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, 2010,
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of exchange on which registered | |
Common Stock, $2.50 par value | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrants 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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer |
x |
Accelerated filer |
¨ | |||
Non-accelerated filer |
¨ |
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting Common Stock held by non-affiliates of the registrant, based on the average bid and asked prices on June 30, 2010, the last business day of the registrants most recently completed second fiscal quarter, was approximately $1.9 billion. The number of shares of the registrants Common Stock outstanding on January 31, 2011 was 199,132,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 28, 2011 are incorporated by reference in Part III.
Description |
Page | |||||
PART I |
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Item 1. |
3 | |||||
Item 1A. |
9 | |||||
Item 1B. |
15 | |||||
Item 2. |
16 | |||||
Item 3. |
16 | |||||
Item 4. |
16 | |||||
PART II |
||||||
Item 5. |
17 | |||||
Item 6. |
19 | |||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
20 | ||||
Item 7A. |
47 | |||||
Item 8. |
||||||
54 | ||||||
55 | ||||||
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) |
56 | |||||
57 | ||||||
58 | ||||||
Management Report On Internal Control Over Financial Reporting |
104 | |||||
105 | ||||||
106 | ||||||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
107 | ||||
Item 9A. |
107 | |||||
Item 9B. |
107 | |||||
PART III |
||||||
Item 10. |
108 | |||||
Item 11. |
108 | |||||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
108 | ||||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
108 | ||||
Item 14. |
108 | |||||
PART IV |
||||||
Item 15. |
109 | |||||
112 | ||||||
114 |
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PART I
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-Bliley Act (GLB Act), which allowed the Corporation to expand its financial services activities under its holding company structure (See Competition and Supervision and Regulation). The Corporation directly owns 100% of the common stock of seven community banks and twelve non-bank entities. As of December 31, 2010, the Corporation had approximately 3,530 full-time equivalent employees.
The common stock of Fulton Financial Corporation is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol FULT. The Corporations internet address is www.fult.com. Electronic copies of the Corporations 2010 Annual Report on Form 10-K are available free of charge by visiting Investor Relations at www.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 Corporations seven subsidiary banks are located primarily in suburban or semi-rural geographical markets throughout a five-state region (Pennsylvania, Delaware, Maryland, New Jersey and Virginia). Each of these banking subsidiaries delivers financial services in a highly personalized, community-oriented style, and many decisions are made by the local management team in each market. Where appropriate, operations are centralized through common platforms and back-office functions.
From time to time, in some markets and in certain circumstances, merging subsidiary banks allows the Corporation to leverage one banks stronger brand recognition over a larger market. It also enables the Corporation to create operating and marketing efficiencies and avoid direct competition between two or more subsidiary banks. For example, in 2010, the former Delaware National Bank subsidiary consolidated into Fulton Bank, N.A. In 2009, the former Peoples Bank of Elkton subsidiary and the former Hagerstown Trust Company subsidiary merged into The Columbia Bank to consolidate the Corporations Maryland franchise.
The Corporations subsidiary banks are located in areas that 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 products and services in its local market area. Personal banking services include various checking account and savings deposit products, certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of consumer lending products to creditworthy customers in their market areas. Secured loan products include home equity loans and lines of credit, which are underwritten based on loan-to-value limits specified in the lending policy. Subsidiary banks also offer a variety of fixed and variable-rate products, including construction loans and jumbo loans. Residential mortgages are offered through Fulton Mortgage Company, which operates as a division of each subsidiary bank. Consumer loan products also include automobile loans, automobile and equipment leases, personal lines of credit, credit cards 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. The maximum total lending commitment to an individual borrower was $33.0 million as of December 31, 2010, which is below the Corporations regulatory lending limit. Commercial lending options include commercial, financial, agricultural and real estate loans. Floating, adjustable and fixed rate loans are provided, with floating and adjustable rate loans generally tied to an index such as the Prime Rate or the London Interbank Offering Rate. The Corporations commercial lending policy encourages relationship banking and provides strict guidelines related to customer creditworthiness and collateral requirements. In addition, equipment leasing, credit cards, letters of credit, cash management services and traditional deposit products are offered to commercial customers.
The Corporation also offers investment management, trust, brokerage, insurance and investment advisory services to consumer and commercial banking customers in the market areas serviced by the subsidiary banks.
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In the fall of 2009, Fulton Bank converted its Pennsylvania state charter to a national charter and became Fulton Bank, National Association (Fulton Bank, N.A.) and the Corporations investment management and trust services subsidiary, Fulton Financial Advisors, N.A., became an operating subsidiary of Fulton Bank, N.A. Subsequently, on January 1, 2010, Fulton Financial Advisors, N.A. merged into Fulton Bank, N.A., thereby becoming a division of Fulton Bank, N.A.
The Corporations 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 online banking. 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 certain information for the Corporations banking subsidiaries as of December 31, 2010.
Subsidiary |
Main Office |
Total Assets |
Total Deposits |
Branches (1) | ||||||||||
(dollars in millions) | ||||||||||||||
Fulton Bank, N.A. |
Lancaster, PA |
$ | 8,731 | $ | 6,282 | 119 | ||||||||
The Bank |
Woodbury, NJ |
2,105 | 1,738 | 48 | ||||||||||
The Columbia Bank |
Columbia, MD |
2,104 | 1,604 | 40 | ||||||||||
Skylands Community Bank |
Hackettstown, NJ |
1,410 | 1,163 | 26 | ||||||||||
Lafayette Ambassador Bank |
Easton, PA |
1,405 | 1,095 | 23 | ||||||||||
FNB Bank, N.A. |
Danville, PA |
388 | 313 | 8 | ||||||||||
Swineford National Bank |
Hummels Wharf, PA |
309 | 254 | 7 | ||||||||||
271 | ||||||||||||||
(1) | Remote service facilities (mainly stand-alone automated teller machines) are excluded. See additional information in Item 2. Properties. |
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are consolidated for financial reporting purposes: (i) Fulton Reinsurance Company, LTD, 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 trust preferred securities issued by a subsidiary of Fulton Bank, N.A; and (vi) Fulton Insurance Services Group, Inc., which engages in the sale of various life insurance products.
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are not consolidated for financial reporting purposes. The following table provides information for these non-bank subsidiaries, whose sole assets consist of junior subordinated deferrable interest debentures issued by the Corporation, as of December 31, 2010 (dollars in thousands):
Subsidiary |
State of Incorporation | Total Assets | ||||
Fulton Capital Trust I |
Pennsylvania | $ | 154,640 | |||
SVB Bald Eagle Statutory Trust I |
Connecticut | 4,124 | ||||
Columbia Bancorp Statutory Trust |
Delaware | 6,186 | ||||
Columbia Bancorp Statutory Trust II |
Delaware | 4,124 | ||||
Columbia Bancorp Statutory Trust III |
Delaware | 6,186 | ||||
PBI Capital Trust |
Delaware | 10,310 |
Competition
The banking and financial services industries are highly competitive. Within its geographical region, the Corporations subsidiaries face direct competition from other commercial banks, varying in size from local community banks to larger regional and national
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banks, credit unions and non-bank entities. With the growth in electronic commerce and distribution channels, the banks also face competition from financial institutions that do not have a physical presence in the Corporations geographical markets.
The industry is also highly competitive due to 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-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 (FRB) 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 a great deal of 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. The Corporation 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, as of June 30th of each year, by the Federal Deposit Insurance Corporation (FDIC). The Corporations banks maintain branch offices in 53 counties across five states. In 10 of these counties, the Corporation ranked in the top three in deposit market share (based on deposits as of June 30, 2010). The following table summarizes information about the counties in which the Corporation has branch offices and its market position in each county.
No. of Financial Institutions |
Deposit Market Share (June 30, 2010) |
|||||||||||||||||||||||||
County |
State | Population (2010 Est.) |
Banking Subsidiary |
Banks/ Thrifts |
Credit Unions |
Rank | % | |||||||||||||||||||
Lancaster |
PA | 508,000 | Fulton Bank, N.A. |
16 | 11 | 1 | 22.3 | % | ||||||||||||||||||
Berks |
PA | 408,000 | Fulton Bank, N.A. |
20 | 10 | 7 | 4.6 | % | ||||||||||||||||||
Bucks |
PA | 624,000 | Fulton Bank, N.A. |
38 | 18 | 16 | 2.3 | % | ||||||||||||||||||
Centre |
PA | 146,000 | Fulton Bank, N.A. |
16 | 4 | 14 | 1.9 | % | ||||||||||||||||||
Chester |
PA | 501,000 | Fulton Bank, N.A. |
39 | 5 | 13 | 2.2 | % | ||||||||||||||||||
Columbia |
PA | 65,000 | FNB Bank, N.A. |
6 | 0 | 5 | 6.5 | % | ||||||||||||||||||
Cumberland |
PA | 232,000 | Fulton Bank, N.A. |
20 | 5 | 14 | 1.5 | % | ||||||||||||||||||
Dauphin |
PA | 258,000 | Fulton Bank, N.A. |
17 | 9 | 6 | 3.8 | % | ||||||||||||||||||
Delaware |
PA | 554,000 | Fulton Bank, N.A. |
39 | 14 | 34 | 0.3 | % | ||||||||||||||||||
Lebanon |
PA | 131,000 | Fulton Bank, N.A. |
11 | 2 | 1 | 31.6 | % | ||||||||||||||||||
Lehigh |
PA | 345,000 | Lafayette Ambassador Bank |
21 | 13 | 9 | 3.5 | % | ||||||||||||||||||
Lycoming |
PA | 116,000 | FNB Bank, N.A. |
11 | 10 | 14 | 1.1 | % | ||||||||||||||||||
Montgomery |
PA | 781,000 | Fulton Bank |
47 | 22 | 26 | 0.6 | % | ||||||||||||||||||
Montour |
PA | 18,000 | FNB Bank, N.A. |
4 | 3 | 1 | 31.9 | % | ||||||||||||||||||
Northampton |
PA | 299,000 | Lafayette Ambassador Bank |
17 | 12 | 3 | 15.4 | % | ||||||||||||||||||
Northumberland |
PA | 91,000 | Swineford National Bank |
19 | 3 | 14 | 1.7 | % | ||||||||||||||||||
FNB Bank, N.A. |
7 | 5.2 | % | |||||||||||||||||||||||
Schuylkill |
PA | 147,000 | Fulton Bank, N.A. |
20 | 3 | 9 | 3.9 | % | ||||||||||||||||||
Snyder |
PA | 38,000 | Swineford National Bank |
8 | 0 | 1 | 30.2 | % |
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No. of Financial Institutions |
Deposit Market Share (June 30, 2010) |
|||||||||||||||||||||||||
County |
State | Population (2010 Est.) |
Banking Subsidiary |
Banks/ Thrifts |
Credit Unions |
Rank | % | |||||||||||||||||||
Union |
PA | 44,000 | Swineford National Bank |
8 | 1 | 6 | 6.1 | % | ||||||||||||||||||
York |
PA | 432,000 | Fulton Bank, N.A. |
16 | 13 | 4 | 10.6 | % | ||||||||||||||||||
New Castle |
DE | 535,000 | Fulton Bank, N.A. |
27 | 19 | 23 | 0.1 | % | ||||||||||||||||||
Sussex |
DE | 194,000 | Fulton Bank, N.A. |
15 | 4 | 5 | 0.6 | % | ||||||||||||||||||
Anne Arundel |
MD | 515,000 | The Columbia Bank |
32 | 7 | 30 | 0.2 | % | ||||||||||||||||||
Baltimore |
MD | 788,000 | The Columbia Bank |
42 | 21 | 22 | 0.8 | % | ||||||||||||||||||
Baltimore City |
MD | 634,000 | The Columbia Bank |
36 | 12 | 16 | 0.3 | % | ||||||||||||||||||
Cecil |
MD | 102,000 | The Columbia Bank |
7 | 3 | 4 | 11.4 | % | ||||||||||||||||||
Frederick |
MD | 229,000 | The Columbia Bank |
18 | 2 | 14 | 1.0 | % | ||||||||||||||||||
Howard |
MD | 279,000 | The Columbia Bank |
19 | 3 | 3 | 11.8 | % | ||||||||||||||||||
Montgomery |
MD | 961,000 | The Columbia Bank |
39 | 21 | 32 | 0.3 | % | ||||||||||||||||||
Prince Georges |
MD | 817,000 | The Columbia Bank |
22 | 20 | 17 | 1.2 | % | ||||||||||||||||||
Washington |
MD | 147,000 | The Columbia Bank |
13 | 3 | 2 | 21.0 | % | ||||||||||||||||||
Atlantic |
NJ | 272,000 | The Bank |
15 | 5 | 14 | 1.4 | % | ||||||||||||||||||
Burlington |
NJ | 446,000 | The Bank |
22 | 11 | 18 | 0.6 | % | ||||||||||||||||||
Camden |
NJ | 518,000 | The Bank |
21 | 6 | 12 | 1.8 | % | ||||||||||||||||||
Cumberland |
NJ | 159,000 | The Bank |
12 | 4 | 10 | 2.3 | % | ||||||||||||||||||
Gloucester |
NJ | 293,000 | The Bank |
22 | 5 | 2 | 14.9 | % | ||||||||||||||||||
Hunterdon |
NJ | 129,000 | Skylands Community Bank |
15 | 3 | 13 | 2.7 | % | ||||||||||||||||||
Mercer |
NJ | 366,000 | The Bank |
26 | 18 | 20 | 1.3 | % | ||||||||||||||||||
Middlesex |
NJ | 795,000 | Skylands Community Bank |
45 | 24 | 26 | 0.5 | % | ||||||||||||||||||
Monmouth |
NJ | 644,000 | The Bank |
26 | 10 | 25 | 0.6 | % | ||||||||||||||||||
Morris |
NJ | 489,000 | Skylands Community Bank |
29 | 9 | 16 | 1.3 | % | ||||||||||||||||||
Ocean |
NJ | 576,000 | The Bank |
22 | 6 | 15 | 0.8 | % | ||||||||||||||||||
Salem |
NJ | 66,000 | The Bank |
8 | 3 | 1 | 27.2 | % | ||||||||||||||||||
Somerset |
NJ | 329,000 | Skylands Community Bank |
29 | 7 | 8 | 2.6 | % | ||||||||||||||||||
Sussex |
NJ | 151,000 | Skylands Community Bank |
12 | 1 | 11 | 0.7 | % | ||||||||||||||||||
Warren |
NJ | 110,000 | Skylands Community Bank |
13 | 2 | 3 | 11.5 | % | ||||||||||||||||||
Chesapeake City |
VA | 221,000 | Fulton Bank, N.A. |
13 | 7 | 11 | 1.7 | % | ||||||||||||||||||
Fairfax |
VA | 1,026,000 | Fulton Bank, N.A. |
39 | 16 | 36 | 0.1 | % | ||||||||||||||||||
Henrico |
VA | 297,000 | Fulton Bank, N.A. |
23 | 13 | 22 | 0.1 | % | ||||||||||||||||||
Manassas |
VA | 36,000 | Fulton Bank, N.A. |
14 | 1 | 10 | 1.5 | % | ||||||||||||||||||
Newport News |
VA | 186,000 | Fulton Bank, N.A. |
12 | 6 | 14 | 0.6 | % | ||||||||||||||||||
Richmond City |
VA | 200,000 | Fulton Bank, N.A. |
16 | 11 | 17 | 0.2 | % | ||||||||||||||||||
Virginia Beach |
VA | 433,000 | Fulton Bank, N.A. |
15 | 8 | 11 | 1.9 | % |
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.
