e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006, or
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o |
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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)
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PENNSYLVANIA
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23-2195389 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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One Penn Square, P. O. Box 4887, Lancaster, Pennsylvania
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17604 |
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(Address of principal executive offices)
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(Zip Code) |
(717) 291-2411
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of exchange on which registered |
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Common Stock, $2.50 par value
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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 þ No o
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 o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filed þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
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, 2006, the last business day of the
registrants most recently completed second fiscal quarter, was approximately $2.6 billion. The
number of shares of the registrants Common Stock outstanding on February 28, 2007 was 172,991,000.
Portions of the Definitive Proxy Statement of the Registrant for the Annual Meeting of Shareholders
to be held on May 7, 2007 are incorporated by reference in Part III.
PART I
Item 1. Business
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 Regulation and Supervision). The Corporation directly owns 100% of the common stock of
fourteen community banks, two financial services companies and fifteen non-bank entities. As of
December 31, 2006, the Corporation had approximately 4,400 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 2006 Annual Report on Form 10-K are available
free of charge by visiting the Investor Information
section of 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 14 subsidiary banks are located primarily in suburban or semi-rural geographical
markets throughout a five state region (Pennsylvania, Maryland, New Jersey, Delaware and Virginia).
Pursuant to its super-community banking strategy, the Corporation operates the banks autonomously
to maximize the advantage of community banking and service to its customers. Where appropriate,
operations are centralized through common platforms and back-office functions; however,
decision-making generally remains with the local bank management. The Corporation is committed to a
decentralized operating philosophy; however in some markets, merging one bank into another creates
operating and marketing efficiencies by leveraging existing brand awareness over a larger
geographic area. During 2006, the Corporation merged its Premier Bank subsidiary into its Fulton
Bank subsidiary. Additionally, in February 2007 the Corporation merged its First Washington State
Bank subsidiary into The Bank. The Corporation has announced plans for two additional affiliate
mergers that will take place during 2007.
The 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 services in its
local market area. Personal banking services include various checking and savings products,
certificates of deposit and individual retirement accounts. The subsidiary banks offer a variety of
consumer lending products to creditworthy customers in their 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 (except for Resource
Bank and The Columbia Bank, which maintain their own mortgage lending operations). Residential
mortgages are generally underwritten based on secondary market standards. Consumer loan products
also include automobile loans, automobile and equipment leases, credit cards, personal lines of
credit and checking account overdraft protection.
Commercial banking services are provided to small and medium sized businesses (generally with sales
of less than $100 million) in the subsidiary banks market areas. Loans to one borrower are
generally limited to $33 million in total commitments, which is below the Corporations regulatory
lending limit. Commercial lending options include commercial, financial, and agricultural and real
estate loans. Both floating and fixed rate loans are provided, with floating rate loans generally
tied to an index such as the Prime Rate or LIBOR (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,
construction lending, equipment leasing, credit cards, letters of credit, cash management services
and traditional deposit products are offered to commercial customers.
3
Through its financial services subsidiaries, the Corporation offers investment management, trust,
brokerage, insurance and investment advisory services in the market areas serviced by the
subsidiary banks.
The 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 through the internet.
The variety of available delivery channels allows customers to access their account information and
perform certain transactions such as transferring funds and paying bills at virtually any hour of
the day.
The following table provides certain information for the Corporations banking and financial
services subsidiaries as of December 31, 2006.
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Main Office |
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Total |
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Total |
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Subsidiary |
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Location |
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Assets |
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Deposits |
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Branches (1) |
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(in millions) |
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Fulton Bank |
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Lancaster, PA |
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$ |
5,003 |
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$ |
3,341 |
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83 |
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Lebanon Valley Farmers Bank |
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Lebanon, PA |
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786 |
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602 |
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12 |
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Swineford National Bank |
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Hummels Wharf, PA |
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266 |
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202 |
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7 |
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Lafayette Ambassador Bank |
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Easton, PA |
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1,328 |
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990 |
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24 |
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FNB Bank, N.A |
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Danville, PA |
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304 |
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219 |
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8 |
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Hagerstown Trust |
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Hagerstown, MD |
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518 |
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407 |
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12 |
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Delaware National Bank |
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Georgetown, DE |
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411 |
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271 |
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12 |
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The Bank |
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Woodbury, NJ |
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1,318 |
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1,058 |
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31 |
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The Peoples Bank of Elkton |
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Elkton, MD |
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111 |
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96 |
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2 |
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Skylands Community Bank |
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Hackettstown, NJ |
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609 |
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467 |
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12 |
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Resource Bank |
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Virginia Beach, VA |
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1,448 |
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832 |
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7 |
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First Washington State Bank |
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Windsor, NJ |
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589 |
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428 |
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16 |
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Somerset Valley Bank |
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Somerville, NJ |
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575 |
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403 |
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13 |
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The Columbia Bank |
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Columbia, MD |
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1,678 |
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1,035 |
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25 |
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Fulton Financial Advisors, N.A. and
Fulton Insurance Services Group,
Inc (2) |
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Lancaster, PA |
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264 |
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(1) |
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See additional information in Item 2. Properties. |
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(2) |
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Dearden, Maguire, Weaver and Barrett LLC, an investment management
and advisory company, is a wholly owned subsidiary of Fulton Financial
Advisors, N.A. |
Non-Bank Subsidiaries
The Corporation owns 100% of the common stock of six non-bank subsidiaries which are consolidated
for financial reporting purposes: (i) Fulton Reinsurance Company, which engages in the business of
reinsuring credit life and accident and health insurance directly related to extensions of credit
by the banking subsidiaries of the Corporation; (ii) Fulton Financial Realty Company, which holds
title to or leases certain properties upon which Corporation branch offices and other facilities
are located; (iii) Central Pennsylvania Financial Corp., which owns certain limited partnership
interests in partnerships invested in low and moderate income housing projects; (iv) FFC
Management, Inc., which owns certain investment securities and other passive investments; (v)
Virginia Financial Services, which engages in business consulting activities; (iv) FFC Penn Square,
Inc. which owns $44.0 million of trust preferred securities issued by a subsidiary of the
Corporations largest bank subsidiary.
The Corporation owns 100% of the common stock of nine non-bank subsidiaries which are not
consolidated for financial reporting purposes: (i) Premier Capital Trust, a Delaware business trust
whose sole asset is $10.3 million of junior subordinated deferrable interest debentures from the
Corporation; (ii) PBI Capital Trust II, a Delaware business trust whose sole asset is $15.5 million
of junior subordinated deferrable interest debentures from the Corporation; (iii) Resource Capital
Trust III, a Delaware business trust
4
whose sole asset is $3.1 million of junior subordinated
deferrable interest debentures from the Corporation; (iv) Bald Eagle Statutory Trust I, a
Connecticut business trust whose sole asset is $4.1 million of junior subordinated deferrable
interest debentures from the Corporation; (v) Bald Eagle Statutory Trust II, a Connecticut business
trust whose sole asset is $2.6 million of junior subordinated deferrable interest debentures from
the Corporation; (vi) Columbia Capital Trust I, a Delaware business trust whose sole asset is $6.2
million of junior subordinated deferrable interest debentures from the Corporation; (vii) Columbia
Capital Trust II, a Delaware business trust whose sole asset is $4.1 million of junior subordinated
deferrable interest debentures from the Corporation; (viii) Columbia Capital Trust III, a Delaware
business trust whose sole asset is $6.2 million of junior subordinated deferrable interest
debentures from the Corporation; and (ix) Fulton Capital Trust I, a Pennsylvania business trust
whose sole asset is $154.6 million of junior subordinated deferrable interest debentures from the
Corporation.
Competition
The banking and financial services industries are highly competitive. Within its geographical
region, the Corporations subsidiaries face direct competition from other commercial banks, varying
in size from local community banks to larger regional and national
banks, credit unions and non-bank entities. With the growth in electronic commerce and distribution
channels, the banks also face competition from banks not physically located in the Corporations
geographical markets.
The competition in 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, such as
insurance products through Fulton Insurance Services Group, Inc. The Corporation also competes
through the variety of products that it offers and the quality of service that it provides to its
customers. However, there is no guarantee that these efforts will insulate the Corporation from
competitive pressure, which could impact its pricing decisions for loans, deposits and other
services and could ultimately impact financial results.
Market Share
Although there are many ways to assess the size and strength of banks, deposit market share
continues to be an important industry statistic. This publicly available information is compiled,
as of June 30th of each year, by the Federal Deposit Insurance Corporation (FDIC). The
Corporations banks maintain branch offices in 48 counties across five states. In ten of these
counties, the Corporation ranks in the top three in deposit market share (based on deposits as of
June 30, 2006). The following table summarizes information about the counties in which the
Corporation has branch offices and its market position in each county.
