risk-free interest rate | 3.55 | % | 4.78 | % | 5.32 | % | 4.22 | % | 3.55 | % | 4.78 | % | ||||||
Volatility of Corporation’s stock | 22.75 | 23.64 | 23.80 | 18.12 | 22.75 | 23.64 | ||||||||||||
Expected dividend yield | 3.22 | 3.10 | 3.13 | 3.22 | 3.22 | 3.10 | ||||||||||||
Expected life of options | 8 Years | 8 Years | 8 Years | 7 Years | 8 Years | 8 Years |
Shareholder Rights
On June 20, 1989, the Board of Directors of the Corporation declared a dividend of one common share purchase right (Original Rights) for each outstanding share of common stock, par value $2.50 per share, of the Corporation. The dividend was paid to the shareholders of record as of the close of business on July 6, 1989. On April 27, 1999, the Board of Directors approved an amendment to the Original Rights and the rights agreement. The significant terms of the amendment included extending the expiration date from June 20, 1999 to April 27, 2009 and resetting the purchase price to $90.00 per share. As of December 31, 2003,2004, the purchase price had adjusted to $56.54$53.85 per share as a result of stock dividends.
The Rights are not exercisable or transferable apart from the common stock prior to distribution. Distribution of the Rights will occur ten business days following (1) a public announcement that a person or group of persons (“Acquiring Person”) has acquired or obtained the right to acquire beneficial ownership of 20% or more of the outstanding shares of common stock (the “Stock Acquisition Date”) or (2) the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 25% or more of such outstanding shares of common stock. The Rights are redeemable in full, but not in part, by the Corporation at any time until ten business days following the Stock Acquisition Date, at a price of $0.01 per Right.
Treasury Stock
The Corporation periodically repurchases shares of its common stock under repurchase plans approved by the Board of Directors. These repurchases have typically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares repurchased have been added to treasury stock and are accounted for at cost. These shares are periodically reissued for stock option exercises, ESPP purchases, acquisitions or other corporate needs.
On November 19, 2004, the Corporation purchased 1.0 million shares of its common stock from an investment bank at a total cost of $22.0 million under an “Accelerated Share Repurchase” program (ASR), which allowed the shares to be purchased immediately rather than over time. The investment bank, in turn, is repurchasing shares on the open market over a period that is determined by the average daily trading volume of our shares, among other factors. The Corporation periodically settles its position with the investment bank by paying or receiving cash in an amount representing the difference between the initial price and the actual price of the shares repurchased. The Corporation expects the ASR to be completed during 2005.
Total treasury stock purchases, including both open market purchases and the ASR, totaled approximately 3.8 million shares in 2004, 3.2 million shares in 2003 and 2.8 million shares in 2002.
NOTE N -– LEASES
Certain branch offices and equipment are leased under agreements that expire at varying dates through 2020.2025. Most leases contain renewal provisions at the Corporation’s option. Total rental expense was approximately $9.4 million in 2004, $6.4 million in 2003 and $5.9 million in 2002 and $5.1 million in 2001.2002. Future minimum payments as of December 31, 20032004 under noncancelable operating leases are as follows (in thousands):
Year | ||||||
2004 | $ | 5,713 | ||||
2005 | 5,161 | $ | 8,051 | |||
2006 | 4,511 | 7,453 | ||||
2007 | 3,878 | 6,508 | ||||
2008 | 3,222 | 4,867 | ||||
2009 | 3,725 | |||||
Thereafter | 15,916 | 19,752 | ||||
$ | 38,401 | $ | 50,356 | |||
NOTE O -– COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the Consolidated Balance Sheets.consolidated balance sheets.
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 a portion of the commitments is expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the financial or performance obligation of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation underwrites these obligations using the same criteria as its commercial lending underwriting. The Corporation’s maximum exposure to loss for standby letters of credit is equal to the contractual (or notional) amount of the instruments.
From time to time, the Corporation and its subsidiary banks may be defendants in legal proceedings relating to the conduct of their banking business. Most of such legal proceedings are a normal part of the banking business, and in management’s opinion, the financial position and results of operations and cash flows of the Corporation would not be affected materially by the outcome of such legal proceedings.
The following table summarizespresents the Corporation’s commitments to extend credit and letters of credit:
2003 | 2002 | 2004 | 2003 | |||||||||
(in thousands) | (in thousands) | |||||||||||
Commercial mortgage, construction and land development | $ | 297,156 | $ | 197,879 | $ | 689,818 | $ | 297,156 | ||||
Home equity | 333,139 | 285,574 | 412,790 | 333,139 | ||||||||
Credit card | 314,532 | 321,602 | 384,504 | 314,532 | ||||||||
Commercial and other | 1,617,108 | 1,280,814 | 1,851,159 | 1,617,108 | ||||||||
Total commitments to extend credit | $ | 2,561,935 | $ | 2,085,869 | $ | 3,338,271 | $ | 2,561,935 | ||||
Standby letters of credit | $ | 510,806 | $ | 446,953 | $ | 533,094 | $ | 483,522 | ||||
Commercial letters of credit | 16,992 | 2,311 | 24,312 | 16,992 | ||||||||
Total letters of credit | $ | 527,798 | $ | 449,264 | $ | 557,406 | $ | 500,514 | ||||
NOTE P -– FAIR VALUE OF FINANCIAL INSTRUMENTS
The following are the estimated fair values of the Corporation’s financial instruments as of December 31, 20032004 and 2002,2003, followed by a general description of the methods and assumptions used to estimate such fair values. These fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument. Further, certain financial instruments and all non-financial instruments are excluded. Accordingly, the aggregate fair value amounts presented do not necessarily represent management’s estimation of the underlying value of the Corporation.