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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 Corporations subsidiary banks.
Subsidiary |
Charter |
Primary | ||
Fulton Bank, N.A. |
National |
OCC | ||
The Bank |
NJ |
NJ/FDIC | ||
The Columbia Bank |
MD |
MD/FDIC | ||
Skylands Community Bank |
NJ |
NJ/FDIC | ||
Lafayette Ambassador Bank |
PA |
PA/FRB | ||
FNB Bank, N.A. |
National |
OCC | ||
Swineford National Bank |
National |
OCC | ||
Fulton Financial (Parent Company) |
N/A |
FRB |
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act, among others. In general, these statutes and related interpretations establish the eligible business activities of the Corporation, certain acquisition and merger restrictions, limitations on intercompany transactions, such as loans and dividends, and capital adequacy requirements, among other statutes and regulations.
The Corporation is subject to regulation and examination by the FRB, and is required to file periodic reports and to provide additional information that the FRB may require. In addition, the FRB must approve certain proposed changes in organizational structure or other business activities before they occur. 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 for which it is not already the majority owner.
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 subsidiarys 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 FRBs 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 FRBs risk-based capital guidelines that 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. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4%. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. Moreover, higher capital ratios may be required for any bank holding company if warranted by its particular circumstances or risk profile. In all cases, bank holding companies should hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed.
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 banks regulatory capital (20% in the aggregate to all such entities).
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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 banks 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 may exist on paying dividends in excess of net income for specified periods. See Note J Regulatory Matters in the Notes to Consolidated Financial Statements for additional information regarding regulatory capital and dividend and loan limitations.
Federal Deposit Insurance Substantially all of the deposits of the Corporations subsidiary banks are insured up to the applicable limits by the Deposit Insurance Fund (DIF) of the FDIC, generally up to $250,000 per insured depositor. The Corporations subsidiary banks are subject to deposit insurance assessments to maintain the DIF.
The subsidiary banks pay deposit insurance premiums based on assessment rates established by the FDIC. The FDIC has established a risk-based assessment system under which institutions are classified and pay premiums according to their perceived risk to the Federal deposit insurance funds. The FDIC is not required to charge deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels.
In May 2009, the FDIC levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institutions total assets less Tier 1 capital as of June 30, 2009, resulting in a one-time pre-tax charge of $7.7 million for the Corporation. In November 2009, the FDIC issued a ruling requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of December 31, 2010, the balance of prepaid FDIC assessments included in other assets on the Corporations consolidated balance sheet was $47.9 million.
In October 2010, as required by the Dodd-Frank Act, the FDIC adopted a DIF restoration plan to ensure a 1.35% fund reserve ratio by September 30, 2020. On at least a semi-annual basis, the FDIC will determine if a future adjustment of assessment rates will be needed based on its income and loss projections for the DIF. In November 2010, the FDIC issued a ruling which, effective December 31, 2010, provides unlimited coverage for non-interest bearing transaction accounts until December 31, 2012.
In February 2011, the FDIC issued a ruling that amends the deposit insurance assessment base from total domestic deposits to average total assets, minus average tangible equity, effective April 1, 2011. In connection with this ruling, the FDIC also created a two scorecard system, one for large depository institutions that have more than $10 billion in assets and another for highly complex institutions that have over $50 billion in assets. As of December 31, 2010, none of the Corporations individual subsidiary banks had assets in excess of $10 billion and would therefore, not meet the classification of large depository institutions under this ruling. The Corporations FDIC insurance assessments under this latest ruling would be approximately $12 million on an annualized basis, based on balances as of December 31, 2010.
USA Patriot Act Anti-terrorism legislation enacted under the USA Patriot Act of 2001 (Patriot Act) expanded the scope of anti-money laundering laws and regulations and imposed significant new compliance obligations for financial institutions, including the Corporations 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 Acts requirements could have serious legal, financial and reputational consequences. The Corporation has adopted appropriate policies, procedures and controls to address compliance with the Patriot Act and will continue to revise and update its policies, procedures and controls to reflect required changes.
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.
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Section 404 of Sarbanes-Oxley requires management to issue a report on the effectiveness of its internal controls over financial reporting. In addition, the Corporations independent registered public accountants are required to issue an opinion on the effectiveness of the Corporations internal control over financial reporting. These reports can be found in Item 8, Financial Statements and Supplementary Data. 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 and Exhibits sections.
Regulatory Developments On July 21, 2010, the President of the United States signed into law the Dodd-Frank Act. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services. The scope of the Dodd-Frank Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years.
An investment in the Corporations common stock involves certain risks, including, among others, the risks described below. In addition to the other information contained in this report, you should carefully consider the following risk factors.
Difficult conditions in the economy and the capital markets may materially adversely affect the Corporations business and results of operations.
The Corporations results of operations and financial condition are affected by conditions in the capital markets and the economy generally. The capital and credit markets have experienced extreme volatility and disruption in recent years. The volatility and disruption in these markets have produced downward pressure on stock prices of, and credit availability to, certain companies without regard to those companies underlying financial strength.
Concerns over the availability and cost of credit and the decline in the U.S. real estate market also contributed to increased volatility in the capital and credit markets and diminished expectations for the economy. These factors precipitated the recent economic slowdown, and may have an adverse effect on the Corporation.
Included among the potential adverse effects of economic downturns on the Corporation are the following:
| Economic downturns and the composition of the Corporations loan portfolio could impact the level of loan charge-offs and the provision for credit losses and may affect the Corporations net income or loss. National, regional, and local economic conditions could impact the Corporations loan portfolio. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities the Corporation serves. Weakness in the market areas served by the Corporation could depress its earnings and consequently its financial condition because: |
| borrowers may not be able to repay their loans; |
| the value of the collateral securing the Corporations loans to borrowers may decline; and |
| the quality of the Corporations loan portfolio may decline. |
Any of these scenarios could require the Corporation to charge-off a higher percentage of its loans and/or increase its provision for credit losses, which would negatively impact its results of operations.
Approximately $5.2 billion, or 43.4%, of the Corporations loan portfolio was in commercial mortgage and construction loans at December 31, 2010. The Corporation did not have a concentration of credit risk with any single borrower, industry or geographical location. However, the performance of real estate markets and the weak economic conditions in general may adversely impact the performance of these loans.
In addition, the amount of the Corporations provision for credit losses and the percentage of loans it is required to charge-off may be impacted by the overall risk composition of the loan portfolio. In 2010, the Corporations provision for loan losses was $160.0 million. While the Corporation believes that its allowance for loan losses as of December 31, 2010 is sufficient to cover losses inherent in the loan portfolio on that date, the Corporation may be required to increase its provision for credit losses or charge-off a higher percentage of loans due to changes in the risk characteristics of the loan portfolio, thereby negatively impacting its results of operations.
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| Economic downturns, especially ones affecting the Corporations geographic market areas, could reduce the Corporations customer deposits and demand for financial products, such as loans. The Corporations success depends significantly upon the growth in population, unemployment and income levels, deposits and housing starts in its geographic markets. Unlike large national institutions, the Corporation is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies and geographic locations. If the communities in which the Corporation operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, its business could be adversely affected. |
| Negative developments in the financial industry and the credit markets may subject the Corporation to additional regulation. Negative developments in the financial industry and the domestic and international credit markets, and the impact of legislation in response to those developments, may negatively impact the Corporations operations and financial performance. The Corporation and its subsidiaries are subject to regulation and examinations by various regulatory authorities. |
The potential exists for new federal or state regulations regarding lending and funding practices, capital requirements, deposit insurance premiums, other bank-focused special assessments and liquidity standards. Bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, which may result in the issuance of formal enforcement orders.
| The Corporations future growth and liquidity needs may require the Corporation to raise additional capital in the future, but that capital may not be available when it is needed or may be available at an excessive cost. The Corporation is required by regulatory authorities to maintain adequate levels of capital to support its operations. The Corporation anticipates that current capital levels will satisfy regulatory requirements for the foreseeable future. |
The Corporation, however, may at some point choose to raise additional capital to support its continued growth. The Corporations ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside of the Corporations control. Accordingly, the Corporation may be unable to raise additional capital, if and when needed, on terms acceptable to the Corporation, or at all. If the Corporation cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions could be materially impacted. In addition, future issuances of equity securities could dilute the interests of existing shareholders and could cause a decline in the Corporations stock price.
In addition to primary sources of liquidity in the form of principal and interest payments on outstanding loans and investments and deposits, the Corporation maintains secondary sources that provide it with additional liquidity. These secondary sources include secured and unsecured borrowings from sources such as the FRB and Federal Home Loan Bank (FHLB) and third-party commercial banks. The Corporation maintains a strong liquidity position and believes that it is well positioned to withstand current market conditions. However, market liquidity conditions have been negatively impacted by disruptions in the capital markets in the past and such disruptions could, in the future, have a negative impact on secondary sources of liquidity.
Changes in interest rates may have an adverse effect on the Corporations net income or loss.
The Corporation is affected by fiscal and monetary policies of 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. The use of these techniques may also affect interest rates charged on loans and paid on deposits.
Net interest income is the most significant component of the Corporations net income, accounting for approximately 76% of total revenues in 2010. The narrowing of interest rate spreads, the difference between interest rates earned on loans and investments and interest rates paid on deposits and borrowings, could adversely affect the Corporations net interest income and financial condition. Regional and local economic conditions as well as fiscal and monetary policies of the federal government, including those of the FRB, may affect prevailing interest rates. The Corporation cannot predict or control changes in interest rates.
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The supervision and regulation to which the Corporation is subject can be a competitive disadvantage.
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 is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. In general, these laws and regulations establish: the eligible business activities for the Corporation; certain acquisition and merger restrictions; limitations on intercompany transactions such as loans and dividends; capital adequacy requirements; requirements for anti-money laundering programs; and other compliance matters, among other regulations. Compliance with these statutes and regulations is important to the Corporations ability to engage in new activities and to consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. While these statutes and regulations are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes and regulations increases the Corporations expense, requires managements attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
Federal and state banking regulators also possess broad powers to take supervisory actions, as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Corporations activities that could have a material adverse effect on its business and profitability.
The federal government, the FRB and other governmental and regulatory bodies have taken, and may in the future take other actions, in response to the stress on the financial system. For example, in response to the recent stress affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was enacted. Pursuant to the EESA, the U.S. Treasury was authorized to, among other things, deploy up to $750 billion into the financial system. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was enacted, which amended EESA. Such actions, although intended to aid the financial markets, and continued volatility in the markets could materially and adversely affect the Corporations business, financial condition and results of operations, or the trading price of the Corporations common stock.
Recently enacted financial reform legislation may have a significant impact on the Corporations business and results of operations.
On July 21, 2010, the President of the United States signed into law the Dodd-Frank Act. Among other things, the Dodd-Frank Act creates the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services. The Dodd-Frank Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks. The scope of the Dodd-Frank Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under the Dodd-Frank Act and the approaches taken in implementing regulations. Additional uncertainty regarding the effect of the Dodd-Frank Act exists due to the potential for additional legislative changes to the Dodd-Frank Act. The Corporation, as well as the broader financial services industry, is continuing to assess the potential impact of the Dodd-Frank Act on its business and operations, but at this stage, the extent of the impact cannot be determined with any degree of certainty. However, the Corporation is likely to be impacted by the Dodd-Frank Act in the areas of corporate governance, deposit insurance assessments, capital requirements, risk management, stress testing, and regulation under consumer protection laws.
Price fluctuations in securities markets, as well as other market events, such as a disruption in credit and other markets and the abnormal functioning of markets for securities, could have an impact on the Corporations results of operations.
As of December 31, 2010, the Corporations equity investments consisted of FHLB and Federal Reserve Bank stock ($96.4 million), common stocks of publicly traded financial institutions ($33.1 million), and mutual funds and other equity investments ($7.0 million). The value of the securities in the Corporations equity portfolio may be affected by a number of factors, including factors that impact the performance of the U.S. securities market in general and specific risks associated with the financial institution sector. Historically, gains on sales of stocks of other financial institutions had been a recurring component of the Corporations earnings. However, general economic conditions and uncertainty surrounding the financial institution sector as a whole has impacted the value of these securities.
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Declines in bank stock values, in general, as well as, deterioration in the performance of specific banks could result in additional other-than-temporary impairment charges.
As of December 31, 2010, the Corporation had $122.2 million of corporate debt securities issued by financial institutions. As with stocks of financial institutions, continued declines in the values of these securities, combined with adverse changes in the expected cash flows from these investments, could result in additional other-than-temporary impairment charges. Included in corporate debt securities as of December 31, 2010 were $8.3 million in pooled trust preferred securities. Further deterioration in the ability of banks, within pooled trust preferred holdings, to make contractual debt payments could result in an adverse impact on the credit-related valuation portion of these securities.
As of December 31, 2010, the Corporation had $349.6 million of municipal securities issued by various municipalities in its investment portfolio. Ongoing uncertainty with respect to the financial viability of municipal insurers places much greater emphasis on the underlying strength of issuers. Increasing pressure on local tax revenues of issuers due to adverse economic conditions could also have an adverse impact on the underlying credit quality of issuers. The Corporation evaluates existing and potential holdings primarily on the underlying credit worthiness of the issuing municipality and then, to a lesser extent, on the credit enhancement corresponding to the individual issuance. As of December 31, 2010, approximately 94% of municipal securities were supported by the general obligation of corresponding municipalities. In addition, approximately 69% of these securities were school district issuances that are supported by the general obligation of the corresponding municipalities, as of December 31, 2010.