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No. of Financial |
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Deposit Market |
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Institutions |
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Share (6/30/06) |
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Population |
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Banking |
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Banks/ |
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Credit |
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County |
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State |
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(2006 Est.) |
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Subsidiary |
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Thrifts |
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Unions |
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Rank |
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% |
Lancaster |
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PA |
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493,000 |
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Fulton Bank |
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21 |
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12 |
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1 |
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19.2 |
% |
Centre |
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PA |
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142,000 |
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Fulton Bank |
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15 |
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4 |
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19 |
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0.06 |
% |
Dauphin |
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PA |
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254,000 |
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Fulton Bank |
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17 |
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10 |
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7 |
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4.6 |
% |
Cumberland |
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PA |
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224,000 |
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Fulton Bank |
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19 |
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6 |
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14 |
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0.7 |
% |
York |
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PA |
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410,000 |
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Fulton Bank |
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17 |
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23 |
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4 |
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9.8 |
% |
Chester |
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PA |
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477,000 |
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Fulton Bank |
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41 |
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5 |
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16 |
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1.2 |
% |
Delaware |
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PA |
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556,000 |
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Fulton Bank |
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39 |
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15 |
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41 |
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0.1 |
% |
5
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No. of Financial |
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Deposit Market |
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Institutions |
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Share (6/30/06) |
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Population |
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Banking |
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Banks/ |
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Credit |
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County |
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State |
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(2006 Est.) |
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Subsidiary |
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Thrifts |
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Unions |
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Rank |
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% |
Montgomery |
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PA |
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781,000 |
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Fulton Bank |
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44 |
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28 |
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37 |
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0.2 |
% |
Berks |
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PA |
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398,000 |
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Fulton Bank |
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21 |
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13 |
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9 |
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3.1 |
% |
Bucks |
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PA |
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624,000 |
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Fulton Bank |
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33 |
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11 |
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14 |
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2.3 |
% |
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Lebanon Valley Farmers Bank |
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22 |
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0.4 |
% |
Lebanon |
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PA |
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126,000 |
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Lebanon Valley Farmers Bank |
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9 |
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2 |
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1 |
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29.0 |
% |
Schuylkill |
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PA |
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147,000 |
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Lebanon Valley Farmers Bank |
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18 |
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6 |
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9 |
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3.5 |
% |
Snyder |
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PA |
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38,000 |
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Swineford National Bank |
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8 |
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1 |
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30.0 |
% |
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Union |
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PA |
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43,000 |
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Swineford National Bank |
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7 |
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1 |
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5 |
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5.0 |
% |
Northumberland |
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PA |
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92,000 |
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Swineford National Bank |
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17 |
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3 |
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14 |
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1.8 |
% |
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FNB Bank, N.A. |
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9 |
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4.7 |
% |
Montour |
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PA |
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18,000 |
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FNB Bank, N.A. |
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5 |
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3 |
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1 |
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27.8 |
% |
Columbia |
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PA |
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65,000 |
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FNB Bank, N.A. |
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7 |
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6 |
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4.6 |
% |
Lycoming |
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PA |
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118,000 |
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FNB Bank, N.A. |
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11 |
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10 |
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16 |
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0.6 |
% |
Northampton |
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PA |
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289,000 |
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Lafayette Ambassador Bank |
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18 |
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12 |
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2 |
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16.6 |
% |
Lehigh |
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PA |
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332,000 |
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Lafayette Ambassador Bank |
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20 |
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14 |
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8 |
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0.6 |
% |
Washington |
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MD |
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143,000 |
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Hagerstown Trust |
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10 |
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3 |
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2 |
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20.4 |
% |
Frederick |
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MD |
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225,000 |
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The Columbia Bank |
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15 |
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3 |
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17 |
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0.1 |
% |
Montgomery |
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MD |
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935,000 |
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The Columbia Bank |
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34 |
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20 |
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30 |
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0.3 |
% |
Howard |
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MD |
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272,000 |
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The Columbia Bank |
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21 |
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23 |
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2 |
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13.9 |
% |
Prince Georges |
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MD |
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855,000 |
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The Columbia Bank |
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21 |
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22 |
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13 |
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1.6 |
% |
Baltimore |
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MD |
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790,000 |
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The Columbia Bank |
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44 |
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16 |
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25 |
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0.9 |
% |
Baltimore City |
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MD |
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632,000 |
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The Columbia Bank |
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39 |
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21 |
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24 |
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0.3 |
% |
Cecil |
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MD |
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99,000 |
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Peoples Bank of Elkton |
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7 |
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3 |
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5 |
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10.0 |
% |
Sussex |
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DE |
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178,000 |
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Delaware National Bank |
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|
17 |
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4 |
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7 |
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1.1 |
% |
New Castle |
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DE |
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526,000 |
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Delaware National Bank |
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|
30 |
|
|
|
24 |
|
|
|
29 |
|
|
|
0.1 |
% |
Camden |
|
NJ |
|
|
520,000 |
|
|
The Bank |
|
|
22 |
|
|
|
9 |
|
|
|
15 |
|
|
|
1.1 |
% |
Gloucester |
|
NJ |
|
|
278,000 |
|
|
The Bank |
|
|
22 |
|
|
|
4 |
|
|
|
2 |
|
|
|
13.1 |
% |
Salem |
|
NJ |
|
|
66,000 |
|
|
The Bank |
|
|
8 |
|
|
|
4 |
|
|
|
1 |
|
|
|
31.8 |
% |
Atlantic |
|
NJ |
|
|
275,000 |
|
|
The Bank |
|
|
17 |
|
|
|
6 |
|
|
|
17 |
|
|
|
0.7 |
% |
Warren |
|
NJ |
|
|
112,000 |
|
|
Skylands Community Bank |
|
|
12 |
|
|
|
3 |
|
|
|
3 |
|
|
|
10.1 |
% |
Sussex |
|
NJ |
|
|
155,000 |
|
|
Skylands Community Bank |
|
|
13 |
|
|
|
1 |
|
|
|
11 |
|
|
|
0.7 |
% |
Morris |
|
NJ |
|
|
495,000 |
|
|
Skylands Community Bank |
|
|
40 |
|
|
|
14 |
|
|
|
16 |
|
|
|
1.3 |
% |
Hunterdon |
|
NJ |
|
|
132,000 |
|
|
Skylands Community Bank |
|
|
17 |
|
|
|
3 |
|
|
|
15 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
Somerset Valley Bank |
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
0.4 |
% |
Middlesex |
|
NJ |
|
|
797,000 |
|
|
Somerset Valley Bank |
|
|
46 |
|
|
|
24 |
|
|
|
47 |
|
|
|
0.1 |
% |
Somerset |
|
NJ |
|
|
323,000 |
|
|
Somerset Valley Bank |
|
|
26 |
|
|
|
10 |
|
|
|
8 |
|
|
|
3.9 |
% |
Mercer |
|
NJ |
|
|
371,000 |
|
|
First Washington State Bank |
|
|
27 |
|
|
|
29 |
|
|
|
12 |
|
|
|
1.7 |
% |
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Financial |
|
Deposit Market |
|
|
|
|
|
|
|
|
|
|
|
|
Institutions |
|
Share (6/30/06) |
|
|
|
|
|
|
Population |
|
Banking |
|
Banks/ |
|
Credit |
|
|
|
|
County |
|
State |
|
(2006 Est.) |
|
Subsidiary |
|
Thrifts |
|
Unions |
|
Rank |
|
% |
Monmouth |
|
NJ |
|
|
643,000 |
|
|
First Washington State Bank |
|
|
28 |
|
|
|
9 |
|
|
|
23 |
|
|
|
0.9 |
% |
Ocean |
|
NJ |
|
|
566,000 |
|
|
First Washington State Bank |
|
|
23 |
|
|
|
5 |
|
|
|
16 |
|
|
|
1.0 |
% |
Chesapeake |
|
VA |
|
|
217,000 |
|
|
Resource Bank |
|
|
15 |
|
|
|
6 |
|
|
|
11 |
|
|
|
1.7 |
% |
Fairfax |
|
VA |
|
|
1,018,000 |
|
|
Resource Bank |
|
|
35 |
|
|
|
13 |
|
|
|
21 |
|
|
|
0.4 |
% |
Newport News |
|
VA |
|
|
183,000 |
|
|
Resource Bank |
|
|
12 |
|
|
|
7 |
|
|
|
14 |
|
|
|
0.8 |
% |
Richmond City |
|
VA |
|
|
191,000 |
|
|
Resource Bank |
|
|
15 |
|
|
|
18 |
|
|
|
15 |
|
|
|
0.2 |
% |
Virginia Beach |
|
VA |
|
|
441,000 |
|
|
Resource Bank |
|
|
17 |
|
|
|
8 |
|
|
|
4 |
|
|
|
8.8 |
% |
Supervision and Regulation
The Corporation operates in an industry that is subject to various laws and regulations that are
enforced by a number of Federal and state agencies. Changes in these laws and regulations,
including interpretation and enforcement activities, could impact the cost of operating in the
financial services industry, limit or expand permissible activities or affect competition among
banks and other financial institutions. The Corporation cannot predict the changes in laws and
regulations that might occur, however, it is likely that the current high level of enforcement and
compliance-related activities of Federal and state authorities will continue or potentially
increase.
The following discussion summarizes the current regulatory environment for financial holding
companies and banks, including a summary of the more significant laws and regulations.
Regulators The Corporation is a registered financial holding company and its subsidiary
banks are depository institutions whose deposits are insured by the FDIC. The Corporation and its
subsidiaries are subject to various regulations and examinations by regulatory authorities. The
following table summarizes the charter types and primary regulators for each of the Corporations
subsidiary banks.
|
|
|
|
|
|
|
|
|
Primary |
Entity |
|
Charter |
|
Regulator(s) |
Fulton Bank
|
|
PA
|
|
PA/FDIC |
Lebanon Valley Farmers Bank
|
|
PA
|
|
PA/FRB |
Swineford National Bank
|
|
National
|
|
OCC (1) |
Lafayette Ambassador Bank
|
|
PA
|
|
PA/FRB |
FNB Bank, N.A
|
|
National
|
|
OCC |
Hagerstown Trust
|
|
MD
|
|
MD/FDIC |
Delaware National Bank
|
|
National
|
|
OCC |
The Bank
|
|
NJ
|
|
NJ/FDIC |
Peoples Bank of Elkton
|
|
MD
|
|
MD/FDIC |
Skylands Community Bank
|
|
NJ
|
|
NJ/FDIC |
Resource Bank
|
|
VA
|
|
VA/FRB |
First Washington State Bank
|
|
NJ
|
|
NJ/FDIC |
Somerset Valley Bank
|
|
NJ
|
|
NJ/FDIC |
The Columbia Bank
|
|
MD
|
|
MD/FDIC |
Fulton Financial Advisors, N.A
|
|
National (2)
|
|
OCC |
Fulton Financial (Parent Company)
|
|
N/A
|
|
FRB |
|
|
|
(1) |
|
Office of the Comptroller of the Currency. |
|
(2) |
|
Fulton Financial Advisors, N.A. is chartered as an uninsured
national trust bank. |
7
Federal statutes that apply to the Corporation and its subsidiaries include the GLB Act, the
Bank Holding Company Act (BHCA), the Federal Reserve Act and the Federal Deposit Insurance Act. In
general, these statutes establish the eligible business activities of the Corporation, certain
acquisition and merger restrictions, limitations on inter-company transactions such as loans and
dividends, and capital adequacy requirements, among other regulations.
The Corporation is subject to regulation and examination by the 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 of 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. All other bank holding companies are expected to maintain a
leverage capital ratio of at least 1% to 2% above the stated minimum.
Dividends and Loans from Subsidiary Banks There are also various restrictions on the
extent to which the Corporation and its non-bank subsidiaries can receive loans from its banking
subsidiaries. In general, these restrictions require that such loans be secured by designated
amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank
subsidiaries, to 10% of the lending banks regulatory capital (20% in the aggregate to all such
entities).
The Corporation is also limited in the amount of dividends that it may receive from its subsidiary
banks. Dividend limitations vary, depending on the subsidiary 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 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 Bank Insurance Fund
of the FDIC, generally up to $100,000 per insured depositor and up to $250,000 for retirement
accounts. The subsidiary banks pay deposit insurance premiums to the FDIC based on an assessment
rate established by the FDIC for Bank Insurance Fund member institutions. 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. During the past several years, the ratio has been above the
minimum level and, accordingly, the Corporation has not been required to pay premiums. However, in
2006 legislation was passed reforming the bank deposit insurance system. The reform act allowed the
FDIC to raise the minimum reserve ratio and allowed eligible insured institutions an initial
one-time credit to be used against premiums due. As a result, beginning in 2007 the Corporation
will be assessed insurance premiums, which may be partly offset by the one-time credit.
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
8
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 for the institution. The Corporation has adopted appropriate policies,
procedures and controls to address compliance with the Patriot Act and will continue to revise and
update its policies, procedures and controls to reflect changes required, as necessary.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which was
signed into law in July 2002, impacts all companies with securities registered under the Securities
Exchange Act of 1934, including the Corporation. Sarbanes-Oxley created new requirements in the
areas of corporate governance and financial disclosure including, among other things, (i) increased
responsibility for Chief Executive Officers and Chief Financial Officers with respect to the
content of filings with the SEC; (ii) enhanced requirements for audit committees, including
independence and disclosure of expertise; (iii) enhanced requirements for auditor independence and
the types of non-audit services that auditors can provide; (iv) accelerated filing requirements for
SEC reports; (v) disclosure of a code of ethics (vi) increased disclosure and reporting obligations
for companies, their directors and their executive officers; and (vii) new and increased civil and
criminal penalties for violations of securities laws. Many of the provisions became effective
immediately, while others became effective as a result of rulemaking procedures delegated by
Sarbanes-Oxley to the SEC.