2003 | 2002 | 2004 | 2003 | |||||||||||||||||||||
Book Value | Estimated Fair Value | Book Value | Estimated Fair Value | Book Value | Estimated Fair Value | Book Value | Estimated Fair Value | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
FINANCIAL ASSETS | ||||||||||||||||||||||||
Cash and due from banks | $ | 300,966 | $ | 300,966 | $ | 314,857 | $ | 314,857 | $ | 278,065 | $ | 278,065 | $ | 300,966 | $ | 300,966 | ||||||||
Interest-bearing deposits with other banks | 4,559 | 4,559 | 7,899 | 7,899 | 4,688 | 4,688 | 4,559 | 4,559 | ||||||||||||||||
Federal funds sold | 32,000 | 32,000 | — | — | ||||||||||||||||||||
Mortgage loans held for sale | 32,761 | 32,761 | 70,475 | 70,475 | 158,872 | 158,872 | 32,761 | 32,761 | ||||||||||||||||
Securities held to maturity | 22,993 | 23,739 | 32,684 | 34,135 | 25,001 | 25,413 | 22,993 | 23,739 | ||||||||||||||||
Securities available for sale | 2,904,157 | 2,904,157 | 2,383,607 | 2,383,607 | 2,424,858 | 2,424,858 | 2,904,157 | 2,904,157 | ||||||||||||||||
Net loans | 6,082,294 | 6,187,091 | 5,245,148 | 5,410,828 | 7,584,547 | 7,669,736 | 6,082,294 | 6,187,091 | ||||||||||||||||
Accrued interest receivable | 34,407 | 34,407 | 42,675 | 42,675 | 40,633 | 40,633 | 34,407 | 34,407 | ||||||||||||||||
FINANCIAL LIABILITIES | ||||||||||||||||||||||||
Demand and savings deposits | $ | 4,303,635 | $ | 4,303,635 | $ | 3,708,621 | $ | 3,708,621 | $ | 4,926,476 | $ | 4,926,476 | $ | 4,303,635 | $ | 4,303,635 | ||||||||
Time deposits | 2,448,148 | 2,480,789 | 2,536,907 | 2,612,927 | 2,969,048 | 2,974,551 | 2,448,148 | 2,480,789 | ||||||||||||||||
Short-term borrowings | 1,396,711 | 1,396,711 | 632,194 | 632,194 | 1,194,524 | 1,194,524 | 1,396,711 | 1,396,711 | ||||||||||||||||
Accrued interest payable | 24,579 | 24,579 | 27,608 | 27,608 | 27,279 | 27,279 | 24,579 | 24,579 | ||||||||||||||||
Other financial liabilities | 26,769 | 26,769 | 33,708 | 33,708 | 29,640 | 29,640 | 26,769 | 26,769 | ||||||||||||||||
Federal Home Loan Bank advances and long-term debt | 568,730 | 560,699 | 535,555 | 567,546 | 684,236 | 710,215 | 568,730 | 560,699 | ||||||||||||||||
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust | — | — | 5,500 | 5,638 |
For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments are predominantly short-term:
Assets | Liabilities | |
Cash and due from banks | Demand and savings deposits | |
Interest bearing deposits | Short-term borrowings | |
| Accrued interest payable | |
| Other financial liabilities | |
Mortgage loans held for sale |
For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair values were determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date.
As indicated in Note A, “Summary of Significant Accounting Policies”, securities available for sale are carried at their estimated fair values. The estimated fair values of securities held to maturity as of December 31, 20032004 and 20022003 were generally based on quoted market prices, broker quotes or dealer quotes.
For short-term loans and variable rate loans that reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination.
The fair value of long-term debt was estimated by discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. The fair value of commitments to extend credit and standby letters of credit is estimated to equal their carrying amounts.
NOTE Q -– MERGERS AND ACQUISITIONS
Premier Bancorp, IncCompleted Acquisitions -
On December 31, 2004, the Corporation acquired all of the outstanding common stock of First Washington FinancialCorp (First Washington), of Windsor, New Jersey. First Washington was a $490 million bank holding company whose primary subsidiary was First Washington State Bank, which operates sixteen community-banking offices in Mercer, Monmouth, and Ocean Counties in New Jersey. This acquisition enabled the Corporation to expand and enhance its existing New Jersey franchise.