The Corporations investment management and trust division, Fulton Financial Advisors, previously held student loan auction rate securities, also known as auction rate certificates (ARCs), for some of its customers accounts. From the second quarter of 2008 through 2009, the Corporation purchased illiquid ARCs from customers of Fulton Financial Advisors. Total ARCs included in the Corporations investment securities at December 31, 2010 were $260.7 million. Continued uncertainty with respect to resolution of auction rate security market illiquidity and the current low interest rate environment could adversely affect the performance of individual holdings.
The Corporations investment management and trust services income could also be impacted by fluctuations in the securities markets. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due to factors influencing U.S. securities markets in general, or otherwise, the Corporations revenue could be negatively impacted. In addition, the Corporations ability to sell its brokerage services is dependent, in part, upon consumers level of confidence in securities markets.
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on the Corporations results of operations.
The Corporation has historically supplemented its internal growth with strategic acquisitions of banks, branches and other financial services companies. If the purchase price of an acquired company exceeds the fair value of the companys net assets, the excess is carried on the acquirers balance sheet as goodwill. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to earnings in the period in which the impairment occurs. Based on its annual goodwill impairment tests, the Corporation determined that no impairment charges were necessary in 2009 or 2010. During 2008, the Corporation recorded a $90.0 million goodwill impairment charge. As of December 31, 2010, the Corporation had $535.5 million of goodwill on its consolidated balance sheet. There can be no assurance that future evaluations of goodwill will not result in additional impairment charges.
The competition the Corporation faces is significant and may reduce the Corporations customer base and negatively impact the Corporations results of operations.
There is significant competition among commercial banks in the market areas served by the Corporation. In addition, as a result of the deregulation of the financial industry, the Corporation also competes with other providers of financial services such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than the Corporation is with respect to the products and services they provide. Some of the Corporations competitors, including certain super-regional and national bank holding companies that have made acquisitions in its market area, have greater resources than the Corporation has and, as such, may have higher lending limits and may offer other services not offered by the Corporation.
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The Corporation also experiences competition from a variety of institutions outside its market areas. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Competition may adversely affect the rates the Corporation pays on deposits and charges on loans, thereby potentially adversely affecting the Corporations profitability. The Corporations profitability depends upon its continued ability to successfully compete in the market areas it serves while achieving its objectives.
The heightened, industry-wide attention associated with the processing of residential mortgage foreclosures may adversely affect the Corporations business.
In late 2010, the media began reporting on possible processing errors and documentation problems in mortgage foreclosures at several of the nations largest banks and mortgage servicing businesses. As a result of the economic downturn which began in 2008 and which persists today, larger banks and mortgage servicing companies have been challenged with processing tens of thousands of foreclosures nationwide. It has been reported that, in some foreclosures, the procedural steps (which often vary by state and in some cases by local jurisdictions within a state) required to complete a foreclosure have not been followed. As a result, there were questions concerning the validity of some foreclosures. The foreclosure procedures used by banks and servicing companies have also come under scrutiny by consumer advocates, attorneys representing borrowers, state Attorney Generals and banking regulators.
As a financial institution, the Corporation offers a variety of residential mortgage loan products. A majority of the mortgage loans originated by the Corporation are made in the Corporations five-state market. The Corporation also services loans owned by investors in accordance with the investors guidelines. A small percentage of the Corporations residential mortgage borrowers default on their mortgage loans. When this occurs, the Corporation attempts to resolve the default in a way that provides the greatest return to the Corporation or is in accordance with investor guidelines; typically, options are pursued that allow the borrower to remain the owner of their home. However, when these efforts are not successful, it becomes necessary for the Corporation to foreclose on the loan. Unlike larger banks and mortgage servicers, however, the Corporation analyzes whether foreclosure is necessary on a case-by-case basis and the number of residential foreclosures undertaken by the Corporation is not substantial. The Corporation only initiated approximately 400 residential foreclosure actions during 2010 for residential loans the Corporation owned or serviced for investors.
Although the number of foreclosures undertaken by the Corporation on residential mortgage loans in its portfolio or that the Corporation services for others is substantially less than those of larger banks and mortgage servicers, the Corporation has recently received inquiries from banking regulators, title insurance companies and others regarding its foreclosure procedures. As a result of these inquiries and the publicity surrounding the mortgage foreclosure area nationally, the Corporation has reviewed the requirements for foreclosures in each of the states where most of its foreclosures occur and its own foreclosure procedures. In addition, the Corporation has consulted with the law firms it uses to undertake foreclosures in each of the states in its primary markets and in other states where it has substantial mortgage lending activities regarding foreclosure procedures. The Corporation will continue to conduct such reviews and consultation. The Corporation does not expect any deficiencies that it has discovered, or which it might discover in the future, as a result of these reviews and consultations to have a material impact on the financial position or results of operations of the Corporation.
Increases in FDIC insurance premiums may adversely affect the Corporations earnings.
In response to the impact of economic conditions since 2008 on banks generally and on the FDIC deposit insurance fund, the FDIC changed its risk-based assessment system and increased base assessment rates. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years worth of premiums to replenish the depleted insurance fund.
In February 2011, as required under the Dodd-Frank Act, the FDIC issued a ruling pursuant to which the assessment base against which FDIC assessments for deposit insurance are made will change. Instead of FDIC insurance assessments being based upon an insured banks deposits, FDIC insurance assessments will generally be based on an insured banks total average assets minus average tangible equity. With this change, the Corporation expects that its overall FDIC insurance cost will decline. However, a change in the risk categories applicable to the Corporations bank subsidiaries, further adjustments to base assessment rates and any special assessments could have a material adverse effect on the Corporation.
The Dodd-Frank Act also requires that the FDIC take steps necessary to increase the level of the Deposit Insurance Fund to 1.35% of total insured deposits by September 30, 2020. In October 2010, the FDIC adopted a Restoration Plan to achieve that goal. Certain elements of the Restoration Plan are left to future FDIC rulemaking, as are the potential for increases to the assessment rates, which
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may become necessary to achieve the targeted level of the DIF. Future FDIC rulemaking in this regard may have a material adverse effect on the Corporation.
The Corporation is a holding company and relies on dividends from its subsidiaries for substantially all of its revenue and its ability to make dividends, distributions and other payments.
The Corporation is a separate and distinct legal entity from its banking and nonbanking subsidiaries, and depends on the payment of dividends from its subsidiaries, principally its banking subsidiaries, for substantially all of its revenues. As a result, the Corporations ability to make dividend payments on its common stock depends primarily on certain federal and state regulatory considerations and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential supervisory restrictions, which may change from time to time, that impact on the ability of its banking subsidiaries to pay dividends or make other payments to it. For additional information regarding the regulatory restrictions Corporation and its subsidiaries, see Item 1 Business - Supervision and Regulation.
If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition and results of operations of the Corporations banking subsidiaries, the applicable regulatory authority might deem the Corporation to be engaged in an unsafe or unsound practice if its banking subsidiaries were to pay dividends. The Federal Reserve and the Office of the Comptroller of the Currency have issued policy statements generally requiring insured banks and bank holding companies only to pay dividends out of current operating earnings. In 2009, the FRB released a supervisory letter advising bank holding companies, among other things, that as a general matter a bank holding company should inform its Federal Reserve Bank and should eliminate, defer or significantly reduce its dividends if (1) the bank holding companys net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (2) the bank holding companys prospective rate of earnings is not consistent with the bank holding companys capital needs and overall current and prospective financial condition, or (3) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Anti-takeover provisions could negatively impact the Corporations shareholders.
Provisions of Pennsylvania law and of the Corporations Amended and Restated Articles of Incorporation and Bylaws could make it more difficult for a third party to acquire control of the Corporation or have the effect of discouraging a third party from attempting to acquire control of the Corporation. The Corporations Amended and Restated Articles of Incorporation and Bylaws include certain provisions which may be considered to be anti-takeover in nature because they may have the effect of discouraging or making more difficult the acquisition of control over the Corporation by means of a hostile tender offer, exchange offer, proxy contest or similar transaction. These provisions are intended to protect the Corporations shareholders by providing a measure of assurance that the Corporations shareholders will be treated fairly in the event of an unsolicited takeover bid and by preventing a successful takeover bidder from exercising its voting control to the detriment of the other shareholders. However, the anti-takeover provisions set forth in the Corporations Amended and Restated Articles of Incorporation and Bylaws, taken as a whole, may discourage a hostile tender offer, exchange offer, proxy solicitation or similar transaction relating to the Corporations common stock. To the extent that these provisions actually discourage such a transaction, holders of the Corporations common stock may not have an opportunity to dispose of part or all of their stock at a higher price than that prevailing in the market. In addition, some of these provisions make it more difficult to remove, and thereby may serve to entrench, the Corporations incumbent directors and officers, even if their removal would be regarded by some shareholders as desirable.
The Corporation relies on its systems and certain counterparties, and certain failures could materially affect its operations.
The Corporations businesses are dependent on its ability to process, record and monitor a large number of transactions. If any of its financial, accounting, or other data processing systems fail or have other significant shortcomings, the Corporation could be materially adversely affected. Third parties with which the Corporation does business could also be sources of operational risk to the Corporation, including relating to breakdowns or failures of such parties own systems. Any of these occurrences could diminish the Corporations ability to operate one or more of the Corporations businesses, or result in potential liability to clients, reputational damage and regulatory intervention, any of which could materially adversely affect the Corporation.
If personal, confidential or proprietary information of customers or clients in the Corporations possession were to be mishandled or misused, the Corporation could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the
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information, either by fault of the Corporations systems, employees or counterparties, or where such information is intercepted or otherwise inappropriate taken by third parties.
The Corporation may be subject to disruptions of the Corporations operating systems arising from events that are wholly or partially beyond the Corporations control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other damage to property or physical assets or terrorist acts. Such disruptions may give rise to losses in service to customers and loss or liability to the Corporation.
The Corporations framework for managing risks may not be effective in mitigating risk and loss to the Corporation.
The Corporations risk management framework seeks to mitigate risk and loss. The Corporation has established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which the Corporation is subject, including liquidity risk, credit risk, market risk and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to the Corporations risk management strategies and there may exist, or develop in the future, risks that the Corporation has not appropriately anticipated or identified. If the Corporations risk management framework proves to be ineffective, the Corporation could suffer unexpected losses and could be materially adversely affected.
Negative publicity could damage the Corporations reputation.
Reputation risk, or the risk to the Corporations earnings and capital from negative public opinion, is inherent in the Corporations business. Negative public opinion could adversely affect the Corporations ability to keep and attract customers and expose it to adverse legal and regulatory consequences. Negative public opinion could result from the Corporations actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory, compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information and from actions taken by government regulators and community organizations in response to that conduct. Because the Corporation conducts the majority of its businesses under the Fulton brand, negative public opinion about one business could affect the Corporations other businesses.
The Corporation may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.
The Corporation maintains systems and procedures designed to ensure that it complies with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. For example, the Corporation is subject to regulations issued by the Office of Foreign Assets Control (OFAC) that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage the Corporations reputation (see above) and could restrict the ability of institutional investment managers to invest in the Corporations securities.
Item 1B. Unresolved Staff Comments
None.
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The following table summarizes the Corporations full-service branch properties, by subsidiary bank, as of December 31, 2010. Remote service facilities (mainly stand-alone automated teller machines) are excluded.
Total | ||||||||||||
Subsidiary Bank |
Owned | Leased | Branches | |||||||||
Fulton Bank, N.A. |
45 | 74 | 119 | |||||||||
The Bank |
32 | 16 | 48 | |||||||||
The Columbia Bank |
9 | 31 | 40 | |||||||||
Skylands Community Bank |
7 | 19 | 26 | |||||||||
Lafayette Ambassador Bank |
6 | 17 | 23 | |||||||||
FNB Bank, N.A. |
6 | 2 | 8 | |||||||||
Swineford National Bank |
5 | 2 | 7 | |||||||||
Total |
110 | 161 | 271 | |||||||||
The following table summarizes the Corporations other significant administrative properties. Banking subsidiaries also maintain administrative offices at their respective main banking branches, which are included within the preceding table.
Owned/ | ||||||
Entity |
Property |
Location |
Leased | |||
Fulton Bank, N.A./Fulton Financial Corporation | Corporate Headquarters |
Lancaster, PA |
(1) | |||
Fulton Financial Corporation |
Operations Center |
East Petersburg, PA |
Owned | |||
Fulton Bank, N.A. |
Operations Center |
Mantua, NJ |
Owned | |||
Lafayette Ambassador Bank |
Operations Center |
Bethlehem, PA |
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 Corporation owns the remainder of the Corporate Headquarters location. This property also includes a Fulton Bank, N.A. branch, which is included in the preceding table. |
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.
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of December 31, 2010, the Corporation had 199.1 million shares of $2.50 par value common stock outstanding held by approximately 45,000 holders of record. The closing price per share of the Corporations common stock on December 31, 2010 was $10.34. The common stock of the Corporation is traded on the Global Select Market of The NASDAQ Stock Market under the symbol FULT.
The following table presents the quarterly high and low prices of the Corporations common stock and per common share cash dividends declared for each of the quarterly periods in 2010 and 2009.
Price Range | Per Common Share |
|||||||||||
High | Low | Dividend | ||||||||||
2010 |
||||||||||||
First Quarter |
$ | 10.57 | $ | 8.33 | $ | 0.03 | ||||||
Second Quarter |
11.75 | 9.30 | 0.03 | |||||||||
Third Quarter |
10.56 | 8.15 | 0.03 | |||||||||
Fourth Quarter |
10.64 | 8.51 | 0.03 | |||||||||
2009 |
||||||||||||
First Quarter |
$ | 10.05 | $ | 5.09 | $ | 0.03 | ||||||
Second Quarter |
7.93 | 4.75 | 0.03 | |||||||||
Third Quarter |
8.00 | 4.72 | 0.03 | |||||||||
Fourth Quarter |
9.00 | 6.77 | 0.03 |
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporations 2004 Stock Option and Compensation Plan as of December 31, 2010:
Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) |
|||||||||
Equity compensation plans approved by security holders |
6,432,264 | $ | 12.17 | 12,999,002 | ||||||||
Equity compensation plans not approved by security holders |
0 | N/A | 0 | |||||||||
Total |
6,432,264 | $ | 12.17 | 12,999,002 | ||||||||
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Performance Graph
The graph below shows cumulative investment returns to shareholders based on the assumptions that (A) an investment of $100.00 was made on December 31, 2005, in each of the following: (i) Fulton Financial Corporation common stock; (ii) the stock of all U. S. companies traded on The NASDAQ Stock Market and (iii) common stock of the performance peer group approved by the Board of Directors on September 21, 2004 consisting of bank and financial holding companies located throughout the United States with assets between $6-20 billion which were not a party to a merger agreement as of the end of the period and (B) all dividends were reinvested in such securities over the past five years. The graph is not indicative of future price performance.