Section 404 of Sarbanes Oxley became effective for the year ended December 31, 2004. This section
required management to issue a report on the effectiveness of its internal controls over financial
reporting. In addition, the Corporations independent registered public accountants were required
to issue an opinion on managements assessment and an opinion on the effectiveness of the
Corporations internal control over financial reporting as of December 31, 2004. These reports can
be found in Item 8, Financial Statements and Supplementary Information. Certifications of the
Chief Executive Officer and the Chief Financial Officer as required by Sarbanes-Oxley and the
resulting SEC rules can be found in the Signatures and Exhibits sections.
Monetary and Fiscal Policy The Corporation and its subsidiary banks are 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.
These techniques are used in varying combinations to influence the overall growth of bank loans,
investments and deposits. Their use may also affect interest rates charged on loans and paid on
deposits. The effect of monetary policies on the earnings of the Corporation cannot be predicted.
Item 1A. Risk Factors
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.
Changes in interest rates may have an adverse effect on the Corporations profitability.
The Corporation is affected by fiscal and monetary policies of the federal government, including
those of the Federal Reserve Board (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 78% of total revenues in 2006. 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 income and financial
condition. Based on the current interest rate environment and the price sensitivity of customers,
loan demand could continue to outpace the growth of core demand and savings accounts, resulting in
compression of net interest margin. Furthermore, the U. S. Treasury yield curve, which is a plot of
the yields on treasury securities over various maturity terms was relatively flat, and at times,
downward sloping, with minimal differences between long and short-term rates during 2006, resulting
in a negative impact to the Corporations net interest income and net interest margin. Finally,
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.
9
Changes in economic conditions and the composition of the Corporations loan portfolio could lead
to higher loan charge-offs or an increase in the Corporations provision for loan losses and may
reduce the Corporations net income.
Changes in national and regional economic conditions could impact the loan portfolios of the
Corporations subsidiary banks. 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 Corporations
subsidiary banks could depress its earnings and consequently its financial condition because:
|
|
|
customers may not want or need the Corporations products or services; |
|
|
|
|
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 the latter three scenarios could require the Corporation to charge-off a higher percentage
of its loans and/or increase its provision for loan losses, which would reduce its net income.
In addition, the amount of the Corporations provision for loan 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 recent years, the amount of the Corporations commercial loans (including agricultural loans)
and commercial mortgages has increased, comprising a greater percentage of its overall loan
portfolio. These loans are inherently more risky than certain other types of loans, such as
residential mortgage loans. While the Corporation believes that its allowance for loan losses as of
December 31, 2006 is sufficient to cover losses inherent in the loan portfolio on that date, the
Corporation may be required to increase its loan loss provision or charge-off a higher percentage
of loans due to changes in the risk characteristics of the loan portfolio, thereby reducing its net
income. To the extent any of the Corporations subsidiary banks rely more heavily on loans secured
by real estate, a decrease in real estate values could cause higher loan losses and require higher
loan loss provisions.
Fluctuations in the value of the Corporations equity portfolio, or assets under management by the
Corporations investment management and trust services, could have an impact on the Corporations
results of operations.
At December 31, 2006, the Corporations investments consisted of $72.3 million of FHLB and other
government agency stock, $72.3 million of stocks of other financial institutions and $13.5 million
of mutual funds. The Corporations equity portfolio consists primarily of common stocks of publicly
traded financial institutions. The Corporation realized net gains on sales of financial
institutions stocks of $7.0 million in 2006, $5.8 million in 2005 and $14.8 million in 2004. 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, due to the concentration in stocks of financial institutions in the Corporations equity
portfolio, specific risks associated with that sector. If the value of one or more equity
securities in the portfolio were to decline significantly, the unrealized gains in the portfolio
could be reduced or lost in their entirety. In addition to the Corporations equity portfolio, the
Corporations investment management and trust services income could be impacted by fluctuations in
the securities market. A portion of the Corporations trust 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 the outlook for rising
securities prices.
If the Corporation is unable to acquire additional banks on favorable terms or if it fails to
successfully integrate or improve the operations of acquired banks, the Corporation may be unable
to execute its growth strategies.
The Corporation has historically supplemented its internal growth with strategic acquisitions of
banks, branches and other financial services companies. There can be no assurance that the
Corporation will be able to complete future acquisitions on favorable terms or that it will be able
to assimilate acquired institutions successfully. In addition, the Corporation may not be able to
achieve anticipated cost savings or operating results associated with acquisitions. Acquired
institutions also may have unknown or contingent liabilities or
deficiencies in internal controls that could result in material liabilities or negatively impact
the Corporations ability to complete the internal control procedures required under federal
securities laws, rules and regulations or by certain laws, rules and regulations applicable to the
banking industry.
10
If the goodwill that the Corporation has recorded in connection with its acquisitions becomes
impaired, it could have a negative impact on the Corporations profitability.
Applicable accounting standards require that the purchase method of accounting be used for all
business combinations. Under purchase accounting, 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. At December 31, 2006, the Corporation had approximately $626.0 million of
goodwill on its balance sheet. Companies must evaluate goodwill for impairment at least annually.
Write-downs of the amount of any impairment, if necessary, are to be charged to the results of
operations in the period in which the impairment occurs. Based on tests of goodwill impairment
conducted to date, the Corporation has concluded that there has been no impairment, and no
write-downs have been recorded. However, there can be no assurance that the future evaluations of
goodwill will not result in findings of impairment and write-downs.
The competition the Corporation faces is increasing 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
Corporations subsidiary banks. In addition, as a result of the deregulation of the financial
industry, the Corporations subsidiary banks also compete 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.
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 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). As a
result, the Corporation and its subsidiaries are subject to regulations and examinations by various
regulatory authorities. In general, statutes establish the eligible business activities for the
Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions
such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering
programs and other compliance matters, among other regulations. 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.
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. The Corporation
cannot predict whether any of these changes may adversely and materially affect it. 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. While these statutes are generally designed to minimize
potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and
compliance with such statutes increases the Corporations expense, requires managements attention
and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
Item 1B. Unresolved Staff Comments
None.
11
Item 2. Properties
The following table summarizes the Corporations branch properties, by subsidiary bank as of
December 31, 2006. Remote service facilities (mainly stand-alone automated teller machines) are
excluded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Bank |
|
Owned |
|
|
Leased |
|
|
Branches |
|
Fulton Bank |
|
|
56 |
|
|
|
27 |
|
|
|
83 |
|
Lebanon Valley Farmers Bank |
|
|
11 |
|
|
|
1 |
|
|
|
12 |
|
Swineford National Bank |
|
|
5 |
|
|
|
2 |
|
|
|
7 |
|
Lafayette Ambassador Bank |
|
|
14 |
|
|
|
10 |
|
|
|
24 |
|
FNB Bank, N.A |
|
|
6 |
|
|
|
2 |
|
|
|
8 |
|
Hagerstown Trust |
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
Delaware National Bank |
|
|
11 |
|
|
|
1 |
|
|
|
12 |
|
The Bank |
|
|
25 |
|
|
|
6 |
|
|
|
31 |
|
The Peoples Bank of Elkton |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Skylands Community Bank |
|
|
5 |
|
|
|
7 |
|
|
|
12 |
|
Resource Bank |
|
|
2 |
|
|
|
5 |
|
|
|
7 |
|
Somerset Valley Bank |
|
|
|
|
|
|
13 |
|
|
|
13 |
|
First Washington State Bank |
|
|
7 |
|
|
|
9 |
|
|
|
16 |
|
The Columbia Bank |
|
|
4 |
|
|
|
21 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
157 |
|
|
|
107 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
12
The following table summarizes the Corporations other significant properties (administrative
headquarters locations generally include a branch; these are also reflected in the preceding
table):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned/ |
Bank |
|
Property |
|
Location |
|
Leased |
Fulton Financial Corp. |
|
Operations Center |
|
East Petersburg, PA |
|
Owned |
Fulton Bank/Fulton Financial Corp. |
|
Admin. Headquarters |
|
Lancaster, PA |
|
|
(1 |
) |
Fulton Bank |
|
Operations Center |
|
Mantua, NJ |
|
Owned |
Fulton Bank, Drovers Division |
|
Admin. Headquarters |
|
York, PA |
|
Leased (2) |
Fulton Bank, Great Valley Division |
|
Admin. Headquarters |
|
Reading, PA |
|
Leased (5) |
Fulton Bank, Premier Division |
|
Admin. Headquarters |
|
Doylestown, PA |
|
Owned |
Lebanon Valley Farmers Bank |
|
Admin. Headquarters |
|
Lebanon, PA |
|
Owned |
Swineford National Bank |
|
Admin. Headquarters |
|
Hummels Wharf, PA |
|
Owned |
Lafayette Ambassador Bank |
|
Admin. Headquarters |
|
Easton, PA |
|
Owned |
Lafayette Ambassador Bank |
|
Operations Center |
|
Bethlehem, PA |
|
Owned |
Lafayette Ambassador Bank |
|
Corp Service Center |
|
Bethlehem, PA |
|
Leased (6) |
FNB Bank, N.A |
|
Admin. Headquarters |
|
Danville, PA |
|
Owned |
Hagerstown Trust |
|
Admin. Headquarters |
|
Hagerstown, MD |
|
Owned |
Delaware National Bank |
|
Admin. Headquarters |
|
Georgetown, DE |
|
Leased (3) |
The Bank |
|
Admin. Headquarters |
|
Woodbury, NJ |
|
Owned |
Peoples Bank of Elkton |
|
Admin. Headquarters |
|
Elkton, MD |
|
Owned |
Skylands Community Bank |
|
Admin. Headquarters |
|
Hackettstown, NJ |
|
Leased (4) |
Resource Bank |
|
Admin. Headquarters |
|
Herndon, VA |
|
Owned |
Somerset Valley Bank |
|
Admin. Headquarters |
|
Somerville, PA |
|
Owned |
First Washington State Bank |
|
Admin. Headquarters |
|
Windsor, NJ |
|
Owned |
The Columbia Bank |
|
Admin. Headquarters |
|
Columbia, MD |
|
Leased (7) |
|
|
|
(1) |
|
Includes approximately 100,000 square feet which is owned by an independent third
party who financed the construction through a loan from Fulton Bank. The Corporation
is leasing this space from the third party in an arrangement accounted for as a
capital lease. The lease term expires in 2027. The remainder of the Administrative
Headquarters location is owned by the Corporation. |
|
(2) |
|
Lease expires in 2013. |
|
(3) |
|
Lease expires in 2011. |
|
(4) |
|
Lease expires in 2009. |
|
(5) |
|
Lease expires in 2016. |
|
(6) |
|
Lease expires in 2017. |
|
(7) |
|
Lease expires in 2013. |
Item 3. Legal Proceedings
There are no legal proceedings pending against Fulton Financial Corporation or any of its
subsidiaries which are expected to have a material impact upon the financial position and/or the
operating results of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Fulton Financial Corporation during the
fourth quarter of 2006.