The total purchase price was $125.8 million including $125.2 million in stock issued and options assumed and $610,000 in First Washington stock purchased for cash and other direct acquisition costs. The Corporation issued 1.35 shares of its stock for each of the 4.3 million shares of First Washington outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
The acquisition was accounted for as a purchase and the Corporation’s consolidated balance sheet includes First Washington balances as of December 31, 2004. Since this acquisition occurred on the last day of the year, the Corporation’s results of operations do not include First Washington. The following is a summary of the preliminary purchase price allocation based on estimated fair values on the acquisition date (in thousands):
Cash and due from banks | $ | 14,823 | |
Other earning assets | 17,719 | ||
Investment securities available for sale | 206,068 | ||
Loans, net of allowance | 241,520 | ||
Premises and equipment | 12,110 | ||
Core deposit intangible asset | 6,685 | ||
Trade name intangible asset | 417 | ||
Goodwill | 84,183 | ||
Other assets | 1,089 | ||
Total assets acquired | 584,614 | ||
Deposits | 426,474 | ||
Short-term borrowings | 16,560 | ||
Long-term debt | 13,483 | ||
Other liabilities | 2,262 | ||
Total liabilities assumed | 458,779 | ||
Net assets acquired | $ | 125,835 | |
In August 2004, the Corporation acquired Penn Business Credit, Inc. (PBC), a finance company with approximately $10.0 million of commercial loans located in Bala Cynwyd, PA. The Corporation paid approximately $6.1 million in cash and recorded $4.4 million in goodwill, representing the excess of the purchase price over the fair value of the net assets acquired. The goodwill recorded for this acquisition is being deducted for Federal income tax purposes on a straight-line basis over 15 years. PBC became a wholly owned subsidiary of Fulton Bank.
On April 1, 2004, the Corporation acquired all of the outstanding common stock of Resource Bankshares Corporation (Resource), an $889 million financial holding company, and its primary subsidiary, Resource Bank. The total purchase price was $195.7 million, including $185.9 million in stock issued and options assumed, and $9.8 million in Resource stock purchased for cash and other direct
acquisition costs. The Corporation issued 1.54 shares of its stock for each of the 5.9 million shares of Resource outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
Resource Bank is located in Virginia Beach, Virginia, and operates six community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach, and Richmond, Virginia and 14 loan production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida. This acquisition allowed the Corporation to enter a new geographic market.
The acquisition was accounted for as a purchase and the Corporation’s results of operations include Resource from the date of acquisition. The following is a summary of the purchase price allocation based on estimated fair values on the acquisition date (in thousands):
Cash and due from banks | $ | 11,497 | |
Other earning assets | 5,222 | ||
Mortgage loans held for sale | 94,546 | ||
Investment securities available for sale | 125,473 | ||
Loans, net of allowance | 619,118 | ||
Premises and equipment | 10,272 | ||
Core deposit intangible asset | 1,450 | ||
Trade name intangible asset | 484 | ||
Goodwill | 146,062 | ||
Other assets | 28,690 | ||
Total assets acquired | 1,042,814 | ||
Deposits | 598,389 | ||
Short-term borrowings | 111,195 | ||
Long-term debt | 120,532 | ||
Other liabilities | 17,006 | ||
Total liabilities assumed | 847,122 | ||
Net assets acquired | $ | 195,692 | |
On August 1, 2003, the Corporation acquired all of the outstanding common stock of Premier Bancorp, Inc. (Premier), a $600 million financial holding company, and its wholly-owned subsidiary, Premier Bank. The total purchase price was $92.0 million, including $2.1 million of direct acquisition costs. The Corporation issued 1.4071.477 shares of its stock for each of the 3.4 million shares of Premier outstanding on the acquisition date. The purchase price was determined based on the value of the Corporation’s stock on the date when the final terms of the acquisition were agreed to and announced.
Premier Bank is located in Doylestown, Pennsylvania and the eight community banking offices in Bucks, Northampton and Montgomery Counties, Pennsylvania acquired by the Corporation in this transaction complement its existing retail banking network.
The acquisition was accounted for as a purchase and the Corporation’s results of operations include Premier prospectively from the date of the acquisition.
The following table summarizes unaudited pro-forma information assuming the acquisitions of First Washington, Resource and Premier had occurred on January 1, 2003. This pro-forma information includes certain adjustments, including amortization related to fair value adjustments recorded in purchase price was allocated based on estimated fair values on the acquisition date as followsaccounting (in thousands)thousands, except per-share information):
Cash and due from banks | $ | 17,222 | |
Other earning assets | 30,701 | ||
Investment securities available for sale | 168,022 | ||
Loans, net | 359,704 | ||
Premises and equipment | 4,976 | ||
Core deposit intangible asset | 8,400 | ||
Goodwill | 66,154 | ||
Other assets | 7,419 | ||
Total assets acquired | 662,598 | ||
Deposits | 454,350 | ||
Short-term borrowings | 20,094 | ||
Long-term debt | 91,026 | ||
Other liabilities | 5,141 | ||
Total liabilities assumed | 570,611 | ||
Net assets acquired | $ | 91,987 | |
2004 | 2003 | |||||
Net interest income | $ | 381,251 | $ | 354,424 | ||
Other income | 147,764 | 163,352 | ||||
Net income | 159,378 | 153,851 | ||||
Per Share: | ||||||
Net income (basic) | $ | 1.25 | $ | 1.18 | ||
Net income (diluted) | 1.23 | 1.16 |
Resource Bankshares CorporationPending Acquisition –
On August 25, 2003,January 11, 2005, the Corporation entered into a merger agreement to acquire Resource Bankshares Corporation (Resource)SVB Financial Services (SVB), of Virginia Beach, Virginia. ResourceSomerville, New Jersey. SVB is an $870a $475 million financialbank holding company whose primary subsidiary is ResourceSomerset Valley Bank, which operates six community bankingeleven community-banking offices in Newport News, Chesapeake, Herndon, Virginia Beach (two locations)Somerset, Hunterdon and RichmondMiddlesex Counties in Virginia. In addition, Resource operates 14 loan production and residential mortgage offices in Virginia, North Carolina, Maryland and Florida.New Jersey.