The graph below is furnished under this Part II, Item 5 of this Form 10-K and shall not be deemed to be soliciting material or to be filed with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934, as amended.
(1) | A listing of the Fulton Financial Peer Group is located under the heading Compensation Discussion and Analysis within the Corporations 2011 Proxy Statement. |
Year Ending December 31 | ||||||||||||||||||||||||
Index |
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
Fulton Financial Corporation |
100.00 | 103.24 | 72.42 | 65.44 | 60.39 | 72.48 | ||||||||||||||||||
NASDAQ Composite |
100.00 | 110.39 | 122.15 | 73.32 | 106.57 | 125.91 | ||||||||||||||||||
Fulton Financial 2010 Peer Group |
100.00 | 109.02 | 90.95 | 86.09 | 77.13 | 88.26 |
Issuer Purchases of Equity Securities
Not Applicable.
18
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data)
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
SUMMARY OF OPERATIONS |
||||||||||||||||||||
Interest income |
$ | 745,373 | $ | 786,467 | $ | 867,494 | $ | 939,577 | $ | 864,507 | ||||||||||
Interest expense |
186,627 | 265,513 | 343,346 | 450,833 | 378,944 | |||||||||||||||
Net interest income |
558,746 | 520,954 | 524,148 | 488,744 | 485,563 | |||||||||||||||
Provision for credit losses |
160,000 | 190,020 | 119,626 | 15,063 | 3,498 | |||||||||||||||
Investment securities gains (losses), net |
701 | 1,079 | (58,241 | ) | 1,740 | 7,439 | ||||||||||||||
Other income, excluding investment securities gains (losses) |
184,201 | 174,781 | 158,228 | 148,586 | 144,506 | |||||||||||||||
Gain on sale of credit card portfolio |
0 | 0 | 13,910 | 0 | 0 | |||||||||||||||
Other expenses |
410,907 | 417,462 | 409,466 | 407,757 | 368,061 | |||||||||||||||
Goodwill impairment |
0 | 0 | 90,000 | 0 | 0 | |||||||||||||||
Income before income taxes |
172,741 | 89,332 | 18,953 | 216,250 | 265,949 | |||||||||||||||
Income taxes |
44,409 | 15,408 | 24,570 | 63,532 | 80,422 | |||||||||||||||
Net income (loss) |
128,332 | 73,924 | (5,617 | ) | 152,718 | 185,527 | ||||||||||||||
Preferred stock dividends and discount accretion |
(16,303 | ) | (20,169 | ) | (463 | ) | 0 | 0 | ||||||||||||
Net income (loss) available to common shareholders |
$ | 112,029 | $ | 53,755 | $ | (6,080 | ) | $ | 152,718 | $ | 185,527 | |||||||||
PER COMMON SHARE |
||||||||||||||||||||
Net income (loss) (basic) |
$ | 0.59 | $ | 0.31 | $ | (0.03 | ) | $ | 0.88 | $ | 1.07 | |||||||||
Net income (loss) (diluted) |
0.59 | 0.31 | (0.03 | ) | 0.88 | 1.06 | ||||||||||||||
Cash dividends |
0.120 | 0.120 | 0.600 | 0.598 | 0.581 | |||||||||||||||
RATIOS |
||||||||||||||||||||
Return on average assets |
0.78 | % | 0.45 | % | (0.04 | %) | 1.01 | % | 1.30 | % | ||||||||||
Return on average common shareholders equity |
6.29 | 3.54 | (0.38 | ) | 9.98 | 12.84 | ||||||||||||||
Return on average tangible common shareholders equity (1) |
9.39 | 5.96 | 9.33 | 18.16 | 23.87 | |||||||||||||||
Net interest margin |
3.80 | 3.52 | 3.70 | 3.66 | 3.82 | |||||||||||||||
Efficiency ratio |
53.49 | 57.88 | 56.48 | 61.33 | 56.15 | |||||||||||||||
Ending tangible common equity to tangible assets |
8.47 | 6.30 | 5.97 | 6.03 | 5.98 | |||||||||||||||
Dividend payout ratio |
20.34 | 38.70 | N/M | 68.00 | 54.80 | |||||||||||||||
PERIOD-END BALANCES |
||||||||||||||||||||
Total assets |
$ | 16,275,254 | $ | 16,635,635 | $ | 16,185,106 | $ | 15,923,098 | $ | 14,918,964 | ||||||||||
Investment securities |
2,861,484 | 3,267,086 | 2,724,841 | 3,153,552 | 2,878,238 | |||||||||||||||
Loans, net of unearned income |
11,933,307 | 11,972,424 | 12,042,620 | 11,204,424 | 10,374,323 | |||||||||||||||
Deposits |
12,388,581 | 12,097,914 | 10,551,916 | 10,105,445 | 10,232,469 | |||||||||||||||
Short-term borrowings |
674,077 | 868,940 | 1,762,770 | 2,383,944 | 1,680,840 | |||||||||||||||
Federal Home Loan Bank advances and long-term debt |
1,119,450 | 1,540,773 | 1,787,797 | 1,642,133 | 1,304,148 | |||||||||||||||
Shareholders equity |
1,880,389 | 1,936,482 | 1,859,647 | 1,574,920 | 1,516,310 | |||||||||||||||
AVERAGE BALANCES |
||||||||||||||||||||
Total assets |
$ | 16,426,459 | $ | 16,480,673 | $ | 15,976,871 | $ | 15,090,458 | $ | 14,297,681 | ||||||||||
Investment securities |
2,899,925 | 3,137,708 | 2,924,340 | 2,843,478 | 2,869,862 | |||||||||||||||
Loans, net of unearned income |
11,958,435 | 11,975,899 | 11,595,243 | 10,736,566 | 9,892,082 | |||||||||||||||
Deposits |
12,343,844 | 11,637,125 | 10,016,528 | 10,222,594 | 9,955,247 | |||||||||||||||
Short-term borrowings |
587,602 | 1,043,279 | 2,336,526 | 1,574,495 | 1,653,974 | |||||||||||||||
Federal Home Loan Bank advances and long-term debt |
1,326,449 | 1,712,630 | 1,822,115 | 1,579,527 | 1,069,868 | |||||||||||||||
Shareholders equity |
1,977,166 | 1,889,561 | 1,609,828 | 1,530,613 | 1,444,793 |
N/M Not meaningful.
(1) | Net income (loss) available to common shareholders, as adjusted for intangible amortization (net of tax) and goodwill impairment charges, divided by average common shareholders equity, net of goodwill and intangible assets. |
19
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements 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. Managements Discussion 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 its financial condition and results of operations and business. Many factors could affect future financial results including, without limitation: the impact of adverse changes in the economy and real estate markets; increases in non-performing assets which may reduce the level of the earning assets and require the Corporation to increase the allowance for credit losses, charge-off loans and to incur elevated collection and carrying costs related to such non-performing assets; acquisition and growth strategies; market risk; changes or adverse developments in political or regulatory conditions; a disruption in or abnormal functioning of credit and other markets, including the lack of or reduced access to markets for mortgages and other asset-backed securities and for commercial paper and other short-term borrowings; changes in the levels of, or methodology for determining, FDIC deposit insurance premiums and assessments; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and other income growth; investment securities gains and losses; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth or a decline in loans originated; balances of risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies, and other financial and business matters for future periods. Do not unduly rely on forward-looking statements. Forward-looking statements can be identified by the use of words such as may, should, will, could, estimates, predicts, potential, continue, anticipates, believes, plans, expects, future, intends and similar expressions which are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond the Corporations control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. The Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
Net income available to common shareholders increased $58.3 million, or 108.4%, to $112.0 million in 2010 as compared to $53.8 million in 2009. Diluted net income per common share increased $0.28, or 90.3%, to $0.59 in 2010 from $0.31 in 2009. The following is a summary of the significant factors impacting the Corporations financial performance in 2010.
Asset Quality The financial services industry continued to be challenged by general economic conditions throughout 2010. While there had been some improvements in local and national economic conditions during the year, the economic recovery in general has been slower than expected, and conditions remain unsettled.
The most notable area where the improving, but unstable, economic conditions were evident was in asset quality, which saw some deterioration during the first nine months of 2010, but showed signs of improvement during the fourth quarter. The provision for credit losses decreased $30.0 million, or 15.8%, to $160.0 million in 2010, as compared to $190.0 million in 2009. While both non-performing assets and net charge-offs increased, additional provisions for credit losses were not needed as allowance allocations were considered to be sufficient. This relationship between the provision for credit losses and net charge-offs is not unusual, since the recognition of losses through the provision generally occurs before such losses are realized through a charge-off against the allowance for credit losses. In the fourth quarter of 2010, non-performing assets and delinquency levels both improved in comparison to the third quarter. This was the first time improvements in these measures in comparison to the preceding quarter had occurred since the second quarter of 2006.
While there is still much uncertainty about the economic outlook and the potential effects on financial performance, particularly asset quality, the Corporation believes that it has taken the appropriate steps to manage its exposures and continues to actively monitor its portfolio for signs of further deterioration.
20
Net Interest Income and Net Interest Margin Net interest income increased $37.8 million, or 7.3%, to $558.7 million in 2010 as compared to $521.0 million in 2009. The net interest margin increased 28 basis points, or 8.0%, to 3.80% in 2010 as compared to 3.52% in 2009. The increases in both net interest income and net interest margin were primarily attributable to decreases in funding costs as interest rates remained at historically low levels throughout the year. In addition, average core demand and savings accounts increased $1.2 billion, or 19.5%, which also contributed to a decrease in funding costs, as well as an improvement in the Corporations overall liquidity position. This increase in deposits reduced the Corporations wholesale funding position, mostly through reductions to average Federal funds purchased and advances from the Federal Home Loan Bank (FHLB).
Other Income Growth Total other income increased $9.0 million, or 5.1%, mainly due to a $4.2 million, or 16.9%, increase in mortgage banking income and a $4.6 million, or 11.4%, increase in other service charges and fees. Mortgage banking income increased as margins on loans sold increased, while refinance volumes remained high in the low interest rate environment that existed for most of 2010. Other service charges growth was driven by higher debit card, foreign currency processing and merchant fee transaction volumes.
Expense Control Total other expenses decreased $6.6 million, or 1.6%, and the efficiency ratio improved to 53.5% in 2010 as compared to 57.9% in 2009. While 2009 expenses included a one-time $7.7 million FDIC assessment, other discretionary expenses remained well-controlled during 2010.
Common Stock Offering and Exit from Capital Purchase Program In May 2010, the Corporation issued 21.8 million shares of its common stock, in an underwritten public offering, for net proceeds of $226.3 million. As a result of this common stock issuance, weighted average diluted shares increased to 191.4 million in 2010 from 175.9 million in 2009.
In July 2010, the Corporation redeemed all 376,500 outstanding shares of its Series A preferred stock with a total payment to the U. S. Treasury Department (UST) of $379.6 million, consisting of $376.5 million of principal and $3.1 million of dividends. In September 2010, the Corporation repurchased an outstanding common stock warrant for the purchase of 5.5 million shares of its common stock for $10.8 million, completing the Corporations participation in the USTs Capital Purchase Program (CPP).
As a result of the exit from CPP, preferred stock dividends and accretion decreased $3.9 million, or 19.2%. In addition, shareholders equity decreased $56.1 million, or 2.9%, at December 31, 2010 in comparison to 2009. Despite the decrease in shareholders equity, all regulatory capital ratios exceeded the minimum levels to be considered well-capitalized by at least 400 basis points.
Legislation and Regulation On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Among other things, the Dodd-Frank Act creates the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services. The Dodd-Frank Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks. The scope of the Dodd-Frank Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under the Dodd-Frank Act and the approaches taken in implementing regulations. Additional uncertainty regarding the effect of the Dodd-Frank Act exists due to the potential for additional legislative changes to the Dodd-Frank Act. The Corporation, as well as the broader financial services industry, is continuing to assess the potential impact of the Dodd-Frank Act on its business and operations, but at this stage, the extent of the impact cannot be determined with any degree of certainty. However, the Corporation is likely to be impacted by the Dodd-Frank Act in the areas of corporate governance, deposit insurance assessments, capital requirements, risk management, stress testing, and regulation under consumer protection laws.
Summary Financial Results
The Corporation generates the majority of its revenue through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and/or maintaining or increasing the net interest margin, which is net interest income (fully taxable-equivalent) 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 gains on sales of assets, such as loans, investments, or properties. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.
21
The following table presents a summary of the Corporations earnings and selected performance ratios:
2010 | 2009 | |||||||
Net income available to common shareholders (in thousands) |
$ | 112,029 | $ | 53,755 | ||||
Diluted net income per common share (1) |
$ | 0.59 | $ | 0.31 | ||||
Return on average assets |
0.78 | % | 0.45 | % | ||||
Return on average common equity (2) |
6.29 | % | 3.54 | % | ||||
Return on average tangible common equity (3) |
9.39 | % | 5.96 | % | ||||
Net interest margin (4) |
3.80 | % | 3.52 | % | ||||
Efficiency ratio |
53.49 | % | 57.88 | % | ||||
Non-performing assets to total assets |
2.22 | % | 1.83 | % | ||||
Net charge-offs to average loans |
1.19 | % | 0.94 | % |
(1) | Net income available to common shareholders divided by diluted weighted average common shares outstanding. |
(2) | Net income available to common shareholders divided by average common shareholders equity. |
(3) | Net income available to common shareholders, as adjusted for intangible amortization (net of tax), divided by average common shareholders equity, net of goodwill and intangible assets. |
(4) | Presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax rate and statutory interest expense disallowances. See also Net Interest Income section of Managements Discussion. |
22
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporations net income. The Corporation manages the risk associated with changes in interest rates through the techniques described in the Market Risk section of Managements Discussion. Fully taxable-equivalent (FTE) net interest income increased $37.8 million, or 7.0%, to $574.3 million in 2010. This increase was the net result of a $41.1 million decrease in FTE interest income and a $78.9 million decrease in interest expense.
The following table provides a comparative average balance sheet and net interest income analysis for 2010 compared to 2009 and 2008. Interest income and yields are presented on an FTE basis, using a 35% Federal tax rate and statutory interest expense disallowances. The discussion following this table is based on these tax-equivalent amounts.