13
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock
As of December 31, 2006, the Corporation had 173.6 million shares of $2.50 par value common stock
outstanding held by 51,000 holders of record. The common stock of the Corporation is traded on 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-share cash dividends declared for each of the quarterly periods in 2006 and 2005. Per-share
amounts have been retroactively adjusted to reflect the effect of stock dividends and splits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
Per-Share |
|
|
High |
|
Low |
|
Dividend |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
17.35 |
|
|
$ |
16.07 |
|
|
$ |
0.138 |
|
Second Quarter |
|
|
16.47 |
|
|
|
15.36 |
|
|
|
0.1475 |
|
Third Quarter |
|
|
16.99 |
|
|
|
15.55 |
|
|
|
0.1475 |
|
Fourth Quarter |
|
|
16.88 |
|
|
|
15.65 |
|
|
|
0.1475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
17.92 |
|
|
$ |
16.00 |
|
|
$ |
0.126 |
|
Second Quarter |
|
|
17.14 |
|
|
|
15.68 |
|
|
|
0.138 |
|
Third Quarter |
|
|
18.00 |
|
|
|
15.43 |
|
|
|
0.138 |
|
Fourth Quarter |
|
|
16.90 |
|
|
|
14.87 |
|
|
|
0.138 |
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about options outstanding under the Corporations 1996 Incentive
Stock Option Plan and 2004 Stock Option and Compensation Plan as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
first column) |
|
Equity compensation
plans
approved by
security holders |
|
|
7,996,776 |
|
|
$ |
12.65 |
|
|
|
14,864,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not
approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,996,776 |
|
|
$ |
12.65 |
|
|
|
14,864,642 |
|
|
|
|
|
|
|
|
|
|
|
14
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, 2001, 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 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.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Ending December 31 |
Index |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
Fulton Financial Corporation |
|
$ |
100.00 |
|
|
$ |
104.42 |
|
|
$ |
140.24 |
|
|
$ |
161.58 |
|
|
$ |
157.56 |
|
|
$ |
162.67 |
|
NASDAQ Composite |
|
$ |
100.00 |
|
|
$ |
68.76 |
|
|
$ |
103.67 |
|
|
$ |
113.16 |
|
|
$ |
115.57 |
|
|
$ |
127.58 |
|
Fulton Financial Peer Group |
|
$ |
100.00 |
|
|
$ |
100.53 |
|
|
$ |
130.70 |
|
|
$ |
151.98 |
|
|
$ |
151.50 |
|
|
$ |
165.31 |
|
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
|
|
|
|
|
|
|
|
|
|
|
shares purchased |
|
Maximum number of |
|
|
Total |
|
|
|
|
|
as part of a |
|
shares that may yet |
|
|
number of |
|
Average price |
|
publicly |
|
be |
|
|
shares |
|
paid per |
|
announced plan |
|
purchased under the |
Period |
|
purchased |
|
share |
|
or program |
|
plan or program |
(10/01/06 - 10/31/06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043,490 |
|
(11/01/06 - 11/30/06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043,490 |
|
(12/01/06 - 12/31/06) |
|
|
5,000 |
|
|
$ |
15.99 |
|
|
|
5,000 |
|
|
|
1,038,490 |
|
On March 21, 2006 a stock repurchase plan was approved by the Board of Directors to repurchase up
to 2.1 million shares through December 31, 2006. On December 19, 2006 the Board of Directors
extended the stock repurchase plan through June 30, 2007. As of December 31, 2006, 1.1 million
shares were repurchased under this plan. No stock repurchases were made outside the plans and all
were made under the guidelines of Rule 10b-18 and in compliance with Regulation M.
16
Item 6. Selected Financial Data
5-YEAR CONSOLIDATED SUMMARY OF FINANCIAL RESULTS
(dollars in thousands, except per-share data and ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
SUMMARY OF INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
864,507 |
|
|
$ |
625,768 |
|
|
$ |
493,643 |
|
|
$ |
435,531 |
|
|
$ |
469,288 |
|
Interest expense |
|
|
378,944 |
|
|
|
213,220 |
|
|
|
135,994 |
|
|
|
131,094 |
|
|
|
158,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
485,563 |
|
|
|
412,548 |
|
|
|
357,649 |
|
|
|
301,437 |
|
|
|
311,069 |
|
Provision for loan losses |
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
|
|
9,705 |
|
|
|
11,900 |
|
Other income |
|
|
149,875 |
|
|
|
144,298 |
|
|
|
138,864 |
|
|
|
134,370 |
|
|
|
114,012 |
|
Other expenses |
|
|
365,991 |
|
|
|
316,291 |
|
|
|
277,515 |
|
|
|
233,651 |
|
|
|
226,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
265,949 |
|
|
|
237,435 |
|
|
|
214,281 |
|
|
|
195,451 |
|
|
|
187,135 |
|
Income taxes |
|
|
80,422 |
|
|
|
71,361 |
|
|
|
64,673 |
|
|
|
59,084 |
|
|
|
56,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
$ |
149,608 |
|
|
$ |
136,367 |
|
|
$ |
130,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER-SHARE DATA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (basic) |
|
$ |
1.07 |
|
|
$ |
1.01 |
|
|
$ |
0.95 |
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
Net income (diluted) |
|
|
1.06 |
|
|
|
1.00 |
|
|
|
0.94 |
|
|
|
0.92 |
|
|
|
0.88 |
|
Cash dividends |
|
|
0.581 |
|
|
|
0.540 |
|
|
|
0.493 |
|
|
|
0.452 |
|
|
|
0.405 |
|
RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.30 |
% |
|
|
1.41 |
% |
|
|
1.45 |
% |
|
|
1.55 |
% |
|
|
1.66 |
% |
Return on average equity |
|
|
12.84 |
|
|
|
13.24 |
|
|
|
13.98 |
|
|
|
15.23 |
|
|
|
15.61 |
|
Return on average tangible equity (2) |
|
|
23.87 |
|
|
|
20.28 |
|
|
|
18.58 |
|
|
|
17.33 |
|
|
|
17.25 |
|
Net interest margin |
|
|
3.82 |
|
|
|
3.93 |
|
|
|
3.83 |
|
|
|
4.35 |
|
|
|
4.27 |
|
Efficiency ratio |
|
|
56.00 |
|
|
|
55.50 |
|
|
|
56.90 |
|
|
|
54.00 |
|
|
|
53.10 |
|
Average equity to average assets |
|
|
10.10 |
|
|
|
10.60 |
|
|
|
10.30 |
|
|
|
10.20 |
|
|
|
10.60 |
|
Dividend payout ratio |
|
|
54.80 |
|
|
|
54.00 |
|
|
|
52.50 |
|
|
|
49.20 |
|
|
|
46.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERIOD-END BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,918,964 |
|
|
$ |
12,401,555 |
|
|
$ |
11,160,148 |
|
|
$ |
9,768,669 |
|
|
$ |
8,388,915 |
|
Investment securities |
|
|
2,878,238 |
|
|
|
2,562,145 |
|
|
|
2,449,859 |
|
|
|
2,927,150 |
|
|
|
2,407,344 |
|
Loans, net of unearned income |
|
|
10,374,323 |
|
|
|
8,424,728 |
|
|
|
7,533,915 |
|
|
|
6,140,200 |
|
|
|
5,295,459 |
|
Deposits |
|
|
10,232,469 |
|
|
|
8,804,839 |
|
|
|
7,895,524 |
|
|
|
6,751,783 |
|
|
|
6,245,528 |
|
Federal Home Loan Bank advances
and long-term debt |
|
|
1,304,148 |
|
|
|
860,345 |
|
|
|
684,236 |
|
|
|
568,730 |
|
|
|
535,555 |
|
Shareholders equity |
|
|
1,516,310 |
|
|
|
1,282,971 |
|
|
|
1,244,087 |
|
|
|
948,317 |
|
|
|
864,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,297,681 |
|
|
$ |
11,781,618 |
|
|
$ |
10,347,290 |
|
|
$ |
8,805,807 |
|
|
$ |
7,903,920 |
|
Investment securities |
|
|
2,869,862 |
|
|
|
2,498,671 |
|
|
|
2,562,165 |
|
|
|
2,569,421 |
|
|
|
1,949,635 |
|
Loans, net of unearned income |
|
|
9,892,082 |
|
|
|
7,981,604 |
|
|
|
6,857,386 |
|
|
|
5,564,806 |
|
|
|
5,381,950 |
|
Deposits |
|
|
9,955,247 |
|
|
|
8,364,435 |
|
|
|
7,285,134 |
|
|
|
6,505,371 |
|
|
|
6,052,667 |
|
Federal Home Loan Bank advances
and long-term debt |
|
|
1,069,868 |
|
|
|
839,827 |
|
|
|
640,176 |
|
|
|
568,959 |
|
|
|
478,937 |
|
Shareholders equity |
|
|
1,444,793 |
|
|
|
1,254,476 |
|
|
|
1,069,904 |
|
|
|
895,616 |
|
|
|
839,111 |
|
|
|
|
(1) |
|
Adjusted for stock dividends and stock splits. |
|
(2) |
|
Net income, as adjusted for intangible amortization (net of tax), divided by average
shareholders equity, net of goodwill and intangible assets. |
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. This discussion and analysis should be read in conjunction with the consolidated
financial statements and other financial information presented in this report.
FORWARD-LOOKING STATEMENTS
17
The Corporation has made, and may continue to make, certain forward-looking statements with respect
to acquisition and growth strategies, market risk, the effect of competition and interest rates on
net interest margin and net interest income, investment strategy and income growth, investment
securities gains, other-than-temporary impairment of investment securities, deposit and loan
growth, asset quality, balances of risk-sensitive assets to risk-sensitive liabilities, employee
benefits and other expenses, amortization of intangible assets, goodwill impairment, capital and
liquidity strategies and other financial and business matters for future periods. The Corporation
cautions that these forward-looking statements are subject to various assumptions, risks and
uncertainties. Because of the possibility that the underlying assumptions may change, actual
results could differ materially from these forward-looking statements.
OVERVIEW
As a financial institution with a focus on traditional banking activities, 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 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.
The Corporations net income for 2006 increased $19.5 million, or 11.7%, from $166.1 million in
2005 to $185.5 million in 2006. Diluted net income per share increased $0.06, or 6.0%, from $1.00
per share in 2005 to $1.06 per share in 2006. In 2006, the Corporation realized a return on average
assets of 1.30% and a return on average tangible equity of 23.87%, compared to 1.41% and 20.28%,
respectively, in 2005. Net income for 2005 increased $16.5 million, or 11.0%, from $149.6 million
in 2004. Diluted net income per share for 2005 increased $0.06, or 6.4%, from $0.94 per share in
2004.
The 2006 increase in net income was driven by a $72.6 million, or 17.7%, increase in net interest
income after the provision for loan losses, primarily due to external growth through acquisitions,
which contributed $60.4 million to the increase. Also contributing to the increase was a $4.8
million, or 3.5%, increase in other income (excluding securities gains), primarily as a result of
acquisitions. These items were offset by a $49.7 million, or 15.7%, increase in other expenses,
also primarily due to acquisitions, and a $9.1 million increase in income tax expense.
In 2006, the Corporation experienced a decline in net interest margin of 11 basis points.