Under the terms of the merger agreement, each of the approximately 6.04.1 million shares of Resource’sSVB’s common stock will be acquired based on a “cash election merger” structure. Each SVB shareholder will have the ability to elect to receive 100% of the merger consideration in stock, 100% in cash, or a combination of FFC stock and cash. Their elections will be subject to prorating to achieve a result where a minimum of 20% and a maximum of 40% of SVB’s outstanding shares will receive cash consideration. Those shares that will be converted into FFC stock would be exchanged for 1.4667based on a fixed exchange ratio of 0.9519 shares of the Corporation’s commonFFC stock for each share of SVB stock. Those shares of SVB stock that will be converted into cash will be converted into a per share amount of cash based on a fixed price of $21.00 per share of SVB stock. In addition, each of the options to acquire Resource’sSVB’s stock will be converted to options to purchase the Corporation’s stock.
The acquisition is subject to approval by both the SVB shareholders and applicable bank regulatory authorities and Resource’s shareholders, andauthorities. The acquisition is expected to be completed induring the first halfthird quarter of 2004.2005. As a result of the acquisition, ResourceSVB will be merged into the Corporation and ResourceSomerset Valley Bank will become a wholly-ownedwholly owned subsidiary.
The acquisition will be accounted for as a purchase. Purchase accounting requires the Corporation to allocate the total purchase price of the acquisition to the assets acquired and liabilities assumed, based on their respective fair values at the acquisition date, with any remaining acquisition cost being recorded as goodwill. The resultingResulting goodwill balance isbalances are then subject to an impairment testreview on at least an annual basis. The results of Resource’sSVB’s operations will be included in the Corporation’s financial statements prospectively from the date of the acquisition.
The total purchase price is estimated to be approximately $196.0$89.0 million, which includes cash paid, the value of the Corporation’s stock to be issued, Resource stockSVB’s options to be converted and certain acquisition-relatedacquisition related costs. The net assets of ResourceSVB as of December 31, 20032004 were approximately $60.0$29.4 million (unaudited) and accordingly, the purchase price exceeds the carrying value of the net assets by $136.0$59.6 million as of this date. The total purchase price will be allocated to the net assets acquired as of the merger effective date, based on fair market values at that date. The Corporation expects to record a core deposit intangible asset and goodwill as a result of the acquisition accounting.
NOTE R -– CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
(in thousands)
December 31 | December 31 | December 31 | ||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2004 | 2003 | |||||||||||||||
ASSETS | LIABILITIES AND EQUITY | |||||||||||||||||||
Cash, securities, and other | $ | 8,186 | $ | 3,010 | Line of credit with bank | $ | 2,878 | $ | 19,556 | $ | 4,943 | $ | 8,186 | |||||||
Receivable from subsidiaries | 96 | 9 | Long-term debt | 34,717 | 7,735 | 777 | 96 | |||||||||||||
Payable to non-bank subsidiaries | 5,662 | 8,661 | ||||||||||||||||||
Investment in: | Other liabilities | 28,594 | 24,168 | |||||||||||||||||
Bank subsidiaries | 775,074 | 709,217 | Total Liabilities | 71,851 | 60,120 | 1,183,856 | 775,074 | |||||||||||||
Non-bank subsidiaries | 235,431 | 211,626 | Shareholders’ equity | 946,936 | 863,742 | 250,901 | 235,431 | |||||||||||||
Total Assets | $ | 1,018,787 | $ | 923,862 | Total Liabilities and Shareholders’ Equity | $ | 1,018,787 | $ | 923,862 | $ | 1,440,477 | $ | 1,018,787 | |||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Line of credit with bank subsidiaries | $ | 70,500 | $ | 2,878 | ||||||||||||||||
Revolving line of credit | 11,930 | — | ||||||||||||||||||
Long-term debt | 34,955 | 34,717 | ||||||||||||||||||
Payable to non-bank subsidiaries | 48,117 | 5,662 | ||||||||||||||||||
Other liabilities | 32,685 | 28,594 | ||||||||||||||||||
Total Liabilities | 198,187 | 71,851 | ||||||||||||||||||
Shareholders’ equity | 1,242,290 | 946,936 | ||||||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,440,477 | $ | 1,018,787 | ||||||||||||||||
CONDENSED STATEMENTS OF INCOME
Year ended December 31 | Year ended December 31 | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Income: | ||||||||||||||||||||||||
Dividends from bank subsidiaries | $ | 149,596 | $ | 100,161 | $ | 126,897 | $ | 62,131 | $ | 149,596 | $ | 100,161 | ||||||||||||
Other | 38,206 | 32,531 | 24,417 | 40,227 | 38,206 | 32,531 | ||||||||||||||||||
187,802 | 132,692 | 151,314 | 102,358 | 187,802 | 132,692 | |||||||||||||||||||
Expenses | 48,180 | 43,883 | 38,772 | 54,663 | 48,180 | 43,883 | ||||||||||||||||||
Income before income taxes and equity in undistributed net income of subsidiaries | 139,622 | 88,809 | 112,542 | 47,695 | 139,622 | 88,809 | ||||||||||||||||||
Income tax benefit | (3,898 | ) | (4,171 | ) | (6,329 | ) | (5,829 | ) | (3,898 | ) | (4,171 | ) | ||||||||||||
143,520 | 92,980 | 118,871 | 53,524 | 143,520 | 92,980 | |||||||||||||||||||
Equity in undistributed net income (loss) of: | ||||||||||||||||||||||||