(dollars in thousands) |
2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||
Average Balance |
Interest (1) | Yield/ Rate |
Average Balance |
Interest (1) | Yield/ Rate |
Average Balance |
Interest (1) | Yield/ Rate |
||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans, net of unearned income (2) |
$ | 11,958,435 | $ | 637,438 | 5.33 | % | $ | 11,975,899 | $ | 655,384 | 5.47 | % | $ | 11,595,243 | $ | 732,533 | 6.32 | % | ||||||||||||||||||
Taxable inv. securities (3) |
2,403,206 | 96,237 | 4.00 | 2,548,810 | 112,945 | 4.43 | 2,228,204 | 110,220 | 4.95 | |||||||||||||||||||||||||||
Tax-exempt inv. securities (3) |
357,427 | 20,513 | 5.74 | 451,828 | 25,180 | 5.57 | 512,920 | 27,904 | 5.44 | |||||||||||||||||||||||||||
Equity securities (3) |
139,292 | 3,103 | 2.23 | 137,070 | 2,917 | 2.13 | 183,216 | 6,520 | 3.56 | |||||||||||||||||||||||||||
Total investment securities |
2,899,925 | 119,853 | 4.13 | 3,137,708 | 141,042 | 4.50 | 2,924,340 | 144,644 | 4.95 | |||||||||||||||||||||||||||
Loans held for sale |
69,157 | 3,088 | 4.47 | 105,067 | 5,390 | 5.13 | 93,085 | 5,701 | 6.12 | |||||||||||||||||||||||||||
Other interest-earning assets |
192,888 | 505 | 0.26 | 21,255 | 196 | 0.92 | 21,503 | 586 | 2.71 | |||||||||||||||||||||||||||
Total interest-earning assets |
15,120,405 | 760,884 | 5.04 | 15,239,929 | 802,012 | 5.27 | 14,634,171 | 883,464 | 6.04 | |||||||||||||||||||||||||||
Noninterest-earning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
268,615 | 305,410 | 318,524 | |||||||||||||||||||||||||||||||||
Premises and equipment |
204,316 | 203,865 | 197,967 | |||||||||||||||||||||||||||||||||
Other assets (3) |
1,114,678 | 952,597 | 951,270 | |||||||||||||||||||||||||||||||||
Less: Allowance for loan losses |
(281,555 | ) | (221,128 | ) | (125,061 | ) | ||||||||||||||||||||||||||||||
Total Assets |
$ | 16,426,459 | $ | 16,480,673 | $ | 15,976,871 | ||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
$ | 2,099,026 | $ | 7,341 | 0.35 | % | $ | 1,857,081 | $ | 7,995 | 0.43 | % | $ | 1,714,029 | $ | 13,168 | 0.77 | % | ||||||||||||||||||
Savings deposits |
3,124,157 | 19,889 | 0.63 | 2,425,864 | 19,487 | 0.80 | 2,152,158 | 28,520 | 1.32 | |||||||||||||||||||||||||||
Time deposits |
5,016,645 | 95,129 | 1.90 | 5,507,090 | 153,344 | 2.78 | 4,502,399 | 170,426 | 3.79 | |||||||||||||||||||||||||||
Total interest-bearing deposits |
10,239,828 | 122,359 | 1.19 | 9,790,035 | 180,826 | 1.85 | 8,368,586 | 212,114 | 2.53 | |||||||||||||||||||||||||||
Short-term borrowings |
587,602 | 1,455 | 0.25 | 1,043,279 | 3,777 | 0.36 | 2,336,526 | 50,091 | 2.12 | |||||||||||||||||||||||||||
Long-term debt |
1,326,449 | 62,813 | 4.74 | 1,712,630 | 80,910 | 4.72 | 1,822,115 | 81,141 | 4.45 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
12,153,879 | 186,627 | 1.54 | 12,545,944 | 265,513 | 2.12 | 12,527,227 | 343,346 | 2.74 | |||||||||||||||||||||||||||
Noninterest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
2,104,016 | 1,847,090 | 1,647,942 | |||||||||||||||||||||||||||||||||
Other |
191,398 | 198,078 | 191,874 | |||||||||||||||||||||||||||||||||
Total Liabilities |
14,449,293 | 14,591,112 | 14,367,043 | |||||||||||||||||||||||||||||||||
Shareholders equity |
1,977,166 | 1,889,561 | 1,609,828 | |||||||||||||||||||||||||||||||||
Total Liabs. and Equity |
$ | 16,426,459 | $ | 16,480,673 | $ | 15,976,871 | ||||||||||||||||||||||||||||||
Net interest income/net interest margin (FTE) |
574,257 | 3.80 | % | 536,499 | 3.52 | % | 540,118 | 3.70 | % | |||||||||||||||||||||||||||
Tax equivalent adjustment |
(15,511 | ) | (15,545 | ) | (15,970 | ) | ||||||||||||||||||||||||||||||
Net interest income |
$ | 558,746 | $ | 520,954 | $ | 524,148 | ||||||||||||||||||||||||||||||
(1) | Includes dividends earned on equity securities. |
(2) | Includes non-performing loans. |
(3) | Includes amortized historical cost for available for sale securities; the related unrealized holding gains (losses) are included in other assets. |
23
The following table sets forth a summary of changes in FTE interest income and expense resulting from changes in average balances (volumes) and changes in rates:
2010 vs. 2009 Increase (decrease) due To change in |
2009 vs. 2008 Increase (decrease) due To change in |
|||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest income on: |
||||||||||||||||||||||||
Loans and leases |
$ | (955 | ) | $ | (16,991 | ) | $ | (17,946 | ) | $ | 23,414 | $ | (100,563 | ) | $ | (77,149 | ) | |||||||
Taxable investment securities |
(6,221 | ) | (10,487 | ) | (16,708 | ) | 12,787 | (10,062 | ) | 2,725 | ||||||||||||||
Tax-exempt investment securities |
(5,398 | ) | 731 | (4,667 | ) | (3,391 | ) | 667 | (2,724 | ) | ||||||||||||||
Equity securities |
48 | 138 | 186 | (1,388 | ) | (2,215 | ) | (3,603 | ) | |||||||||||||||
Loans held for sale |
(1,669 | ) | (633 | ) | (2,302 | ) | 681 | (992 | ) | (311 | ) | |||||||||||||
Other interest-earning assets |
541 | (232 | ) | 309 | (7 | ) | (383 | ) | (390 | ) | ||||||||||||||
Total interest-earning assets |
$ | (13,654 | ) | $ | (27,474 | ) | $ | (41,128 | ) | $ | 32,096 | $ | (113,548 | ) | $ | (81,452 | ) | |||||||
Interest expense on: |
||||||||||||||||||||||||
Demand deposits |
$ | 962 | $ | (1,616 | ) | $ | (654 | ) | $ | 1,022 | $ | (6,195 | ) | $ | (5,173 | ) | ||||||||
Savings deposits |
5,087 | (4,685 | ) | 402 | 3,202 | (12,235 | ) | (9,033 | ) | |||||||||||||||
Time deposits |
(12,705 | ) | (45,510 | ) | (58,215 | ) | 33,428 | (50,510 | ) | (17,082 | ) | |||||||||||||
Short-term borrowings |
(1,347 | ) | (975 | ) | (2,322 | ) | (18,535 | ) | (27,779 | ) | (46,314 | ) | ||||||||||||
Long-term debt |
(18,287 | ) | 190 | (18,097 | ) | (5,023 | ) | 4,792 | (231 | ) | ||||||||||||||
Total interest-bearing liabilities |
$ | (26,290 | ) | $ | (52,596 | ) | $ | (78,886 | ) | $ | 14,094 | $ | (91,927 | ) | $ | (77,833 | ) | |||||||
Note: | Changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component. |
2010 vs. 2009
FTE interest income decreased $41.1 million, or 5.1%. A 23 basis point, or 4.4%, decrease in average rates resulted in a $27.5 million decrease in interest income, while a $119.5 million, or 0.8%, decrease in average interest-earning assets resulted in a $13.7 million decrease in interest income.
Average loans decreased $17.5 million. The following table summarizes the changes in average loans by type:
Increase (decrease) | ||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Real estate - commercial mortgage |
$ | 4,333,371 | $ | 4,135,486 | $ | 197,885 | 4.8 | % | ||||||||
Commercial - industrial, financial and agricultural |
3,681,692 | 3,673,654 | 8,038 | 0.2 | ||||||||||||
Real estate - home equity |
1,642,999 | 1,665,834 | (22,835 | ) | (1.4 | ) | ||||||||||
Real estate - residential mortgage |
977,909 | 938,187 | 39,722 | 4.2 | ||||||||||||
Real estate - construction |
889,267 | 1,111,863 | (222,596 | ) | (20.0 | ) | ||||||||||
Consumer |
363,066 | 368,651 | (5,585 | ) | (1.5 | ) | ||||||||||
Leasing and other |
70,131 | 82,224 | (12,093 | ) | (14.7 | ) | ||||||||||
Total |
$ | 11,958,435 | $ | 11,975,899 | $ | (17,464 | ) | (0.1 | %) | |||||||
Overall loan demand continued to be weak during 2010 as a result of general economic conditions. In addition, the Corporation continued to manage risk by reducing its exposure in certain loan types, particularly construction loans. As a result, increases resulting from new originations were more than offset by decreases due to repayments and charge-offs.
24
Geographically, the $197.9 million, or 4.8%, increase in commercial mortgages was within the Corporations Pennsylvania ($127.8 million, or 5.9%), Maryland ($31.3 million, or 8.8%), New Jersey ($21.1 million, or 1.8%) and Virginia ($17.6 million, or 5.4%) markets.
The $39.7 million, or 4.2%, increase in residential mortgages was largely due to the Corporations retention in portfolio of certain 10 and 15 year fixed rate mortgages and certain adjustable rate mortgages with longer initial repricing terms. The majority of these loans were underwritten to the standards required for sale to third-party investors, however, the Corporation elected to retain them in portfolio to partially mitigate the impact of decreases in average interest-earning assets.
The $222.6 million, or 20.0% decrease in construction loans was primarily due to efforts to decrease credit exposure in this portfolio as new loan originations decreased during the current year. In addition, $66.4 million of charge-offs recorded in 2010 contributed to the decrease. Geographically, the decline was primarily in the Corporations Maryland ($91.6 million, or 31.2%), Virginia ($65.8 million, or 23.6%) and New Jersey ($62.4 million, or 28.6%) markets.
The average yield on loans during 2010 of 5.33% represented a 14 basis point, or 2.6%, decrease in comparison to 2009, despite the average prime rate remaining at 3.25% for both 2010 and 2009. The decrease in average yields on loans was attributable to repayments of higher-yielding loans and declining average rates on fixed and adjustable rate loans which, unlike floating rate loans, have a lagged repricing effect. In addition, approximately one-third of the floating rate portfolio is based on an index rate other than prime, such as the one-month London Interbank Offering Rate, or LIBOR, which decreased on average from 2009 to 2010.
Average investments decreased $237.8 million, or 7.6%, due largely to maturities of mortgage-backed securities, state and municipal securities and U.S. government sponsored agency securities, partially offset by an increase in collateralized mortgage obligations. During 2010, the proceeds from the maturities and sales of securities were not fully reinvested into the portfolio because current rates on many investment options were not attractive. The average yield on investments decreased 37 basis points, or 8.2%, from 4.50% in 2009 to 4.13% in 2010, as the reinvestment of cash flows and incremental purchases of taxable investment securities were at yields that were lower than the overall portfolio yield.
Other interest-earning assets increased $171.6 million, or 807.5%, due to a lack of attractive investment alternatives.
Interest expense decreased $78.9 million, or 29.7%, to $186.6 million in 2010 from $265.5 million in 2009. Of this decrease, $52.6 million resulted from a 58 basis point, or 27.4%, decrease in the average cost of total interest-bearing liabilities. The remainder of the decrease in interest expense, $26.3 million, resulted from a $392.1 million, or 3.1%, decrease in average interest-bearing liabilities.
The following table summarizes the changes in average deposits, by type:
Increase (decrease) | ||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Noninterest-bearing demand |
$ | 2,104,016 | $ | 1,847,090 | $ | 256,926 | 13.9 | % | ||||||||
Interest-bearing demand |
2,099,026 | 1,857,081 | 241,945 | 13.0 | ||||||||||||
Savings |
3,124,157 | 2,425,864 | 698,293 | 28.8 | ||||||||||||
Total demand and savings |
7,327,199 | 6,130,035 | 1,197,164 | 19.5 | ||||||||||||
Time deposits |
5,016,645 | 5,507,090 | (490,445 | ) | (8.9 | ) | ||||||||||
Total deposits |
$ | 12,343,844 | $ | 11,637,125 | $ | 706,719 | 6.1 | % | ||||||||
Total demand and savings accounts increased $1.2 billion, or 19.5%, which was consistent with industry trends as economic conditions have slowed spending and encouraged saving. The increase in noninterest-bearing accounts was primarily due to a $217.8 million, or 17.5%, increase in business account balances. The increase in interest-bearing demand and savings accounts consisted of a $468.6 million, or 17.8%, increase in personal account balances, a $284.9 million, or 30.7%, increase in municipal account balances and a $186.8 million, or 26.1%, increase in business account balances. Growth in business account balances was due, in part, to businesses being required to keep higher balances on hand to offset service fees, as well as a migration away from the Corporations cash management products due to low interest rates. The increase in personal account balances was a result of a decrease in customer certificates of deposit as well as the Corporations promotional efforts with a focus on building customer relationships.
25
The $490.4 million decrease in time deposits consisted of a $353.4 million, or 6.6%, decrease in retail customer certificates of deposits and a $137.1 million, or 93.2%, decrease in brokered certificates of deposit. The decrease in customer certificates of deposit was in accounts with original maturity terms of less than one year of $901.6 million, or 33.8%, partially offset by an increase in accounts with original maturity terms of greater than one year of $586.4 million, or 34.4%. As noted above, the decrease in short-term customer certificates of deposit was largely due to customers migrating funds to interest-bearing savings and demand accounts in anticipation of rising rates. The growth in longer-term certificates of deposit was due to the Corporations continuing focus on building customer relationships, while at the same time extending funding maturities at reasonable rates over a longer time horizon. The decrease in brokered certificates of deposit occurred because the significant growth in customer funding reduced the need for non-core funding alternatives.
The average cost of interest-bearing deposits decreased 66 basis points, or 35.7%, from 1.85% in 2009 to 1.19% in 2010, primarily due to the maturities of higher-rate certificates of deposit. The average cost of time deposits decreased 88 basis points, or 31.7%. During 2010, $5.2 billion of time deposits matured at a weighted average rate of 1.69%, while $4.9 billion of time deposits were issued at a weighted average rate of 1.11%.