Significant increases in loans and investments, due to both external and internal growth, were
funded by higher cost certificates of deposits and short-term borrowings, as opposed to lower cost
core demand and savings accounts. If loan demand continues to outpace the growth of core demand and
savings accounts based upon the continuation of the current interest rate environment and price
sensitivity of customers, then further compression of the net interest margin may occur.
The following summarizes some of the more significant factors that influenced the Corporations
2006 results.
Interest Rates Changes in the interest rate environment can impact both the Corporations
net interest income and its non-interest income. The term interest rate environment generally
refers to both the level of interest rates and the shape of the U. S. Treasury yield curve, which
is a plot of the yields on treasury securities over various maturity terms. Typically, the shape of
the yield curve is upward sloping, with longer-term rates exceeding short-term rates. However,
during 2006, the yield curve was relatively flat, and at times, downward sloping, with minimal
differences between long and short-term rates, resulting in a negative impact to the Corporations
net interest income and net interest margin.
Floating rate loans, short-term borrowings and savings and time deposit rates are generally
influenced by short-term rates. During 2006, the FRB raised the Federal funds rate four times, for
a total increase of 100 basis points since December 31, 2005, with the overnight borrowing, or
Federal funds, rate ending the year at 5.25%. The Corporations prime lending rate had a
corresponding increase, from 7.25% to 8.25%, resulting in an increase in the rates on floating rate
loans as well as the rates on new fixed-rate loans. More significantly, the increase in short-term
rates also resulted in increased funding costs, with short-term borrowings immediately repricing to
higher rates and deposit rates, although more discretionary, increasing due to competitive
pressures. Additionally, as rates increased, customers shifted funds from lower rate core demand
and savings accounts to fixed rate certificates of deposit in order to
18
lock into higher rates. As a
result, the net interest margin was negatively impacted when compared to the prior year, as shown
in the following table:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
1st Quarter |
|
|
3.88 |
% |
|
|
3.96 |
% |
2nd Quarter |
|
|
3.90 |
|
|
|
3.92 |
|
3rd Quarter |
|
|
3.85 |
|
|
|
3.91 |
|
4th Quarter |
|
|
3.68 |
|
|
|
3.92 |
|
Year to Date |
|
|
3.82 |
|
|
|
3.93 |
|
With respect to longer-term rates, the 10-year treasury yield, which is a common benchmark for
evaluating residential mortgage rates, increased to 4.71% at December 31, 2006 as compared to 4.39%
at December 31, 2005. Higher mortgage rates resulted in slower refinance activity and origination
volumes and, therefore, lower net gains for the Corporation on fixed rate residential mortgages,
which are generally sold in the secondary market. While absolute longer-term rates increased, the
32 basis point increase in the 10-year treasury yield was significantly less than the 100 basis
point increase in short-term rates, resulting in a flattened and, at times, downward sloping, yield
curve during 2006. If rates continue to rise and the yield curve steepens, residential mortgage
volume could decrease even further, resulting in a greater negative impact on non-interest income,
as gains on sales would decline. The Market Risk section of Managements Discussion summarizes
the expected impact of rate changes on net interest income.
Acquisitions In February 2006, the Corporation acquired Columbia Bancorp (Columbia) of
Columbia, Maryland. Columbia was a $1.3 billion bank holding company whose primary subsidiary was
The Columbia Bank, which operates 20 full-service community banking offices and five retirement
community offices in Frederick, Howard, Montgomery, Prince Georges and Baltimore Counties and
Baltimore city. In July 2005, the Corporation acquired SVB Financial Services, Inc. (SVB) of
Somerville, New Jersey, a $530 million bank holding company whose primary subsidiary was Somerset
Valley Bank. Period-to-period comparisons in the Results of Operations section of Managements
Discussion are impacted by these acquisitions when 2006 results are compared to 2005. Results for
2005 in comparison to 2004 were impacted by the acquisition of SVB, Resource Bancshares Corporation
(Resource) in April 2004 and First Washington FinancialCorp (First Washington) in December 2004.
The discussion and tables within the Results of Operations section of Managements Discussion
highlight the contributions of these acquisitions in addition to internal changes.
Acquisitions have long been a supplement to the Corporations internal growth. These recent
acquisitions provide the opportunity for additional growth, as they have allowed the Corporations
existing products and services to be sold in new markets. The Corporations acquisition strategy
focuses on high growth areas with strong market demographics and targets organizations that have a
comparable corporate culture, strong performance and sound asset quality, among other factors.
Under the Corporations super-community banking philosophy, acquired organizations generally
retain their status as separate legal entities, unless consolidation with an existing subsidiary
bank is practical. Back office functions are generally consolidated to maximize efficiencies.
Merger and acquisition activity in the financial services industry has been very competitive in
recent years, as evidenced by the prices paid for certain acquisitions. While the Corporation has
been an active acquirer, management is committed to basing its pricing on rational economic models.
Management will continue to focus on generating growth in the most cost-effective manner.
Merger and acquisition activity has also impacted the Corporations capital and liquidity. In order
to complete acquisitions, the Corporation implemented strategies to maintain appropriate levels of
capital and to provide necessary cash resources. See additional information in the Liquidity
section of Managements Discussion.
Deposits and Borrowings The Corporations interest-bearing liabilities increased from
2005 to 2006 in order to fund acquisitions and loan growth.
During 2006, the Corporation experienced a shift from lower cost interest-bearing demand and
savings deposit accounts (36.9% of total interest-bearing liabilities in 2006, compared to 40.9% in
2005) to higher cost certificates of deposit and short-term borrowings (53.2% in 2006, compared to
49.5% in 2005). The shift to higher cost liabilities has contributed to the decline in net interest
margin. Obtaining cost-effective funding will continue to be a challenge for the Corporation and
the financial institutions industry in general.
19
Asset Quality Asset quality refers to the underlying credit characteristics of borrowers
and the likelihood that defaults on contractual loan payments will result in charge-offs of account
balances. Asset quality is generally a function of economic conditions, but can be managed through
conservative underwriting and sound collection policies and procedures.
The Corporation has been able to maintain strong asset quality through different economic cycles,
attributable to its credit culture and underwriting policies. This trend continued in 2006 with net
charge-offs to average loans decreasing from 0.04% in 2005 to 0.02% in 2006. Non-performing assets
to total assets slightly increased to 0.39% at December 31, 2006, from 0.38% at December 31, 2005;
however, this level is still relatively low in absolute terms. While overall asset quality has
remained strong, deterioration in quality of one or several significant accounts could have a
detrimental impact on the ability of some to pay according to the terms of their loans. In
addition, rising interest rates could increase the total payments of borrowers and could have a
negative impact on their ability to pay according to the terms of their loans. Finally, decreases in the values of underlying collateral as
a result of market or economic conditions could negatively affect asset quality.
Equity Markets As disclosed in the Market Risk section of Managements Discussion,
equity valuations can have an impact on the Corporations financial performance. In particular,
bank stocks account for a significant portion of the Corporations equity investment portfolio.
Historically, gains on sales of these equities have been a recurring component of the Corporations
earnings. Declines in bank stock portfolio values could have a detrimental impact on the
Corporations ability to recognize gains in the future.
20
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Corporations net income. The ability
to manage net interest income over changing interest rate and economic environments is important to
the success of a financial institution. Growth in net interest income is generally dependent upon
balance sheet growth and/or maintaining or increasing the net interest margin. The Market Risk
section of Managements Discussion provides additional information on the policies and procedures
used by the Corporation to manage net interest income. The following table provides a comparative
average balance sheet and net interest income analysis for 2006 compared to 2005 and 2004. Interest
income and yields are presented on a fully taxable-equivalent (FTE) basis, using a 35% Federal tax
rate. The discussion following this table is based on these tax-equivalent amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases (1) |
|
$ |
9,892,082 |
|
|
$ |
731,057 |
|
|
|
7.39 |
% |
|
$ |
7,981,604 |
|
|
$ |
520,565 |
|
|
|
6.52 |
% |
|
$ |
6,857,386 |
|
|
$ |
398,190 |
|
|
|
5.82 |
% |
Taxable inv. securities (2) |
|
|
2,268,209 |
|
|
|
97,652 |
|
|
|
4.31 |
|
|
|
1,996,240 |
|
|
|
74,921 |
|
|
|
3.75 |
|
|
|
2,162,695 |
|
|
|
76,792 |
|
|
|
3.54 |
|
Tax-exempt inv. securities (2) |
|
|
447,000 |
|
|
|
21,770 |
|
|
|
4.87 |
|
|
|
368,845 |
|
|
|
17,971 |
|
|
|
4.87 |
|
|
|
264,578 |
|
|
|
14,353 |
|
|
|
5.43 |
|
Equity securities (2) |
|
|
154,653 |
|
|
|
7,341 |
|
|
|
4.75 |
|
|
|
133,586 |
|
|
|
5,562 |
|
|
|
4.16 |
|
|
|
134,892 |
|
|
|
4,974 |
|
|
|
3.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
2,869,862 |
|
|
|
126,763 |
|
|
|
4.42 |
|
|
|
2,498,671 |
|
|
|
98,454 |
|
|
|
3.94 |
|
|
|
2,562,165 |
|
|
|
96,119 |
|
|
|
3.76 |
|