Bank subsidiaries | (20,879 | ) | 29,694 | (14,367 | ) | 84,525 | (20,879 | ) | 29,694 | |||||||||||||||
Non-bank subsidiaries | 15,539 | 10,274 | 9,085 | 14,868 | 15,539 | 10,274 | ||||||||||||||||||
Net Income | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 152,917 | $ | 138,180 | $ | 132,948 | ||||||||||||
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 | Year Ended December 31 | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Cash Flows From Operating Activities: | ||||||||||||||||||||||||
Net Income | $ | 138,180 | $ | 132,948 | $ | 113,589 | $ | 152,917 | $ | 138,180 | $ | 132,948 | ||||||||||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||||||||||||||||||
Decrease (increase) in other assets | 769 | (2,541 | ) | 706 | ||||||||||||||||||||
Decrease (increase) in investment in subsidiaries | 5,340 | (39,968 | ) | 5,282 | ||||||||||||||||||||
(Decrease) increase in other liabilities and payable to non-bank subsidiaries | (4,098 | ) | 5,249 | (12,951 | ) | |||||||||||||||||||
Adjustments to Reconcile Net Income to | ||||||||||||||||||||||||
Net Cash Provided by Operating Activities: | ||||||||||||||||||||||||
(Increase) decrease in other assets | (12,588 | ) | 1,499 | (2,107 | ) | |||||||||||||||||||
(Increase) decrease in investment in subsidiaries | (99,393 | ) | 5,340 | (39,968 | ) | |||||||||||||||||||
Increase (decrease) in other liabilities and payable to non-bank subsidiaries | 36,859 | (4,098 | ) | 5,249 | ||||||||||||||||||||
Total adjustments | 2,011 | (37,260 | ) | (6,963 | ) | (75,122 | ) | 2,741 | (36,826 | ) | ||||||||||||||
Net cash provided by operating activities | 140,191 | 95,688 | 106,626 | 77,795 | 140,921 | 96,122 | ||||||||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||||||||||
Investment in bank subsidiaries | (5,044 | ) | (3,500 | ) | (47,039 | ) | (6,000 | ) | (3,500 | ) | (3,500 | ) | ||||||||||||
Net cash paid for acquisitions | — | — | (16,224 | ) | (5,283 | ) | (1,544 | ) | — | |||||||||||||||
Net cash used in investing activities | (5,044 | ) | (3,500 | ) | (63,263 | ) | (11,283 | ) | (5,044 | ) | (3,500 | ) | ||||||||||||
Cash Flows From Financing Activities: | ||||||||||||||||||||||||
Net (decrease) increase in short-term borrowings | (16,678 | ) | 9,056 | (925 | ) | |||||||||||||||||||
Net increase (decrease) in borrowings | 79,552 | (16,678 | ) | 9,056 | ||||||||||||||||||||
Dividends paid | (64,628 | ) | (58,954 | ) | (51,486 | ) | (74,802 | ) | (64,628 | ) | (58,954 | ) | ||||||||||||
Net proceeds from issuance of common stock | 5,852 | 3,738 | 16,795 | 7,712 | 5,122 | 3,304 | ||||||||||||||||||
Acquisition of treasury stock | (59,699 | ) | (46,133 | ) | (7,922 | ) | (78,966 | ) | (59,699 | ) | (46,133 | ) | ||||||||||||
Net cash used in financing activities | (135,153 | ) | (92,293 | ) | (43,538 | ) | (66,504 | ) | (135,883 | ) | (92,727 | ) | ||||||||||||
Net Decrease in Cash and Cash Equivalents | (6 | ) | (105 | ) | (175 | ) | ||||||||||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 8 | (6 | ) | (105 | ) | |||||||||||||||||||
Cash and Cash Equivalents at Beginning of Year | 6 | 111 | 286 | — | 6 | 111 | ||||||||||||||||||
Cash and Cash Equivalents at End of Year | $ | — | $ | 6 | $ | 111 | $ | 8 | $ | — | $ | 6 | ||||||||||||
Cash paid during the year for: | ||||||||||||||||||||||||
Interest | $ | 2,469 | $ | 1,791 | $ | 3,319 | $ | 2,889 | $ | 2,469 | $ | 1,791 | ||||||||||||
Income taxes | 48,924 | 49,621 | 46,633 | 54,457 | 48,924 | 49,621 |
Management Report on Internal Control Over Financial Reporting
The management of Fulton Financial Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Fulton Financial Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. A discussion of the scope of management’s assessment is included in Note A in the accompanying financial statements. Based on this assessment, management concluded that, as of December 31, 2004, the company’s internal control over financial reporting is effective based on those criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Rufus A. Fulton, Jr. |
Rufus A. Fulton, Jr. |
Chairman and Chief Executive Officer |
/s/ Charles J. Nugent |
Charles J. Nugent |
Senior Executive Vice President and |
Chief Financial Officer |
Report of Independent Auditors’ ReportRegistered Public Accounting Firm
The Board of Directors and Stockholders
Fulton Financial Corporation:
We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting,that Fulton Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fulton Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Fulton Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Fulton Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Fulton Financial Corporation acquired First Washington FinancialCorp. on December 31, 2004, and management excluded from its assessment of the effectiveness of Fulton Financial Corporation’s internal control over financial reporting as of December 31, 2004, First Washington FinancialCorp.’s internal control over financial reporting associated with total assets of approximately $585 million and total revenues of $0 included in the consolidated financial statements of Fulton Financial Corporation as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of Fulton Financial Corporation also excluded an evaluation of the internal control over financial reporting of First Washington FinancialCorp.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fulton Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 22, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Harrisburg, Pennsylvania