The following table summarizes the changes in average borrowings, by type:
Increase (decrease) | ||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Short-term borrowings: |
||||||||||||||||
Customer repurchase agreements |
$ | 252,634 | $ | 254,662 | $ | (2,028 | ) | (0.8 | %) | |||||||
Customer short-term promissory notes |
209,766 | 287,231 | (77,465 | ) | (27.0 | ) | ||||||||||
Total short-term customer funding |
462,400 | 541,893 | (79,493 | ) | (14.7 | ) | ||||||||||
Federal funds purchased |
125,202 | 453,268 | (328,066 | ) | (72.4 | ) | ||||||||||
Federal Reserve Bank borrowings |
0 | 46,137 | (46,137 | ) | (100.0 | ) | ||||||||||
Other short-term borrowings |
0 | 1,981 | (1,981 | ) | (100.0 | ) | ||||||||||
Total other short-term borrowings |
125,202 | 501,386 | (376,184 | ) | (75.0 | ) | ||||||||||
Total short-term borrowings |
587,602 | 1,043,279 | (455,677 | ) | (43.7 | ) | ||||||||||
Long-term debt: |
||||||||||||||||
FHLB Advances |
943,118 | 1,329,482 | (386,364 | ) | (29.1 | ) | ||||||||||
Other long-term debt |
383,331 | 383,148 | 183 | 0.0 | ||||||||||||
Total long-term debt |
1,326,449 | 1,712,630 | (386,181 | ) | (22.5 | ) | ||||||||||
Total |
$ | 1,914,051 | $ | 2,755,909 | $ | (841,858 | ) | (30.5 | %) | |||||||
The $79.5 million, or 14.7%, decrease in short-term customer funding resulted primarily from customers transferring funds from the cash management program to deposits due to the low interest rate environment. The decreases in Federal funds purchased and Federal Reserve Bank borrowings were due to increases in customer deposit accounts, combined with the decreases in investments and loans, the result of which was a reduced funding need for the Corporation. The $386.4 million decrease in FHLB advances was due to maturities, which were generally not replaced with new advances.
2009 vs. 2008
FTE interest income decreased $81.5 million, or 9.2%. A 77 basis point decrease in average rates resulted in a $113.5 million decrease in interest income. This decrease was partially offset by a $32.1 million increase in interest income realized from a $605.8 million, or 4.1%, increase in average interest-bearing balances.
Contributing to the increase in average interest-earning assets was a $380.7 million, or 3.3%, increase in average loans. During 2009, overall loan growth was slowed as a result of weak economic conditions. Also affecting loan growth was the Corporations efforts to reduce credit exposure in certain sectors.
26
The growth in average loans was primarily due to increases in commercial mortgages ($388.2 million, or 10.4%), commercial loans ($148.0 million, or 4.2%) and home equity loans ($68.6 million, or 4.3%), offset by a decrease in construction loans. Geographically, the increase in commercial mortgages was mainly attributable to increases within the Corporations Pennsylvania ($207.3 million, or 10.7%), New Jersey ($80.8 million, or 7.3%) and Maryland ($73.8 million, or 26.1%) markets. The increase in commercial loans was mostly attributable to an increase within the Corporations Pennsylvania market of $134.3 million, or 6.0%. The increase in home equity loans was in home equity lines of credit, offset by a decrease in second mortgages.
Offsetting the above increases was a $208.6 million, or 15.8%, decrease in construction loans, due to both a lower level of new and existing residential housing developments and the Corporations efforts to reduce its credit exposure in this sector, particularly within its Maryland and Virginia markets. Geographically, the decrease was attributable to decreases in the Corporations Maryland ($100.7 million, or 25.5%), Virginia ($48.1 million, or 14.7%), New Jersey ($27.7 million, or 11.3%) and Pennsylvania ($26.6 million, or 8.1%) markets.
The average yield on loans during 2009 of 5.47% represented an 85 basis point, or 13.4%, decrease in comparison to 2008. The decrease in the average yield on loans reflected a lower average rate environment, as illustrated by a lower average prime rate in 2009 (3.25%) as compared to 2008 (5.12%). The decrease in average yields was not as pronounced as the decrease in the average prime rate as fixed and adjustable rate loans, unlike floating rate loans, have a lagged repricing effect during periods of declining interest rates.
Average investments increased $213.4 million, or 7.3%, primarily due to a $181.1 million increase in student loan auction rate securities, also known as auction rate certificates (ARCs). The Corporations investment management and trust division, Fulton Financial Advisors, held ARCs for some of its customers accounts. ARCs are structured to allow for their sale in periodic auctions, with fair values that could be derived based on periodic auctions under normal market conditions. Beginning in the second quarter of 2008 and continuing throughout 2009, the Corporation purchased ARCs from customers due to the failure of these periodic auctions, making these previously short-term investments illiquid.
The average yield on investment securities decreased 45 basis points, or 9.1%, from 4.95% in 2008 to 4.50% in 2009 as purchases were at yields that were lower than the overall portfolio yield. Investment yields were also adversely impacted by the reduction or in some cases the suspension of, dividends on equity securities, particularly financial institution stocks and FHLB stocks. The $181.1 million increase in ARCs resulted in a seven basis point decrease in average yield.
The $81.5 million decrease in interest income was largely offset by a decrease in interest expense of $77.8 million, or 22.7%, to $265.5 million in 2009 from $343.3 million in 2008. Interest expense decreased $91.9 million as a result of a 62 basis point, or 22.6%, decrease in the average cost of total interest-bearing liabilities. This decrease was partially offset by an increase in interest expense of $14.1 million caused by an increase in average interest-bearing liabilities.
The Corporation experienced a net increase in total demand and savings accounts of $615.9 million, or 11.2%. The increase in noninterest-bearing accounts was in business account balances, while the increase in interest-bearing demand and savings accounts was in municipal, business and personal account balances. The growth in business account balances was due, in part, to businesses being required to keep higher balances on hand to offset service fees, as well as a movement from the Corporations cash management products due to low interest rates. The increase in personal account balances was the result of a reduction in customer spending, in addition to the impact of decreased consumer confidence in equity and debt markets, resulting in a shift to deposits.
Time deposits increased $1.0 billion, or 22.3%. The increase in time deposits occurred primarily in retail customer certificates of deposits. This increase was due to active promotion in the fourth quarter of 2008 and the beginning of 2009. These average deposit increases were used to reduce the Corporations short and long-term borrowings.
Short-term borrowings decreased $1.3 billion, or 55.3%, due mainly to an $875.6 million decrease in Federal funds purchased and a $303.2 million decrease in FHLB overnight repurchase agreements, both a result of the increase in deposits. In addition, short-term customer funding decreased $139.7 million due to customers transferring funds from the cash management program to deposits due to the low interest rate environment. Long-term debt decreased $109.5 million, or 6.0%, due to maturities of FHLB advances.
27
Provision and Allowance for Credit Losses
The Corporation accounts for the credit risk associated with lending activities through its allowance for credit losses and provision for credit losses. The provision is the expense recognized on the consolidated statements of operations to adjust the allowance to its proper balance, as determined through the application of the Corporations allowance methodology procedures. These procedures include the evaluation of the risk characteristics of the portfolio and documentation in accordance with the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues (SAB 102). See the Critical Accounting Policies section of Managements Discussion for a discussion of the Corporations allowance for credit loss evaluation methodology.
28
A summary of the Corporations loan loss experience follows:
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Loans, net of unearned income outstanding at end of year |
$ | 11,933,307 | $ | 11,972,424 | $ | 12,042,620 | $ | 11,204,424 | $ | 10,374,323 | ||||||||||
Daily average balance of loans, net of unearned income |
$ | 11,958,435 | $ | 11,975,899 | $ | 11,595,243 | $ | 10,736,566 | $ | 9,892,082 | ||||||||||
Balance of allowance for credit losses at beginning of year |
$ | 257,553 | $ | 180,137 | $ | 112,209 | $ | 106,884 | $ | 92,847 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Real estate construction |
66,412 | 44,909 | 14,891 | 0 | 0 | |||||||||||||||
Commercial industrial, financial and agricultural |
35,865 | 34,761 | 18,592 | 6,796 | 3,013 | |||||||||||||||
Real estate commercial mortgage |
28,209 | 15,530 | 7,516 | 851 | 155 | |||||||||||||||
Consumer and home equity |
11,210 | 10,770 | 5,188 | 3,678 | 3,138 | |||||||||||||||
Real estate residential mortgage |
6,896 | 7,056 | 5,868 | 355 | 274 | |||||||||||||||
Leasing and other |
2,833 | 6,048 | 4,804 | 2,059 | 389 | |||||||||||||||
Total loans charged off |
151,425 | 119,074 | 56,859 | 13,739 | 6,969 | |||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||||||
Real estate construction |
1,296 | 1,194 | 17 | 0 | 0 | |||||||||||||||
Commercial industrial, financial and agricultural |
4,536 | 1,679 | 1,795 | 1,664 | 2,863 | |||||||||||||||
Real estate commercial mortgage |
1,008 | 536 | 286 | 34 | 210 | |||||||||||||||
Consumer and home equity |
1,540 | 1,678 | 1,487 | 1,246 | 1,289 | |||||||||||||||
Real estate residential mortgage |
9 | 150 | 143 | 144 | 58 | |||||||||||||||
Leasing and other |
981 | 1,233 | 1,433 | 913 | 97 | |||||||||||||||
Total recoveries |
9,370 | 6,470 | 5,161 | 4,001 | 4,517 | |||||||||||||||
Net loans charged off |
142,055 | 112,604 | 51,698 | 9,738 | 2,452 | |||||||||||||||
Provision for credit losses |
160,000 | 190,020 | 119,626 | 15,063 | 3,498 | |||||||||||||||
Allowance of purchased entities |
0 | 0 | 0 | 0 | 12,991 | |||||||||||||||
Balance at end of year |
$ | 275,498 | $ | 257,553 | $ | 180,137 | $ | 112,209 | $ | 106,884 | ||||||||||
Components of Allowance for Credit Losses: |
||||||||||||||||||||
Allowance for loan losses |
$ | 274,271 | $ | 256,698 | $ | 173,946 | $ | 107,547 | $ | 106,884 | ||||||||||
Reserve for unfunded lending commitments (1) |
1,227 | 855 | 6,191 | 4,662 | 0 | |||||||||||||||
Allowance for credit losses |
$ | 275,498 | $ | 257,553 | $ | 180,137 | $ | 112,209 | $ | 106,884 | ||||||||||
Selected Asset Quality Ratios: |
||||||||||||||||||||
Net charge-offs to average loans |
1.19 | % | 0.94 | % | 0.45 | % | 0.09 | % | 0.02 | % | ||||||||||
Allowance for loan losses to loans outstanding |
2.30 | % | 2.14 | % | 1.44 | % | 0.96 | % | 1.03 | % | ||||||||||
Allowance for credit losses to loans outstanding |
2.31 | % | 2.15 | % | 1.50 | % | 1.00 | % | 1.03 | % | ||||||||||
Non-performing assets (2) to total assets |
2.22 | % | 1.83 | % | 1.35 | % | 0.76 | % | 0.39 | % | ||||||||||
Non-performing assets to total loans and Other Real Estate Owned (OREO) |
3.02 | % | 2.54 | % | 1.82 | % | 1.08 | % | 0.56 | % | ||||||||||
Non-accrual loans to total loans |
2.35 | % | 1.99 | % | 1.34 | % | 0.68 | % | 0.32 | % | ||||||||||
Allowance for credit losses to non-performing loans |
83.80 | % | 91.42 | % | 91.38 | % | 105.93 | % | 198.87 | % | ||||||||||
Non-performing assets to tangible common shareholders equity and allowance for credit losses |
22.50 | % | 24.00 | % | 19.68 | % | 11.71 | % | 6.03 | % |
(1) | Reserve for unfunded lending commitments recorded within other liabilities on the consolidated balance sheets. |
(2) | Includes accruing loans past due 90 days or more. |
The Corporations provision for credit losses for 2010 totaled $160.0 million, a $30.0 million, or 15.8%, decrease from the $190.0 million provision for credit losses in 2009. During 2010, the level of non-performing assets and net charge-offs increased in comparison to 2009, however, additional provisions for credit losses were not needed as allowance allocations were considered to be sufficient.
29
Net charge-offs increased $29.5 million, or 26.2%, to $142.1 million in 2010 from $112.6 million in 2009. The increase in net charge-offs was primarily due to increases in construction loan net charge-offs ($21.4 million, or 49.0%) and commercial mortgage net charge-offs ($12.2 million, or 81.4%), partially offset by declines in consumer and other net charge-offs ($2.4 million, or 17.1%) and commercial loan net charge-offs ($1.8 million, or 5.3%).
Of the $142.1 million of net charge-offs recorded in 2010, 27.5% were for loans originated by the Corporations banks in New Jersey, 24.9% in Pennsylvania, 23.2% in Virginia and 20.8% in Maryland. During 2010, individual charge-offs of $1.0 million or greater totaled approximately $76 million, of which approximately $52 million were for construction or land development loans, approximately $12 million were for commercial mortgages loans, and approximately $12 million were for commercial loans. For 2009, individual charge-offs of $1.0 million or greater totaled approximately $47 million, of which approximately $25 million were for construction or land development loans, approximately $14 million were for commercial loans, approximately $6 million were for commercial mortgages and approximately $2 million was related to a lease of commercial equipment.