Loans held for sale |
|
|
215,255 |
|
|
|
15,564 |
|
|
|
7.23 |
|
|
|
241,996 |
|
|
|
14,940 |
|
|
|
6.17 |
|
|
|
135,758 |
|
|
|
8,407 |
|
|
|
6.19 |
|
Other interest-earning assets |
|
|
53,211 |
|
|
|
2,530 |
|
|
|
4.73 |
|
|
|
48,357 |
|
|
|
1,586 |
|
|
|
3.27 |
|
|
|
6,067 |
|
|
|
103 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
13,030,410 |
|
|
|
875,914 |
|
|
|
6.73 |
|
|
|
10,770,628 |
|
|
|
635,545 |
|
|
|
5.90 |
|
|
|
9,561,376 |
|
|
|
502,819 |
|
|
|
5.26 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
335,935 |
|
|
|
|
|
|
|
|
|
|
|
346,535 |
|
|
|
|
|
|
|
|
|
|
|
316,170 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
185,084 |
|
|
|
|
|
|
|
|
|
|
|
158,526 |
|
|
|
|
|
|
|
|
|
|
|
128,902 |
|
|
|
|
|
|
|
|
|
Other assets (2) |
|
|
852,186 |
|
|
|
|
|
|
|
|
|
|
|
598,709 |
|
|
|
|
|
|
|
|
|
|
|
425,825 |
|
|
|
|
|
|
|
|
|
Less: Allowance for
loan losses |
|
|
(105,934 |
) |
|
|
|
|
|
|
|
|
|
|
(92,780 |
) |
|
|
|
|
|
|
|
|
|
|
(84,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
$ |
11,781,618 |
|
|
|
|
|
|
|
|
|
|
$ |
10,347,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,673,407 |
|
|
$ |
25,112 |
|
|
|
1.50 |
% |
|
$ |
1,547,766 |
|
|
$ |
15,370 |
|
|
|
0.99 |
% |
|
$ |
1,364,953 |
|
|
$ |
7,201 |
|
|
|
0.53 |
% |
Savings deposits |
|
|
2,340,402 |
|
|
|
51,394 |
|
|
|
2.19 |
|
|
|
2,055,503 |
|
|
|
27,116 |
|
|
|
1.32 |
|
|
|
1,846,503 |
|
|
|
11,928 |
|
|
|
0.65 |
|
Time deposits |
|
|
4,134,190 |
|
|
|
170,435 |
|
|
|
4.12 |
|
|
|
3,171,901 |
|
|
|
98,288 |
|
|
|
3.10 |
|
|
|
2,693,414 |
|
|
|
70,650 |
|
|
|
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
8,147,999 |
|
|
|
246,941 |
|
|
|
3.03 |
|
|
|
6,775,170 |
|
|
|
140,774 |
|
|
|
2.08 |
|
|
|
5,904,870 |
|
|
|
89,779 |
|
|
|
1.52 |
|
Short-term borrowings |
|
|
1,653,974 |
|
|
|
78,043 |
|
|
|
4.67 |
|
|
|
1,186,464 |
|
|
|
34,414 |
|
|
|
2.87 |
|
|
|
1,238,073 |
|
|
|
15,182 |
|
|
|
1.23 |
|
Long-term debt |
|
|
1,069,868 |
|
|
|
53,960 |
|
|
|
5.04 |
|
|
|
839,827 |
|
|
|
38,031 |
|
|
|
4.53 |
|
|
|
640,176 |
|
|
|
31,033 |
|
|
|
4.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
10,871,841 |
|
|
|
378,944 |
|
|
|
3.48 |
|
|
|
8,801,461 |
|
|
|
213,219 |
|
|
|
2.42 |
|
|
|
7,783,119 |
|
|
|
135,994 |
|
|
|
1.75 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,807,248 |
|
|
|
|
|
|
|
|
|
|
|
1,589,265 |
|
|
|
|
|
|
|
|
|
|
|
1,380,264 |
|
|
|
|
|
|
|
|
|
Other |
|
|
173,799 |
|
|
|
|
|
|
|
|
|
|
|
136,416 |
|
|
|
|
|
|
|
|
|
|
|
114,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
12,852,888 |
|
|
|
|
|
|
|
|
|
|
|
10,527,142 |
|
|
|
|
|
|
|
|
|
|
|
9,277,386 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,444,793 |
|
|
|
|
|
|
|
|
|
|
|
1,254,476 |
|
|
|
|
|
|
|
|
|
|
|
1,069,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabs. and Equity |
|
$ |
14,297,681 |
|
|
|
|
|
|
|
|
|
|
$ |
11,781,618 |
|
|
|
|
|
|
|
|
|
|
$ |
10,347,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net
interest margin (FTE) |
|
|
|
|
|
|
496,970 |
|
|
|
3.82 |
% |
|
|
|
|
|
|
422,326 |
|
|
|
3.93 |
% |
|
|
|
|
|
|
366,825 |
|
|
|
3.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment |
|
|
|
|
|
|
(11,407 |
) |
|
|
|
|
|
|
|
|
|
|
(9,778 |
) |
|
|
|
|
|
|
|
|
|
|
(9,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
485,563 |
|
|
|
|
|
|
|
|
|
|
$ |
412,548 |
|
|
|
|
|
|
|
|
|
|
$ |
357,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes non-performing loans. |
|
(2) |
|
Balances include amortized historical cost for available for sale securities. The related
unrealized holding gains (losses) are included in other assets. |
21
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
|
|
Increase (decrease) due |
|
|
Increase (decrease) due |
|
|
|
to change in |
|
|
to change in |
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
|
(in thousands) |
|
Interest income on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
135,262 |
|
|
$ |
75,230 |
|
|
$ |
210,492 |
|
|
$ |
69,877 |
|
|
$ |
52,457 |
|
|
$ |
122,334 |
|
Taxable investment securities |
|
|
10,929 |
|
|
|
11,802 |
|
|
|
22,731 |
|
|
|
(6,194 |
) |
|
|
4,638 |
|
|
|
(1,556 |
) |
Tax-exempt investment securities |
|
|
3,805 |
|
|
|
(6 |
) |
|
|
3,799 |
|
|
|
5,192 |
|
|
|
(1,700 |
) |
|
|
3,492 |
|
Equity securities |
|
|
942 |
|
|
|
837 |
|
|
|
1,779 |
|
|
|
(51 |
) |
|
|
326 |
|
|
|
275 |
|
Loans held for sale |
|
|
(1,762 |
) |
|
|
2,386 |
|
|
|
624 |
|
|
|
6,532 |
|
|
|
1 |
|
|
|
6,533 |
|
Short-term investments |
|
|
173 |
|
|
|
771 |
|
|
|
944 |
|
|
|
1,305 |
|
|
|
178 |
|
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
149,349 |
|
|
$ |
91,020 |
|
|
$ |
240,369 |
|
|
$ |
76,661 |
|
|
$ |
55,900 |
|
|
$ |
132,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,335 |
|
|
$ |
8,407 |
|
|
$ |
9,742 |
|
|
$ |
1,076 |
|
|
$ |
7,093 |
|
|
$ |
8,169 |
|
Savings deposits |
|
|
4,229 |
|
|
|
20,049 |
|
|
|
24,278 |
|
|
|
1,488 |
|
|
|
13,700 |
|
|
|
15,188 |
|
Time deposits |
|
|
34,536 |
|
|
|
37,611 |
|
|
|
72,147 |
|
|
|
13,676 |
|
|
|
13,962 |
|
|
|
27,638 |
|
Short-term borrowings |
|
|
16,848 |
|
|
|
26,781 |
|
|
|
43,629 |
|
|
|
(645 |
) |
|
|
19,877 |
|
|
|
19,232 |
|
Long-term debt |
|
|
11,254 |
|
|
|
4,675 |
|
|
|
15,929 |
|
|
|
9,152 |
|
|
|
(2,154 |
) |
|
|
6,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
68,202 |
|
|
$ |
97,523 |
|
|
$ |
165,725 |
|
|
$ |
24,747 |
|
|
$ |
52,478 |
|
|
$ |
77,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Changes which are partly attributable to rate and volume are allocated based on the
proportion of the direct changes attributable to rate and volume.
2006 vs. 2005
Net interest income (FTE) increased $74.6 million, or 17.7%, from $422.3 million in 2005 to $497.0
million in 2006, primarily as a result of increases in average balances of interest-earning assets
and partially as a result of increases in rates.
Average interest-earning assets grew 21.0%, from $10.8 billion in 2005 to $13.0 billion in 2006,
with acquisitions contributing approximately $1.4 billion to this increase. Interest income
increased $240.4 million, or 37.8%, primarily as a result of the increase in average
interest-earning assets, which contributed $149.3 million of the increase, with the remaining
growth in interest income due to the 83 basis point, or 14.1%, increase in average rates on
interest-earning assets.
22
The increase in average interest-earning assets was primarily due to loan growth, and partially due
to investment growth. Average loans increased by $1.9 billion, or 23.9%, to $9.9 billion in 2006.
The following table presents the growth in average loans, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Commercial industrial and financial |
|
$ |
2,478,893 |
|
|
$ |
2,022,615 |
|
|
$ |
456,278 |
|
|
|
22.6 |
% |
Commercial agricultural |
|
|
335,596 |
|
|
|
324,637 |
|
|
|
10,959 |
|
|
|
3.4 |
|
Real estate commercial mortgage |
|
|
3,073,830 |
|
|
|
2,621,730 |
|
|
|
452,100 |
|
|
|
17.2 |
|
Real estate residential mortgage and home equity |
|
|
2,058,034 |
|
|
|
1,710,736 |
|
|
|
347,298 |
|
|
|
20.3 |
|
Real estate construction |
|
|
1,345,191 |
|
|
|
732,847 |
|
|
|
612,344 |
|
|
|
83.6 |
|
Consumer |
|
|
522,761 |
|
|
|
501,926 |
|
|
|
20,835 |
|
|
|
4.2 |
|
Leasing and other |
|
|
77,777 |
|
|
|
67,113 |
|
|
|
10,664 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,892,082 |
|
|
$ |
7,981,604 |
|
|
$ |
1,910,478 |
|
|
|
23.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions contributed approximately $1.2 billion to the increase in average balances. The
following table presents the average balance impact of acquisitions, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
|
(in thousands) |
|
Commercial industrial and financial |
|
$ |
337,062 |
|
|
$ |
32,576 |
|
|
$ |
304,486 |
|
Real estate commercial mortgage |
|
|
261,493 |
|
|
|
73,743 |
|
|
|
187,750 |
|
Real estate residential mortgage and home equity |
|
|
263,370 |
|
|
|
28,509 |
|
|
|
234,861 |
|
Real estate construction |
|
|
435,092 |
|
|
|
17,700 |
|
|
|
417,392 |
|
Consumer |
|
|
4,992 |
|
|
|
864 |
|
|
|
4,128 |
|
Leasing and other |
|
|
3,725 |
|
|
|
119 |
|
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,305,734 |
|
|
$ |
153,511 |
|
|
$ |
1,152,223 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the growth in average loans, by type, excluding the average balances
contributed by acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Commercial industrial and financial |
|
$ |
2,141,831 |
|
|
$ |
1,990,039 |
|
|
$ |
151,792 |
|
|
|
7.6 |
% |
Commercial agricultural |
|
|
335,596 |
|
|
|
324,637 |
|
|
|
10,959 |
|
|
|
3.4 |
|
Real estate commercial mortgage |
|
|
2,812,337 |
|
|
|
2,547,987 |
|
|
|
264,350 |
|
|
|
10.4 |
|
Real estate residential mortgage and home equity |
|
|
1,794,664 |
|
|
|
1,682,227 |
|
|
|
112,437 |
|
|
|
6.7 |
|
Real estate construction |
|
|
910,099 |
|
|
|
715,147 |
|
|
|
194,952 |
|
|
|
27.3 |
|
Consumer |
|
|
517,769 |
|
|
|
501,062 |
|
|
|
16,707 |
|
|
|
3.3 |
|
Leasing and other |
|
|
74,052 |
|
|
|
66,994 |
|
|
|
7,058 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,586,348 |
|
|
$ |
7,828,093 |
|
|
$ |
758,255 |
|
|
|
9.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding the impact of acquisitions, loan growth continued to be strong in the commercial mortgage
and construction categories, which together increased $459.3 million, or 14.1%, over 2005.
Commercial and agricultural loans grew $162.8 million, or 7.0%, in comparison to 2005. Residential
mortgage and home equity loans increased $112.4 million, or 6.7%, in comparison to 2005 due to
promotional efforts and customers using home equity loans as a cost-effective refinance
alternative.
23
The average yield on loans during 2006 of 7.39% represented an 87 basis point, or 13.3%, increase
in comparison to 2005. This increase reflected the impact of a significant portfolio of floating
rate loans, which repriced as interest rates rose, as they did in 2006, and the addition of higher
yielding new loans.
Average investments increased $371.2 million, or 14.9%, in comparison to 2005. Excluding the impact
of acquisitions, the investment balances increased $86.0 million, or 3.5%. During the second half
of 2006, the Corporation pre-purchased approximately $250.0 million of investment securities, based
on expected cash inflows from maturities of investments over the subsequent six-month period. These
were funded by a combination of short and longer-term borrowings, a portion of which have been
repaid with maturities of investments, while the remaining portion will be repaid during 2007.