February 22, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Fulton Financial Corporation:
We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation and subsidiaries as of December 31, 20032004 and 2002,2003, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years then ended.in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements of the Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. The auditors’ report, dated January 22, 2002, on those financial statements was unqualified and included an explanatory note that they did not audit the financial statements of Drovers Bancshares Corporation, a company acquired during 2001 in a transaction accounted for as a pooling of interests.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fulton Financial Corporation and subsidiaries as of December 31, 20032004 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 5, 2004
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Fulton Financial Corporation
We have audited the accompanying consolidated balance sheets of Fulton Financial Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Drovers Bancshares Corporation, a company acquired during 2001 in a transaction accounted for as a pooling of interests, as discussed in Note O. Such statements are included in the consolidated financial statements of Fulton Financial Corporation and reflect total assets of 10 percent in 2000 and interest income of 11 percent and 10 percent in 2000 and 1999, respectively, of the consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Drovers Bancshares Corporation, is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Fulton Financial Corporation and subsidiaries as of December 31, 2001 and 2000,2003, and the results of their operations and their cash flows for each of the three years in the three-year period ended December 31, 20012004, in conformity with accounting principlesU.S. generally accepted accounting principles.
We also have audited, in accordance with the United States.standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Fulton Financial Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ Arthur AndersenKPMG LLP
Lancaster,Harrisburg, Pennsylvania
JanuaryFebruary 22, 2002
NOTE: This report represents a copy of the predecessor auditor’s report included in the Company’s Form 10-K for the year ended December 31, 2001 and does not represent a reissuance of the report.2005
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(Inin thousands, except per-share data)
Three Months Ended | ||||||||||||
March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||
FOR THE YEAR 2003 | ||||||||||||
Interest income | $ | 110,184 | $ | 107,166 | $ | 105,907 | $ | 112,274 | ||||
Interest expense | 34,546 | 32,796 | 32,128 | 31,624 | ||||||||
Net interest income | 75,638 | 74,370 | 73,779 | 80,650 | ||||||||
Provision for loan losses | 2,835 | 2,490 | 2,190 | 2,190 | ||||||||
Other income | 31,665 | 34,534 | 37,513 | 33,275 | ||||||||
Other expenses | 55,882 | 58,065 | 59,550 | 60,679 | ||||||||
Income before income taxes | 48,586 | 48,349 | 49,552 | 51,056 | ||||||||
Income taxes | 14,543 | 14,287 | 15,170 | 15,363 | ||||||||
Net income | $ | 34,043 | $ | 34,062 | $ | 34,382 | $ | 35,693 | ||||
Per-share data: | ||||||||||||
Net income (basic) | $ | 0.32 | $ | 0.32 | $ | 0.32 | $ | 0.33 | ||||
Net income (diluted) | 0.32 | 0.32 | 0.32 | 0.33 | ||||||||
Cash dividends | 0.143 | 0.160 | 0.160 | 0.160 |
FOR THE YEAR 2002 | ||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||
FOR THE YEAR 2004 | ||||||||||||||||||||||||
Interest income | $ | 117,799 | $ | 118,887 | $ | 117,156 | $ | 115,446 | $ | 113,936 | $ | 122,024 | $ | 126,947 | $ | 130,736 | ||||||||
Interest expense | 41,469 | 39,329 | 39,318 | 38,103 | 30,969 | 33,318 | 34,446 | 37,261 | ||||||||||||||||
Net interest income | 76,330 | 79,558 | 77,838 | 77,343 | 82,967 | 88,706 | 92,501 | 93,475 | ||||||||||||||||
Provision for loan losses | 2,780 | 2,680 | 4,370 | 2,070 | 1,740 | 800 | 1,125 | 1,052 | ||||||||||||||||
Other income | 26,683 | 26,719 | 31,400 | 30,981 | 32,038 | 36,663 | 34,994 | 35,169 | ||||||||||||||||
Other expenses | 54,928 | 56,504 | 56,573 | 57,531 | 62,272 | 70,538 | 70,335 | 70,470 | ||||||||||||||||
Income before income taxes | 45,305 | 47,093 | 48,295 | 48,723 | 50,993 | 54,031 | 56,035 | 57,122 | ||||||||||||||||
Income taxes | 13,075 | 14,103 | 14,474 | 14,816 | 15,147 | 16,167 | 16,915 | 17,035 | ||||||||||||||||
Net income | $ | 32,230 | $ | 32,990 | $ | 33,821 | $ | 33,907 | $ | 35,846 | $ | 37,864 | $ | 39,120 | $ | 40,087 | ||||||||
Per-share data: | ||||||||||||||||||||||||
Net income (basic) | $ | 0.30 | $ | 0.30 | $ | 0.31 | $ | 0.32 | $ | 0.32 | $ | 0.31 | $ | 0.32 | $ | 0.33 | ||||||||
Net income (diluted) | 0.30 | 0.30 | 0.31 | 0.32 | 0.31 | 0.31 | 0.32 | 0.33 | ||||||||||||||||
Cash dividends | 0.130 | 0.143 | 0.143 | 0.143 | 0.152 | 0.165 | 0.165 | 0.165 | ||||||||||||||||
FOR THE YEAR 2003 | ||||||||||||||||||||||||
Interest income | $ | 110,184 | $ | 107,166 | $ | 105,907 | $ | 112,274 | ||||||||||||||||
Interest expense | 34,546 | 32,796 | 32,128 | 31,624 | ||||||||||||||||||||
Net interest income | 75,638 | 74,370 | 73,779 | 80,650 | ||||||||||||||||||||