The following table presents the aggregate amount of non-accrual and past due loans and OREO:
December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Non-accrual loans (1) (2) (3) |
$ | 280,688 | $ | 238,360 | $ | 161,962 | $ | 76,150 | $ | 33,113 | ||||||||||
Accruing loans past due 90 days or more (2) |
48,084 | 43,359 | 35,177 | 29,782 | 20,632 | |||||||||||||||
Total non-performing loans |
328,772 | 281,719 | 197,139 | 105,932 | 53,745 | |||||||||||||||
OREO |
32,959 | 23,309 | 21,855 | 14,934 | 4,103 | |||||||||||||||
Total non-performing assets |
$ | 361,731 | $ | 305,028 | $ | 218,994 | $ | 120,866 | $ | 57,848 | ||||||||||
(1) | In 2010, the total interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms was approximately $20.3 million. The amount of interest income on non-accrual loans that was included in 2010 income was approximately $2.2 million. |
(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. Non-accrual loans may be restored to accrual status when all delinquent principal and interest has been paid currently for six consecutive months or the loan is considered secured and in the process of collection. Certain loans, primarily adequately collateralized mortgage loans, may continue to accrue interest after reaching 90 days past due. |
(3) | Excluded from the amounts presented as of December 31, 2010 were $327.5 million in loans where possible credit problems of borrowers have caused management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms. These loans were reviewed individually for impairment under the Financial Accounting Standards Boards Accounting Standards Codification Section 310-10-35, but continue to accrue interest and are, therefore, not included in non-accrual loans. Non-accrual loans include $246.1 million of impaired loans. |
The following table presents loans whose terms were modified under troubled debt restructurings as of December 31:
2010 | 2009 | |||||||
(in thousands) | ||||||||
Real estate residential mortgage |
$ | 37,826 | $ | 24,639 | ||||
Real estate commercial mortgage |
18,778 | 15,997 | ||||||
Commercial industrial, financial and agricultural |
5,502 | 1,459 | ||||||
Real estate construction |
5,440 | 0 | ||||||
Consumer |
263 | 0 | ||||||
Total accruing troubled debt restructurings |
67,809 | 42,095 | ||||||
Non-accrual troubled debt restructurings (1) |
51,175 | 15,875 | ||||||
Total troubled debt restructurings |
$ | 118,984 | $ | 57,970 | ||||
(1) | Included within non-accrual loans in the preceding table. Non-accrual troubled debt restructurings include $22.4 million and $2.9 million of loans that were modified after being placed on non-accrual status as of December 31, 2010 and 2009. |
30
The following table summarizes the Corporations non-performing loans, by type, as of the indicated dates:
December 31 | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Real estate commercial mortgage |
$ | 93,720 | $ | 61,052 | $ | 41,745 | $ | 14,515 | $ | 8,776 | ||||||||||
Commercial industrial, financial and agricultural |
87,455 | 69,604 | 40,294 | 27,715 | 21,706 | |||||||||||||||
Real estate construction |
84,616 | 92,841 | 80,083 | 30,927 | 13,385 | |||||||||||||||
Real estate residential mortgage |
50,412 | 45,748 | 26,304 | 25,774 | 7,085 | |||||||||||||||
Real estate home equity |
10,188 | 10,790 | 6,766 | 1,991 | 976 | |||||||||||||||
Consumer |
2,154 | 1,529 | 1,608 | 2,750 | 1,817 | |||||||||||||||
Leasing |
227 | 155 | 339 | 2,260 | 0 | |||||||||||||||
Total non-performing loans |
$ | 328,772 | $ | 281,719 | $ | 197,139 | $ | 105,932 | $ | 53,745 | ||||||||||
Non-performing loans increased $47.1 million, or 16.7%, to $328.8 million as of December 31, 2010. The increase was primarily due to a $32.7 million, or 53.5%, increase in non-performing commercial mortgages, a $17.9 million, or 25.6%, increase in non-performing commercial loans and a $4.7 million, or 10.2%, increase in non-performing residential mortgages, offset by an $8.2 million, or 8.9%, decrease in non-performing construction loans.
The increase in non-performing commercial mortgages and commercial loans was a result of the prolonged weak economic conditions continuing to put stress on business customers. Geographically, the $32.7 million increase in non-performing commercial mortgages was due to increases in the New Jersey ($11.8 million, or 36.5%), Pennsylvania ($10.9 million, or 50.7%) and Delaware ($6.0 million, or 254.5%) markets. The $17.9 million increase in non-performing commercial loans was primarily in the Pennsylvania market. The $4.7 million increase in non-performing residential mortgages was primarily in the New Jersey market.
The $8.2 million decrease in non-performing construction loans was due to the $66.4 million of charge-offs recorded in 2010, partially offset by additions to non-accrual construction loans. Geographically, the decrease in non-performing construction loans was in the Maryland ($8.9 million, or 22.4%), Pennsylvania ($7.5 million, or 52.9%) and New Jersey ($4.5 million, or 22.3%) markets, partially offset by an increase in the Virginia ($12.1 million, or 64.8%) market.
The following table summarizes the Corporations OREO, by property type, as of December 31:
2010 | 2009 | |||||||
(in thousands) | ||||||||
Commercial properties |
$ | 15,916 | $ | 5,525 | ||||
Residential properties |
12,635 | 15,250 | ||||||
Undeveloped land |
4,408 | 2,534 | ||||||
Total OREO |
$ | 32,959 | $ | 23,309 | ||||
The following table summarizes loan delinquency rates, by type, as of December 31:
2010 | 2009 | |||||||||||||||||||||||
31-89 Days |
³ 90 Days |
Total | 31-89 Days |
³ 90 Days |
Total | |||||||||||||||||||
Real estate construction |
0.91 | % | 10.56 | % | 11.47 | % | 0.70 | % | 9.43 | % | 10.13 | % | ||||||||||||
Commercial industrial, financial and agricultural |
0.36 | 2.36 | 2.72 | 0.63 | 1.88 | 2.51 | ||||||||||||||||||
Real estate commercial mortgage |
0.56 | 2.14 | 2.70 | 0.91 | 1.42 | 2.33 | ||||||||||||||||||
Real estate residential mortgage |
3.65 | 5.06 | 8.71 | 4.12 | 5.00 | 9.12 | ||||||||||||||||||
Consumer, home equity, leasing and other |
0.88 | 0.61 | 1.49 | 1.12 | 0.60 | 1.72 | ||||||||||||||||||
Total |
0.83 | % | 2.76 | % | 3.59 | % | 1.09 | % | 2.35 | % | 3.44 | % | ||||||||||||
31
The following table summarizes the allocation of the allowance for loan losses by loan type:
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
(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 |
|||||||||||||||||||||||||||||||
Commercial - industrial, financial and agricultural |
$ | 101,436 | 31.0 | % | $ | 96,901 | 30.9 | % | $ | 66,147 | 30.2 | % | $ | 53,194 | 30.6 | % | $ | 52,942 | 28.6 | % | ||||||||||||||||||||
Real estate - construction |
58,117 | 6.7 | 67,388 | 8.2 | 32,917 | 10.5 | 1,174 | 12.2 | 1,383 | 13.9 | ||||||||||||||||||||||||||||||
Real estate - commercial mortgage |
40,831 | 36.8 | 32,257 | 35.9 | 42,402 | 33.4 | 31,542 | 31.0 | 34,606 | 30.9 | ||||||||||||||||||||||||||||||
Real estate - residential mortgage |
17,425 | 8.3 | 13,704 | 7.7 | 7,158 | 8.1 | 2,868 | 7.6 | 1,208 | 6.7 | ||||||||||||||||||||||||||||||
Consumer, Home Equity, Leasing & other |
14,963 | 17.2 | 13,620 | 17.3 | 8,167 | 17.8 | 8,142 | 18.6 | 6,475 | 19.9 | ||||||||||||||||||||||||||||||
Unallocated |
41,499 | N/A | 32,828 | N/A | 17,155 | N/A | 10,627 | N/A | 10,270 | N/A | ||||||||||||||||||||||||||||||
$ | 274,271 | 100.0 | % | $ | 256,698 | 100.0 | % | $ | 173,946 | 100.0 | % | $ | 107,547 | 100.0 | % | $ | 106,884 | 100.0 | % | |||||||||||||||||||||
N/A Not applicable.
The provision for credit losses is determined by the allowance allocation process, whereby an estimated need is allocated to impaired loans, as defined by the Financial Accounting Standards Boards Accounting Standards Codification (FASB ASC) Section 310-10-35, or to pools of loans under FASB ASC Subtopic 450-20. The allocation is based on risk factors, collateral levels, economic conditions and other relevant factors, as appropriate. The Corporation also maintains an unallocated allowance for factors or conditions that exist at the balance sheet date, but are not specifically identifiable. Management believes such an unallocated allowance, which was approximately 15% as of December 31, 2010, is reasonable and appropriate as the estimates used in the allocation process are inherently imprecise. See additional disclosures in Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements and Critical Accounting Policies, in Managements Discussion. Management believes that the allowance for loan losses balance of $274.3 million as of December 31, 2010 is sufficient to cover losses inherent in the loan portfolio.
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Other Income and Expenses
2010 vs. 2009
Other Income
The following table presents the components of other income for the past two years:
Increase (decrease) | ||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Overdraft fees |
$ | 35,612 | $ | 35,964 | $ | (352 | ) | (1.0 | %) | |||||||
Cash management fees |
9,775 | 11,399 | (1,624 | ) | (14.2 | ) | ||||||||||
Other |
13,205 | 13,087 | 118 | 0.9 | ||||||||||||
Service charges on deposit accounts |
58,592 | 60,450 | (1,858 | ) | (3.1 | ) | ||||||||||
Debit card income |
15,870 | 13,148 | 2,722 | 20.7 | ||||||||||||
Merchant fees |
8,509 | 7,476 | 1,033 | 13.8 | ||||||||||||
Foreign currency processing income |
8,193 | 6,573 | 1,620 | 24.6 | ||||||||||||
Letter of credit fees |
5,364 | 6,387 | (1,023 | ) | (16.0 | ) | ||||||||||
Other |
7,087 | 6,841 | 246 | 3.6 | ||||||||||||
Other service charges and fees |
45,023 | 40,425 | 4,598 | 11.4 | ||||||||||||
Investment management and trust services |
34,173 | 32,076 | 2,097 | 6.5 | ||||||||||||
Mortgage banking income |
29,304 | 25,061 | 4,243 | 16.9 | ||||||||||||
Credit card income |
6,115 | 5,472 | 643 | 11.8 | ||||||||||||
Gains on sales of OREO |
2,582 | 1,925 | 657 | 34.1 | ||||||||||||
Other income |
8,412 | 9,372 | (960 | ) | (10.2 | ) | ||||||||||
Total, excluding investment securities gains |
184,201 | 174,781 | 9,420 | 5.4 | ||||||||||||
Investment securities gains |
701 | 1,079 | (378 | ) | (35.0 | ) | ||||||||||
Total |
$ | 184,902 | $ | 175,860 | $ | 9,042 | 5.1 | % | ||||||||
The $352,000, or 1.0%, decrease in overdraft fees was a result of newly enacted regulations which took effect in August of 2010, which require customers to affirmatively consent to the payment of certain types of overdrafts. Partially offsetting the effect of these regulations was growth in fees largely due to an increase in transaction volumes. The $1.6 million, or 14.2%, decrease in cash management fees was due to customers transferring funds from the cash management program to deposits due to the low interest rate environment. Average cash management balances decreased 14.7% in 2010 in comparison to 2009.
The $2.7 million, or 20.7%, increase in debit card income reflected an increase in transaction volumes due partially to the introduction of a new rewards points program in 2010. The Federal Reserve recently issued proposed pricing guidelines regarding interchange income on certain debit card transactions. In 2010, the Corporations debit card interchange income that would be subject to these regulations totaled $15.9 million. If the regulations are enacted as proposed, this interchange income would decline by approximately $9.7 million in 2011.
The $1.0 million, or 13.8%, increase in merchant fees and the $1.6 million, or 24.6%, increase in foreign currency processing income were both due to increases in transaction volumes. The Corporations Fulton Bank, N.A. subsidiary has a foreign currency payment processing division that has achieved significant growth over the past two years, contributing to the increase in foreign currency processing income. The $1.0 million, or 16.0%, decrease in letter of credit fees was due to a decrease in the balance of letters of credit outstanding from $588.7 million at December 31, 2009 to $520.5 million at December 31, 2010.
The $2.1 million, or 6.5%, increase in investment management and trust services was due primarily to a $2.8 million, or 28.2%, increase in brokerage revenue, partially offset by a $716,000, or 3.2%, decrease in trust commissions. Throughout 2009, the Corporation expanded its brokerage operations by adding to its sales staff and transitioning from a transaction-based revenue model to a relationship-based model, which generates fees based on the values of assets under management rather than transaction volume. In 2010, the effect of these fully-implemented changes resulted in a positive impact to brokerage revenue.
33
The $4.2 million increase in mortgage banking income included a $4.9 million increase in gains on sales of mortgage loans, offset by a $631,000 decrease in mortgage servicing income. During 2010, the Corporation recorded a $3.3 million increase to mortgage banking income resulting from a correction of its methodology for determining the fair value of its commitments to originate fixed-rate residential mortgage loans for sale, also referred to as interest rate locks. See Note A, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for additional details. Adjusting for the impact of this change, mortgage banking income increased $2.3 million, or 9.1%, due to an increase in the margins on loans sold in 2010, partially offset by lower sales volumes. Total loans sold in 2010 were $1.6 billion, compared to $2.1 billion of loans sold in 2009. The $571.2 million, or 26.8%, decrease in loans sold was due to a decrease in refinance volumes. Refinances accounted for 60% of sale volumes in 2010, compared to 70% in 2009. The decrease in mortgage servicing income was due to a $550,000 increase to the mortgage servicing rights valuation allowance as expected prepayment speeds increased during the year.
The $643,000, or 11.8%, increase in credit card income was primarily due to an increase of transactions on credit cards previously originated, which generate fees under a joint marketing agreement with an independent third party. Total gains on sales of OREO were approximately $2.6 million in 2010, a $657,000, or 34.1%, increase from 2009. This increase was due to an increase in gains on properties sold, despite a decrease in the number of properties sold. The $960,000, or 10.2%, decrease in other income was primarily due to a decrease in title search fee income, as a result of lower volumes of residential mortgage loans originated.
Investment securities gains of $701,000 for 2010 included $14.7 million of net gains on the sales of securities, partially offset by other-than-temporary impairment charges of $14.0 million. During 2010, the Corporation recorded $12.0 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions and $2.0 million of other-than-temporary impairment charges for financial institutions stocks. The $1.1 million of investment securities gains for 2009 resulted from $14.5 million of net gains on sales of debt securities, partially offset by $9.5 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions and $3.8 million of other-than-temporary impairment charges for financial institutions stocks. See Note C, Investment Securities in the Notes to Consolidated Financial Statements for additional details.
Other Expenses
The following table presents the components of other expenses for each of the past two years:
Increase (decrease) | ||||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Salaries and employee benefits |
$ | 216,487 | $ | 218,812 | $ | (2,325 | ) | (1.1 | %) | |||||||
Net occupancy expense |
43,533 | 42,040 | 1,493 | 3.6 | ||||||||||||
FDIC insurance premiums |
19,715 | 26,579 | (6,864 | ) | (25.8 | ) | ||||||||||
Data processing |
13,263 | 14,432 | (1,169 | ) | (8.1 | ) | ||||||||||
Equipment expense |
11,692 | 12,820 | (1,128 | ) | (8.8 | ) | ||||||||||
Professional fees |
11,523 | 9,099 | 2,424 | 26.6 | ||||||||||||
Marketing |
11,163 | 8,915 | 2,248 | 25.2 | ||||||||||||
OREO and repossession expenses |
10,023 | 8,866 | 1,157 | 13.0 | ||||||||||||
Telecommunications |
8,543 | 8,608 | (65 | ) | (0.8 | ) | ||||||||||
Supplies |
5,633 | 5,637 | (4 | ) | (0.1 | ) | ||||||||||
Postage |
5,306 | 5,292 | 14 | 0.3 | ||||||||||||
Intangible amortization |
5,240 | 5,747 | (507 | ) | (8.8 | ) | ||||||||||
Operating risk loss |
3,025 | 7,550 | (4,525 | ) | (59.9 | ) | ||||||||||
Other |
45,761 | 43,065 | 2,696 | 6.3 | ||||||||||||
Total |
$ | 410,907 | $ | 417,462 | $ | (6,555 | ) | (1.6 | %) | |||||||
Salaries and employee benefits decreased $2.3 million, or 1.1%, with salaries increasing $210,000, or 0.1%, and employee benefits decreasing $2.5 million, or 6.2%. The moderate increase in salaries expense was due to the ending of a 12-month freeze on merit increases in March 2010, which was largely offset by a 2.0% decrease in average full-time equivalent employees, from approximately 3,600 in 2009 to approximately 3,530 in 2010, and an $813,000 decrease in incentive compensation expenses.