The average yield on investment securities improved 48 basis points to 4.42% in 2006 from 3.94% in
2005. The increase was due to the maturity of lower yielding investments, with reinvestment at
higher rates. Also contributing to the increase was a reduction in premium amortization, which is
accounted for as a reduction of interest income, from $6.9 million in 2005 to $4.8 million in 2006,
due to both a reduction in premiums on purchases of mortgage-backed securities in 2006 and due to
decreased prepayments on mortgage-backed securities as interest rates rose.
The increase in interest income (FTE) was offset by an increase in interest expense of $165.7
million, or 77.7%, to $378.9 million in 2006 from $213.2 million in 2005. The increase in interest
expense was primarily due to a 106 basis point, or 43.8%, increase in the cost of total
interest-bearing liabilities in 2006 in comparison to 2005. The remaining increase in interest
expense was due to a $2.1 billion, or 23.5%, increase in total interest-bearing liabilities,
partially due to acquisitions and partially due to internal growth.
The increase in interest expense was primarily due to the increase in interest rates, and partially
due to the increase in interest-bearing deposits. The following table presents average deposits, by
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Noninterest-bearing demand |
|
$ |
1,807,248 |
|
|
$ |
1,589,265 |
|
|
$ |
217,983 |
|
|
|
13.7 |
% |
Interest-bearing demand |
|
|
1,673,407 |
|
|
|
1,547,766 |
|
|
|
125,641 |
|
|
|
8.1 |
|
Savings/money market |
|
|
2,340,402 |
|
|
|
2,055,503 |
|
|
|
284,899 |
|
|
|
13.9 |
|
Time deposits |
|
|
4,134,190 |
|
|
|
3,171,901 |
|
|
|
962,289 |
|
|
|
30.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,955,247 |
|
|
$ |
8,364,435 |
|
|
$ |
1,590,812 |
|
|
|
19.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions accounted for approximately $1.1 billion of the increase in average balances. The
following table presents the average balance impact of acquisitions, by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
|
(in thousands) |
|
Noninterest-bearing demand |
|
$ |
289,332 |
|
|
$ |
33,042 |
|
|
$ |
256,290 |
|
Interest-bearing demand |
|
|
160,938 |
|
|
|
53,461 |
|
|
|
107,477 |
|
Savings/money market |
|
|
277,736 |
|
|
|
76,251 |
|
|
|
201,485 |
|
Time deposits |
|
|
628,881 |
|
|
|
74,907 |
|
|
|
553,974 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,356,887 |
|
|
$ |
237,661 |
|
|
$ |
1,119,226 |
|
|
|
|
|
|
|
|
|
|
|
24
The following table presents the growth in average deposits, by type, excluding the contribution of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Noninterest-bearing demand |
|
$ |
1,517,916 |
|
|
$ |
1,556,223 |
|
|
$ |
(38,307 |
) |
|
|
(2.5 |
)% |
Interest-bearing demand |
|
|
1,512,469 |
|
|
|
1,494,305 |
|
|
|
18,164 |
|
|
|
1.2 |
|
Savings/money market |
|
|
2,062,666 |
|
|
|
1,979,252 |
|
|
|
83,414 |
|
|
|
4.2 |
|
Time deposits |
|
|
3,505,309 |
|
|
|
3,096,994 |
|
|
|
408,315 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,598,360 |
|
|
$ |
8,126,774 |
|
|
$ |
471,586 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding the impact of acquisitions, the Corporation experienced significant growth in
certificates of deposit as a result of the FRBs rate increases over the past year, making them an
attractive investment alternative for customers. The change in the composition of deposits
contributed to the 95 basis point, or 45.7%, increase in the average cost of interest-bearing
deposits in comparison to 2005.
Average borrowings increased $697.6 million, or 34.4%, during 2006. Excluding the impact of
acquisitions, average short-term borrowings increased $242.9 million, or 20.5%, to $1.4 billion.
The increase in short-term borrowings was mainly due to an increase in Federal funds purchased to
fund loan growth, offset slightly by lower borrowings outstanding under customer repurchase
agreements. Average long-term debt increased $230.0 million, or 27.4%, to $1.1 billion, with
acquisitions contributing $29.3 million. The additional increase in long-term debt was primarily
due to the issuance of $154.6 million of junior subordinated deferrable interest debentures in
January 2006, the impact of $100.0 million of subordinated debt issued and outstanding since March
2005 and additional Federal Home Loan Bank (FHLB) advances.
2005 vs. 2004
Net interest income (FTE) increased $55.5 million, or 15.1%, from $367.0 million in 2004 to $422.3
million in 2005, due to both average balance sheet growth and a higher net interest margin for 2005
in comparison to 2004.
Average interest-earning assets grew 12.6%, from $9.6 billion in 2004 to $10.8 billion in 2005.
Acquisitions contributed approximately $1.1 million to this increase. Interest income increased
$132.7 million, or 26.4%, partially as a result of the increase in average earning assets, which
contributed $76.7 million of the increase, with the remaining growth in interest income due to an
increase in rates on interest-earning assets.
Average loans increased by $1.1 billion, or 16.4%, to $8.0 billion in 2005. Acquisitions
contributed approximately $694.5 million to this increase in average balances. Loan growth was
strong in the commercial and commercial mortgage categories, which together increased $284.6
million, or 7.0%, over 2004. Construction loans grew $40.0 million, or 14.5%, in comparison to 2004
mainly due to increased activity in the Pennsylvania and New Jersey markets. Residential mortgage
and home equity loans showed strong growth of approximately $114.8 million due to promotional
efforts and customers using home equity loans as a cost-effective refinance alternative. The
average yield on loans during 2005 was 6.52%, a 70 basis point, or 12.0%, increase from 2004. This
increase reflects the impact of a significant portfolio of adjustable rate loans, which repriced as
interest rates increased throughout the year.
Average investments decreased $63.5 million, or 2.5%, in comparison to 2004. Excluding the impact
of acquisitions, the investment balances would have decreased $390.7 million, or 15.8%. During
2004, proceeds from investment maturities were used to fund loan growth, however during 2005, the
Corporations purchases of new investment securities exceeded proceeds from sales and maturities.
The average yield on investment securities improved 18 basis points from 3.76% in 2004 to 3.94% in
2005. This improvement was due partially to premium amortization decreasing, which is accounted for
as a reduction of interest income, from $10.5 million in 2004 to $6.9 million in 2005 as
prepayments on mortgage-backed securities decreased. The remaining increase was due to the maturity
of lower yielding investments, with reinvestment at higher rates.
Interest expense increased $77.2 million, or 56.8%, to $213.2 million in 2005 from $136.0 million
in 2004. The increase in interest expense was primarily due to a 67 basis point, or 38.3%, increase
in the cost of total interest-bearing liabilities in 2005 in
comparison to 2004. Competitive pricing pressures resulted in increased deposit rates in response to the FRBs
rate increases throughout 2005.
25
The remaining increase in interest expense was due to a $1.0
billion, or 13.1%, increase in total interest-bearing liabilities, resulting from both acquisitions
and internal growth.
Average borrowings increased slightly during 2005, with the $51.6 million decrease in average
short-term borrowings more than offset by a $199.7 million increase in long-term debt. Excluding
the impact of acquisitions, average short-term borrowings decreased $147.4 million, or 13.4%,
mainly due to a decrease in Federal funds purchased. In addition, customer cash management
accounts, which are included in short-term borrowings, decreased $20.6 million, or 5.1%, to an
average of $385.7 million in 2005. Average long-term debt increased $199.7 million, or 31.2%, to
$839.8 million, with acquisitions contributing $51.7 million to the long-term debt increase. The
additional increase in long-term borrowings was due to the Corporations issuance of $100.0 million
ten-year subordinated notes in March 2005 and an increase in FHLB advances as longer-term rates
were locked in anticipation of continued rate increases.
Provision and Allowance for Loan Losses
The Corporation accounts for the credit risk associated with lending activities through its
allowance and provision for loan losses. The provision is the expense recognized in the income
statement to adjust the allowance to its proper balance, as determined through the application of
the 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 loan loss evaluation
methodology.
26
A summary of the Corporations loan loss experience follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(dollars in thousands) |
|
Loans outstanding at end of year |
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
$ |
6,140,200 |
|
|
$ |
5,295,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance of loans and leases |
|
$ |
9,892,082 |
|
|
$ |
7,981,604 |
|
|
$ |
6,857,386 |
|
|
$ |
5,564,806 |
|
|
$ |
5,381,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses
at beginning of year |
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
$ |
71,920 |
|
|
$ |
71,872 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
3,013 |
|
|
|
4,095 |
|
|
|
3,482 |
|
|
|
6,604 |
|
|
|
7,203 |
|
Real estate mortgage |
|
|
429 |
|
|
|
467 |
|
|
|
1,466 |
|
|
|
1,476 |
|
|
|
2,204 |
|
Consumer |
|
|
3,138 |
|
|
|
3,436 |
|
|
|
3,476 |
|
|
|
4,497 |
|
|
|
5,587 |
|
Leasing and other |
|
|
389 |
|
|
|
206 |
|
|
|
453 |
|
|
|
651 |
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off |
|
|
6,969 |
|
|
|
8,204 |
|
|
|
8,877 |
|
|
|
13,228 |
|
|
|
15,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial financial and agricultural |
|
|
2,863 |
|
|
|
2,705 |
|
|
|
2,042 |
|
|
|
1,210 |
|
|
|
842 |
|
Real estate mortgage |
|
|
268 |
|
|
|
1,245 |
|
|
|
906 |
|
|
|
711 |
|
|
|
669 |
|
Consumer |
|
|
1,289 |
|
|
|
1,169 |
|
|
|
1,496 |
|
|
|
1,811 |
|
|
|
2,251 |
|
Leasing and other |
|
|
97 |
|
|
|
77 |
|
|
|
76 |
|
|
|
97 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
4,517 |
|
|
|
5,196 |
|
|
|
4,520 |
|
|
|
3,829 |
|
|
|
3,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
2,452 |
|
|
|
3,008 |
|
|
|
4,357 |
|
|
|
9,399 |
|
|
|
11,852 |
|
Provision for loan losses |
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
|
|
9,705 |
|
|
|
11,900 |
|
Allowance purchased |
|
|
12,991 |
|
|
|
3,108 |
|
|
|
11,567 |
|
|
|
5,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
$ |
71,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans |
|
|
0.02 |
% |
|
|
0.04 |
% |
|
|
0.06 |
% |
|
|
0.17 |
% |
|
|
0.22 |
% |
Allowance for loan losses to loans outstanding at end of year |
|
|
1.03 |
% |
|
|
1.10 |
% |
|
|
1.19 |
% |
|
|
1.27 |
% |
|
|
1.36 |
% |
Non-performing assets (1) to total assets |
|
|
0.39 |
% |
|
|
0.38 |
% |
|
|
0.30 |
% |
|
|
0.33 |
% |
|
|
0.47 |
% |
Non-accrual loans to total loans |
|
|
0.32 |
% |
|
|
0.43 |
% |
|
|
0.30 |
% |
|
|
0.37 |
% |
|
|
0.45 |
% |
|
|
|
(1) |
|
Includes accruing loans past due 90 days or more. |
27
The following table presents the aggregate amount of non-accrual and past due loans and other
real estate owned (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(in thousands) |
|
Non-accrual loans (2) (3) |
|
$ |
33,113 |
|
|
$ |
36,560 |
|
|
$ |
22,574 |
|
|
$ |
22,422 |
|
|
$ |
24,090 |
|
Accruing loans past due 90 days or more |
|
|
20,632 |
|
|
|
9,012 |
|
|
|
8,318 |
|
|
|
9,609 |
|
|
|
14,095 |
|
Other real estate |
|
|
4,103 |
|
|
|
2,072 |
|
|
|
2,209 |
|
|
|
585 |
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,848 |
|
|
$ |
47,644 |
|
|
$ |
33,101 |
|
|
$ |
32,616 |
|
|
$ |
39,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2006, the total interest income that would have been recorded if
non-accrual loans had been current in accordance with their original terms
was approximately $2.6 million. The amount of interest income on non-accrual
loans that was included in 2006 income was approximately $800,000. |
|
(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 are
restored to accrual status when all delinquent principal and interest becomes
current or the loan is considered secured and in the process of collection.