Provision for loan losses | 2,835 | 2,490 | 2,190 | 2,190 | ||||||||||||||||||||
Other income | 31,048 | 33,862 | 36,629 | 32,831 | ||||||||||||||||||||
Other expenses | 55,265 | 57,393 | 58,666 | 60,235 | ||||||||||||||||||||
Income before income taxes | 48,586 | 48,349 | 49,552 | 51,056 | ||||||||||||||||||||
Income taxes | 14,543 | 14,287 | 15,170 | 15,363 | ||||||||||||||||||||
Net income | $ | 34,043 | $ | 34,062 | $ | 34,382 | $ | 35,693 | ||||||||||||||||
Per-share data: | ||||||||||||||||||||||||
Net income (basic) | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.31 | ||||||||||||||||
Net income (diluted) | 0.30 | 0.30 | 0.30 | 0.31 | ||||||||||||||||||||
Cash dividends | 0.136 | 0.152 | 0.152 | 0.152 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On June 18, 2002 Fulton Financial Corporation dismissed its independent accountants, Arthur Andersen LLP (“Andersen”) and appointed KPMG, LLP (“KPMG”) as its new independent accountants, each effective that day. On April 16, 2002, the Corporation had announced that it had decided not to renew the engagement of Andersen and would be seeking proposals from independent accountants to audit the Corporation’s financial statements for the fiscal year ending December 31, 2002. Andersen continued to provide services to the Corporation following the announcement that its engagement would not be renewed. The decision to engage KPMG was approved by the Board of Directors upon the recommendation of the Corporation’s Audit Committee. Andersen’s report on the Corporation’s 2001 financial statements was dated January 22, 2002, in conjunction with the filing of its Annual Report on Form 10-K for the year ended December 31, 2001.
During the Corporation’s two fiscal years ended December 31, 2001 and 2000, and the subsequent interim period through June 18, 2002, there were no disagreements between the Corporation and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Andersen’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred during the Corporation’s two fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through June 18, 2002.
The audit reports of Andersen on the consolidated financial statements of the Corporation and subsidiaries as of and for the fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
On June 24, 2002, the Corporation filed a Form 8-K with the Securities and Exchange Commission reporting these events. Attached as an exhibit to that Form 8-K was a letter from Andersen indicating that the Corporation had provided Andersen with a copy of the foregoing disclosures, and stating that it had found no basis for disagreement with such statements.Not Applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon thatthe evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2003,2004, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporationthe Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
The “Management Report on Internal Control over Financial Reporting” and the “Report of Independent Registered Public Accounting Firm” may be found in Item 8 “Financial Statements and Supplementary Data” of this document.
Changes in Internal Controls
There have beenwas no changeschange in our internalthe Corporation’s “internal control over financial reportingreporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal year covered by this annual reportquarter that has materially affected, or is reasonably likely to materially affect, ourthe Corporation’s internal control over financial reporting.
Not Applicable.
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference herein is the information appearing under the heading “Information about Nominees and Continuing Directors” on pages 89 through 1314 of the 2004 Proxy Statement and under the heading “Executive Officers and Stock Ownership” on page 17 of the 20042005 Proxy Statement.
The Corporation has adopted a code of ethics (Code of Conduct) that applies to all directors, officers and employees, including the Chief Executive Officer, the Chief Financial Officer and the Corporate Controller. A copy of the Code of Conduct may be obtained free of charge by writing to the Corporate Secretary at Fulton Financial Corporation, P.O. Box 4887, Lancaster, Pennsylvania 17604-4887.
Item 11. Executive Compensation
Incorporated by reference herein is the information appearing under the heading “Information Concerning Executive Officers” on pages 1716 through 2324 of the 20042005 Proxy Statement and under the heading “Compensation of Directors” on page 2524 of the 20042005 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference herein is the information appearing under the heading “Voting of Shares and Principal Holders Thereof” on page 56 of the 20042005 Proxy Statement and under the heading “Information about Nominees and Continuing Directors” on pages 89 through 1314 of the 20042005 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference herein is the information appearing under the heading “Transactions with Directors and Executive Officers” on page 2524 of the 20042005 Proxy Statement, the information appearing under the heading “Voting of Shares and Principal Holders Thereof” on page 56 of the 20042005 Proxy Statement and the information appearing in “Note D - Loans and Allowance for Loan Losses”, of the Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”.