The decrease in employee benefits was primarily due to a $2.2 million decrease in healthcare claims costs due in part to a change in employee deductibles, a $932,000 decrease in defined benefit pension plan expense due to a higher return on plan assets and a
34
decrease in severance expense, primarily due to $808,000 of severance expense recorded in 2009 related to the consolidation of the Corporations Columbia Bank subsidiarys back office functions. These decreases were partially offset by an increase in accruals for compensated absences.
The $1.5 million, or 3.6%, increase in net occupancy expense was due to higher maintenance expense, primarily snow removal and utilities costs. The $6.9 million, or 25.8%, decrease in FDIC insurance expense was due to the impact of the $7.7 million special assessment recorded in 2009 and the Corporation opting out of the Transaction Account Guarantee program in mid-year 2010. The impact of these decreases was partially offset by an increase in FDIC assessment rates.
The $1.2 million, or 8.1%, decrease in data processing expense was primarily due to savings realized from the consolidation of back office functions the Corporations Columbia Bank subsidiary during 2009. The $1.1 million, or 8.8%, decrease in equipment expense was largely due to a decrease in depreciation expense and an increase in certain vendor rebates in 2010. The $2.4 million, or 26.6%, increase in professional fees was due to increased legal costs associated with the collection and workout efforts for non-performing loans, in addition to an increase in regulatory fees. The $2.2 million, or 25.2%, increase in marketing expenses was due to new promotional campaigns initiated in 2010. The $1.2 million, or 13.0%, increase in OREO and repossession expense was due primarily to increased costs associated with the repossession of foreclosed assets and a net increase in provisions and losses on sales of OREO. Total losses on sales of OREO were approximately $3.0 million in 2010. Combined with net gains on sales of OREO of $2.6 million, realized in other income, net losses on sales were approximately $450,000.
The $4.5 million, or 59.9%, decrease in operating risk loss was due a $6.2 million charge recorded in 2009 related to the Corporations commitment to purchase illiquid ARCs from customer accounts. The Corporation did not record any charges related to this guarantee in 2010 as all remaining customer ARCs were purchased during 2009. Partially offsetting this increase was the effect of $600,000 of credits, recorded in 2009, related to a reduction in the Corporations accrual for potential repurchases of previously sold residential mortgage and home equity loans.
The $2.7 million, or 6.3%, increase in other expenses included a $1.1 million increase in software maintenance costs, mainly due to upgrades in desktop software for virtually all employees, an $809,000 increase in student loan lender expense as a result of the low interest rate environment and a $376,000 increase in provision for debit card rewards points earned.
2009 vs. 2008
Other Income
Other income for 2009 increased $61.9 million, or 54.4%, in comparison to 2008. Excluding investment security gains and losses and the $13.9 million gain on the sale of the Corporations credit card portfolio in 2008, other income increased $16.6 million, or 10.5%.
Service charges on deposit accounts decreased $1.2 million, or 1.9%, due to a $1.9 million, or 14.1%, decrease in cash management fees, as customers transferred funds from the cash management program to deposits due to the low interest rate environment, offset by a $640,000, or 1.8%, increase in overdraft fees. Other service charges and fees increased $1.3 million, or 3.4%, due to a $1.6 million, or 13.6%, increase in debit card fees as transaction volumes increased.
Mortgage banking income increased $14.4 million, or 135.8%, due to an increase in gains on sales of mortgage loans resulting from an increase in the volume of loans sold from $648.1 million in 2008 to $2.1 billion in 2009. The $1.5 billion, or 229.0%, increase in loans sold was mainly due to an increase in refinance activity, as mortgage rates dropped to historic lows. Refinances accounted for approximately 70% of sales volumes in 2009, compared to approximately 43% in 2008. Also contributing to the increase in mortgage banking income was a $1.0 million mortgage servicing rights impairment charge recorded in 2008.
Credit card income increased $1.9 million, or 52.6%, primarily due to twelve months of revenue being earned in 2009 compared to less than nine months earned during 2008, as the Corporations agreement with the purchaser of the credit card portfolio was executed during the second quarter of 2008. The $1.2 million, or 183.5%, increase in gains on sales of OREO was due to an increase in the number of properties sold in 2009.
Investment securities gains of $1.1 million for 2009 included $14.5 million of net gains on the sales of debt securities, partially offset by other-than-temporary impairment charges of $13.4 million. During 2009, the Corporation recorded $9.5 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions and $3.8 million of other-than-temporary impairment charges for financial institutions stocks. The $58.2 million of investment securities losses for 2008 were
35
primarily a result of $43.1 million of other-than-temporary impairment charges for financial institutions stocks and $15.8 million of other-than-temporary impairment charges for pooled trust preferred securities issued by financial institutions.
Other Expenses
Other expenses for 2009 decreased $82.0 million, or 16.4%, in comparison to 2008, due to a $90.0 million goodwill impairment charge recorded in 2008. Excluding the 2008 goodwill impairment charge, other expenses increased $8.0 million, or 2.0%.
Salaries and employee benefits increased $5.3 million, or 2.5%, with salaries increasing $2.4 million, or 1.4%, and benefits increasing $2.9 million, or 7.5%. The increase in salaries was due to a $2.2 million increase in incentive compensation expense for subsidiary bank management. Although merit increases were suspended as of March 2009, the remaining increase in salary expense reflects the 2009 impact of merit increases granted prior to the salary freeze. These increases were partially offset by a reduction in average full-time equivalent employees from 3,660 in 2008 to 3,600 in 2009.
The increase in employee benefits was primarily due to a $1.8 million, or 9.2%, increase in healthcare costs as claims increased, a $1.9 million increase in defined benefit pension plan expense due to a lower return on plan assets and $1.1 million in severance expense primarily related to the consolidation of back office functions at the Corporations Columbia Bank subsidiary. These increases were offset by a $962,000 decrease in accruals for compensated absences and a $602,000 decrease in postretirement plan expense due to a reduction in benefits covered.
FDIC insurance expense increased $22.0 million, or 482.6%, due to a $7.7 million special assessment in 2009, in addition to an increase in assessment rates, which were effective January 1, 2009. Gross FDIC insurance premiums for 2009, excluding the special assessment, were $18.8 million before applying $114,000 of one-time credits. For 2008, gross FDIC insurance premiums were $7.0 million, before applying $2.4 million of one-time credits.
In November 2009, the FDIC issued a ruling requiring financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As a result, the Corporation pre-paid $70.2 million of FDIC insurance assessments in the fourth quarter of 2009.
Data processing expense decreased $1.2 million, or 7.8%, due to savings realized from the consolidation of back office functions at the Corporations Columbia Bank subsidiary, as well as reductions in costs for certain renegotiated vendor contracts. Professional fees increased $1.5 million, or 19.4%, primarily due to increased legal costs associated with the collection and workout efforts for non-performing loans. Marketing expenses decreased $4.4 million, or 32.8%, due to an effort to reduce discretionary spending and the timing of promotional campaigns. OREO and repossession expenses increased $2.6 million, or 41.4%, due to an increase in foreclosures. Intangible amortization decreased $1.4 million, or 19.8%, realized mainly in core deposit intangible assets, which are amortized on an accelerated basis, with lower expense in later years.
Operating risk loss decreased $16.8 million, or 68.9%, due to a $13.6 million reduction in charges related to the Corporations commitment to purchase ARCs from customer accounts and a $2.9 million decrease in losses on the actual and potential repurchase of residential mortgage and home equity loans previously sold in the secondary market.
Other expenses increased $985,000, or 2.3%, including a $1.9 million increase in student loan lender expense and the impact of a $1.4 million reversal of litigation reserves in 2008 associated with the Corporations share of indemnification liabilities with Visa. Offsetting these increases was a $1.7 million decrease in consulting fees, due primarily to certain information technology initiatives in 2008 that did not recur in 2009, and a $1.1 million decrease in travel and entertainment expense, due to efforts to reduce discretionary spending.
Income Taxes
Income tax expense for 2010 was $44.4 million, an increase of $29.0 million, or 188.2%, from 2009. Income tax expense for 2009 decreased $9.2 million, or 37.3%, from 2008. The Corporations effective tax rate (income taxes divided by income before income taxes) was 25.7%, 17.2% and 129.6% in 2010, 2009 and 2008, respectively. The effective tax rate for 2008 was significantly impacted by a $90.0 million goodwill impairment charge recorded in 2008, which was not deductible for income tax purposes. Excluding the impact of the goodwill charge, the Corporations effective tax rate for 2008 was 22.6%.
36
The Corporations effective tax rates are generally lower than the 35% Federal statutory rate due to investments in tax-free municipal securities and Federal tax credits earned from investments in low and moderate-income housing partnerships (LIH Investments). Net credits associated with LIH investments were $5.7 million, $4.7 million and $3.9 million in 2010, 2009 and 2008, respectively.
The effective rate for 2010 is higher than 2009 due to non-taxable income and tax credits having a smaller impact on the effective tax rate due to the higher level of income before income taxes in 2010.
For additional information regarding income taxes, see Note K, Income Taxes, in the Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
The table below presents condensed consolidated ending balance sheets for the Corporation.
December 31 | Increase (decrease) | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash and due from banks |
$ | 198,954 | $ | 284,508 | $ | (85,554 | ) | (30.1 | %) | |||||||
Other earning assets |
117,237 | 101,975 | 15,262 | 15.0 | ||||||||||||
Investment securities |
2,861,484 | 3,267,086 | (405,602 | ) | (12.4 | ) | ||||||||||
Loans, net of allowance |
11,659,036 | 11,715,726 | (56,690 | ) | (0.5 | ) | ||||||||||
Premises and equipment |
208,016 | 204,203 | 3,813 | 1.9 | ||||||||||||
Goodwill and intangible assets |
547,979 | 552,563 | (4,584 | ) | (0.8 | ) | ||||||||||
Other assets |
682,548 | 509,574 | 172,974 | 33.9 | ||||||||||||
Total Assets |
$ | 16,275,254 | $ | 16,635,635 | $ | (360,381 | ) | (2.2 | %) | |||||||
Liabilities and Shareholders Equity: |
||||||||||||||||
Deposits |
$ | 12,388,581 | $ | 12,097,914 | $ | 290,667 | 2.4 | % | ||||||||
Short-term borrowings |
674,077 | 868,940 | (194,863 | ) | (22.4 | ) | ||||||||||
Long-term debt |
1,119,450 | 1,540,773 | (421,323 | ) | (27.3 | ) | ||||||||||
Other liabilities |
212,757 | 191,526 | 21,231 | 11.1 | ||||||||||||
Total Liabilities |
14,394,865 | 14,699,153 | (304,288 | ) | (2.1 | ) | ||||||||||
Preferred stock |
0 | 370,290 | (370,290 | ) | (100.0 | ) | ||||||||||
Common shareholders equity |
1,880,389 | 1,566,192 | 314,197 | 20.1 | ||||||||||||
Total Shareholders Equity |
1,880,389 | 1,936,482 | (56,093 | ) | (2.9 | ) | ||||||||||
Total Liabilities and Shareholders Equity |
$ | 16,275,254 | $ | 16,635,635 | $ | (360,381 | ) | (2.2 | %) | |||||||
Total assets decreased $360.4 million, or 2.2%, to $16.3 billion as of December 31, 2010, from $16.6 billion as of December 31, 2009. Decreases in investment securities and loans, net of the allowance for loan losses, were partially offset by an increase in other assets. Total liabilities decreased $304.3 million, or 2.1%, due to a decrease in borrowings, partially offset by an increase in deposits.
During 2010, soft loan demand and a lack of attractive investment alternatives resulting from the low interest rate environment prevented the Corporation from effectively utilizing funds generated by the maturities of investment securities and deposit growth. As a result, excess funds were used to reduce wholesale funding in the form of short and long-term borrowings. The discussion that follows provides more details on the changes in specific balance sheet line items.
37
Investment Securities
The following table presents the carrying amount of investment securities held to maturity (HTM) and available for sale (AFS) as of the dates shown:
December 31 | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
HTM | AFS | Total | HTM | AFS | Total | HTM | AFS | Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
U.S. Government securities |
$ | 0 | $ | 1,649 | $ | 1,649 | $ | 0 | $ | 1,325 | $ | 1,325 | $ | 0 | $ | 14,628 | $ | 14,628 | ||||||||||||||||||
U.S. Government sponsored agency securities |
6,339 | 5,058 | 11,397 | 6,713 | 91,956 | 98,669 | 6,782 | 77,002 | 83,784 | |||||||||||||||||||||||||||
State and municipal |
346 | 349,563 | 349,909 | 503 | 415,773 | 416,276 | 825 | 523,536 | 524,361 | |||||||||||||||||||||||||||
Corporate debt securities |
0 | 124,786 | 124,786 | 0 | 116,739 | 116,739 | 25 | 119,894 | 119,919 | |||||||||||||||||||||||||||
Collateralized mortgage obligations |
0 | 1,104,058 | 1,104,058 | 0 | 1,122,996 | 1,122,996 | 0 | 504,193 | 504,193 | |||||||||||||||||||||||||||
Mortgage-backed securities |
1,066 | 871,472 | 872,538 | 1,484 | 1,080,024 | 1,081,508 | 2,004 | 1,141,351 | 1,143,355 | |||||||||||||||||||||||||||
Auction rate securities |
0 | 260,679 | 260,679 | 0 | 289,203 | 289,203 | 0 | 195,900 | 195,900 | |||||||||||||||||||||||||||
Total debt securities |
7,751 | 2,717,265 | 2,725,016 | 8,700 | 3,118,016 | 3,126,716 | 9,636 | 2,576,504 | 2,586,140 | |||||||||||||||||||||||||||
Equity securities |
0 |