Item 14. Principal Accountant Fees and Services
Incorporated by reference herein is the information appearing under the heading “Relationship With Independent Public Accountants” on pages 2625 and 2726 of the 20042005 Proxy Statement
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K
(a) | The following documents are filed as part of this report: |
1. | Financial Statements — The following consolidated financial statements of Fulton Financial Corporation and subsidiaries are incorporated herein by reference in response to Item 8 above: |
(i) | Consolidated Balance Sheets - December 31, |
(ii) | Consolidated Statements of Income - Years ended December 31, 2004, 2003 |
(iii) | Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Years ended December 31, 2004, 2003 |
(iv) | Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 |
(v) | Notes to Consolidated Financial Statements |
(vi) | Report of Independent |
2. | Financial Statement Schedules — All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted. |
3. | Exhibits — The following is a list of the Exhibits required by Item 601 of Regulation S-K and filed as part of this report: |
3. | Articles of Incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
4. | Rights Amendment dated June 20, 1989, as amended and restated on April 27, 1999, between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. |
10. | Material Contracts - Executive Compensation Agreements and Plans: |
(a) | Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J. Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 - Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
(b) |
(c) | Fulton Financial Corporation Profit Sharing Plan, incorporated by reference from Exhibit 4.2 of a registration statement on Form S-8 filed January 11, 2002. |
21. | Subsidiaries of the Registrant. |
23. | Consent of Independent Registered Public |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(c) | Exhibits – The exhibits required to be filed as part of this report are submitted as a separate section of this report. |
(d) | Financial Statement Schedules – None required. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FULTON FINANCIAL CORPORATION | ||||||||
(Registrant) | ||||||||
Dated: March | By: | /s/ Rufus A. Fulton, Jr. | ||||||
Rufus A. Fulton, Jr., | ||||||||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Capacity | Date | ||
/s/ Jeffrey G. Albertson, Esq. Jeffrey G. Albertson, Esq. | Director | March | ||
/s/ Donald M. Bowman, Jr. Donald M. Bowman, Jr. | Director | March | ||
/s/ Beth Ann L. Chivinski Beth Ann L. Chivinski |
and Controller (Principal Accounting Officer) | March | ||
/s/ Craig A. Dally, Esq. Craig A. Dally, Esq. | Director | March | ||
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/s/ Clark S. Frame Clark S. Frame | Director | March | ||
/s/ Patrick J. Freer Patrick J. Freer | Director | March 15, 2005 | ||
Signature | Capacity | Date | ||
/s/ Rufus A. Fulton, Jr. Rufus A. Fulton, Jr. | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | March | ||
/s/ Eugene H. Gardner Eugene H. Gardner | Director | March | ||
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/s/ Charles V. Henry III, Esq. Charles V. Henry III, Esq. | Director | March | ||
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/s/ George W. Hodges George W. Hodges | Director | March | ||
/s/ Carolyn R. Holleran Carolyn R. Holleran | Director | March | ||
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/s/
| Director | March 15, 2005 | ||
Thomas W. Hunt | Director | March | ||
/s/ Donald W. Lesher, Jr. Donald W. Lesher, Jr. | Director | March | ||
/s/ Charles J. Nugent Charles J. Nugent | Senior Executive Vice President and
(Principal Financial Officer) | March | ||
/s/ Joseph J. Mowad, M.D. Joseph J. Mowad, M.D. | Director | March 15, 2005 | ||
Abraham S. Opatut | Director | March | ||
Signature | Capacity | Date | ||
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/s/ Mary Ann Russell Mary Ann Russell | Director | March | ||
/s/ John O. Shirk, Esq. John O. Shirk, Esq. | Director | March | ||
/s/ R. Scott Smith, Jr. R. Scott Smith, Jr. | President and Chief Operating Officer and Director | March | ||
/s/ Gary A. Stewart Gary A. Stewart | Director | March | ||
Exhibits Required Pursuant to Item 601 of Regulation S-K
3. | Articles of Incorporation, as amended and restated, and Bylaws of Fulton Financial Corporation, as amended - Incorporated by reference from Exhibit 3 of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
4. | Rights Amendment dated June 20, 1989, as amended and restated on April 27, 1999, between Fulton Financial Corporation and Fulton Bank - Incorporated by reference from Exhibit 1 of the Fulton Financial Corporation Current Report on Form 8-K dated April 27, 1999. |
10. | Material Contracts - Executive Compensation Agreements and Plans: |
(a) | Severance Agreements entered into between Fulton Financial and: Rufus A. Fulton, Jr., as of April 17, 1984; R. Scott Smith, Jr., as of May 17, 1988; Richard J. Ashby, Jr., as of May 17, 1988; and Charles J. Nugent, as of November 19, 1992 - Incorporated by reference from Exhibit 10(a) of the Fulton Financial Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
(b) |
21. | Subsidiaries of the Registrant. |
23. | Consent of Independent Registered Public |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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