Certain loans, primarily adequately collateralized mortgage loans, that are
determined to be sufficiently collateralized may continue to accrue interest
after reaching 90 days past due. |
|
(3) |
|
Excluded from the amounts presented at December 31, 2006 were $212.4
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 for impairment
under Statement 114, but continue to pay according to their contractual terms
and are therefore not included in non-performing loans. Non-accrual loans
include $18.5 million of impaired loans. |
The following table summarizes the allocation of the allowance for loan losses by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
|
|
|
Loans in |
|
|
|
Allow- |
|
|
In Each |
|
|
Allow- |
|
|
Each |
|
|
Allow- |
|
|
Each |
|
|
Allow- |
|
|
Each |
|
|
Allow- |
|
|
Each |
|
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
|
ance |
|
|
Category |
|
Comml financial &
agricultural |
|
$ |
52,942 |
|
|
|
28.6 |
% |
|
$ |
52,379 |
|
|
|
28.2 |
% |
|
$ |
43,207 |
|
|
|
30.1 |
% |
|
$ |
34,247 |
|
|
|
31.7 |
% |
|
$ |
33,130 |
|
|
|
31.6 |
% |
Real estate
Mortgage |
|
|
37,197 |
|
|
|
65.5 |
|
|
|
17,602 |
|
|
|
64.7 |
|
|
|
19,784 |
|
|
|
62.5 |
|
|
|
14,471 |
|
|
|
59.0 |
|
|
|
13,099 |
|
|
|
56.8 |
|
Consumer, leasing
& other |
|
|
6,475 |
|
|
|
5.9 |
|
|
|
7,935 |
|
|
|
7.1 |
|
|
|
16,289 |
|
|
|
7.4 |
|
|
|
16,279 |
|
|
|
9.3 |
|
|
|
14,178 |
|
|
|
11.6 |
|
Unallocated |
|
|
10,270 |
|
|
|
|
|
|
|
14,931 |
|
|
|
|
|
|
|
10,347 |
|
|
|
|
|
|
|
12,703 |
|
|
|
|
|
|
|
11,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
106,884 |
|
|
|
100.0 |
% |
|
$ |
92,847 |
|
|
|
100.0 |
% |
|
$ |
89,627 |
|
|
|
100.0 |
% |
|
$ |
77,700 |
|
|
|
100.0 |
% |
|
$ |
71,920 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for loan losses increased $378,000 from $3.1 million in 2005 to $3.5 million in
2006, after decreasing $1.6 million in 2005. Net charge-offs as a percentage of average loans were
0.02% in 2006, a two basis point decrease from 0.04% in 2005, which was a two basis point decrease
from 2004. Total net charge-offs were $2.5 million in 2006 and $3.0 million in 2005. Non-performing
assets as a percentage of total assets increased slightly from 0.38% at December 31, 2005 to 0.39%
at December 31, 2006, after increasing nine basis points in 2005. While the non-performing assets
ratio increased slightly in comparison to 2005, the level of non-performing assets was still
relatively low in absolute terms. The 2006 increase was due primarily to the impact of a $10.0
million loan, which the Corporation placed on non-accrual in October 2006. This loan was for a
community reinvestment act project that had
28
been delayed as a result of funding shortfalls. The 2006 increase in accruing loans past due 90 days or
more was due to a number of factors, most significantly the timing of certain loan payments and the
adequate collateralization of certain real estate mortgage loans.
In recent years, net charge-offs approximated the amounts recorded for the provision for loan
losses. In 2006, net charge-offs were less than the provision for loan losses due to
adjustments to the allowance for loan loss during the year based on application of the
Corporations allowance methodology.
The provision for loan losses is determined by the allowance allocation process, whereby an
estimated need is allocated to impaired loans as defined in Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, or to pools of loans under
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. The allocation
is based on risk factors, collateral levels, economic conditions and other relevant factors, as
appropriate. The Corporation also maintains an unallocated allowance, which was approximately 10%
at December 31, 2006. The unallocated allowance is used to cover any factors or conditions that
might exist at the balance sheet date, but are not specifically identifiable. Management believes
such an unallocated allowance 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 balance of $106.9
million at December 31, 2006 is sufficient to cover losses inherent in the loan portfolio on that
date and is appropriate based on applicable accounting standards.
Other Income and Expenses
2006 vs. 2005
Other Income
The following table presents the components of other income for the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Investment management and trust services |
|
$ |
37,441 |
|
|
$ |
35,669 |
|
|
$ |
1,772 |
|
|
|
5.0 |
% |
Service charges on deposit accounts |
|
|
43,773 |
|
|
|
40,198 |
|
|
|
3,575 |
|
|
|
8.9 |
|
Other service charges and fees |
|
|
26,792 |
|
|
|
24,229 |
|
|
|
2,563 |
|
|
|
10.6 |
|
Gains on sales of loans |
|
|
21,086 |
|
|
|
25,032 |
|
|
|
(3,946 |
) |
|
|
(15.8 |
) |
Gain on sale of deposits |
|
|
|
|
|
|
2,200 |
|
|
|
(2,200 |
) |
|
|
N/A |
|
Other |
|
|
13,344 |
|
|
|
10,345 |
|
|
|
2,999 |
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities
gains |
|
|
142,436 |
|
|
|
137,673 |
|
|
|
4,763 |
|
|
|
3.5 |
|
Investment securities gains |
|
|
7,439 |
|
|
|
6,625 |
|
|
|
814 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
149,875 |
|
|
$ |
144,298 |
|
|
$ |
5,577 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts which were contributed by acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
|
(in thousands) |
|
Investment management and trust services |
|
$ |
805 |
|
|
$ |
114 |
|
|
$ |
691 |
|
Service charges on deposit accounts |
|
|
2,508 |
|
|
|
217 |
|
|
|
2,291 |
|
Other service charges and fees |
|
|
958 |
|
|
|
171 |
|
|
|
787 |
|
Gains on sales of loans |
|
|
1,089 |
|
|
|
33 |
|
|
|
1,056 |
|
Other |
|
|
1,161 |
|
|
|
217 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities
gains |
|
|
6,521 |
|
|
|
752 |
|
|
|
5,769 |
|
Investment securities gains |
|
|
57 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,578 |
|
|
$ |
752 |
|
|
$ |
5,826 |
|
|
|
|
|
|
|
|
|
|
|
29
The following table presents the components of other income for each of the past two years,
excluding the amounts contributed by acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Investment management and trust services |
|
$ |
36,636 |
|
|
$ |
35,555 |
|
|
$ |
1,081 |
|
|
|
3.0 |
% |
Service charges on deposit accounts |
|
|
41,265 |
|
|
|
39,981 |
|
|
|
1,284 |
|
|
|
3.2 |
|
Other service charges and fees |
|
|
25,834 |
|
|
|
24,058 |
|
|
|
1,776 |
|
|
|
7.4 |
|
Gains on sales of loans |
|
|
19,997 |
|
|
|
24,999 |
|
|
|
(5,002 |
) |
|
|
(20.0 |
) |
Gain on sale of deposits |
|
|
|
|
|
|
2,200 |
|
|
|
(2,200 |
) |
|
|
N/A |
|
Other |
|
|
12,183 |
|
|
|
10,128 |
|
|
|
2,055 |
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excluding investment securities
gains |
|
$ |
135,915 |
|
|
$ |
136,921 |
|
|
$ |
(1,006 |
) |
|
|
(0.7 |
)% |
Investment securities gains |
|
|
7,382 |
|
|
|
6,625 |
|
|
|
757 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
143,297 |
|
|
$ |
143,546 |
|
|
$ |
(249 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The discussion that follows, unless otherwise noted, addresses changes in other income, excluding
acquisitions.
Excluding investment securities gains, total other income decreased $1.0 million, or 0.7%, as
slight growth in fee income was more than offset by decreased gains on sales of mortgage loans. The
decrease in gains on sales of loans was due to the change in gains on the sale of mortgage loans,
which were impacted by the increase in longer-term mortgage rates, resulting in both decreased
volumes of $351.8 million, or 15.3%, and lower spreads on sales of 17 basis points.
Investment management and trust services increased slightly by $1.1 million, or 3.0%, primarily due
to increases in trust commission income of $496,000, or 2.2%, resulting from positive trends within
equity markets as well as expanded marketing initiatives to attract new customers.
Total service charges on deposit accounts increased $1.3 million, or 3.2%. The increase was due to
increases of $1.2 million in overdraft fees and $1.2 million in cash management fees, offset by a
$1.1 million decrease in other service charges on deposit accounts, primarily related to lower fees
earned on both personal and commercial non-interest and interest-bearing demand accounts. During
2006, the rising interest rate environment made cash management services more attractive for
business customers.
Other service charges and fees increased $1.8 million, or 7.4%, due to increases in letter of
credit fees ($921,000, or 21.5%) and debit card fees ($951,000, or 14.7%), offset by decreases in
merchant fees ($366,000, or 5.1%). Other income increased $2.1 million, or 20.3%, due to $2.2
million of gains on sales of branch and office facilities during 2006.
Including the impact of acquisitions, investment securities gains increased $814,000, or 12.3%, in
2006. Investment securities gains, net of realized losses, included realized gains on the sale of
equity securities of $7.0 million in 2006, compared to $5.8 million in 2005, and $474,000 and
$843,000 in 2006 and 2005, respectively, on the sale of debt securities, which were generally sold
to take advantage of the interest rate environment.
30
Other Expenses
The following table presents the components of other expenses for each of the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Salaries and employee benefits |
|
$ |
213,913 |
|
|
$ |
181,889 |
|
|
$ |
32,024 |
|
|
|
17.6 |
% |
Net occupancy expense |
|
|
36,493 |
|
|
|
29,275 |
|
|
|
7,218 |
|
|
|
24.7 |
|
Equipment expense |
|
|
14,251 |
|
|
|
11,938 |
|
|
|
2,313 |
|
|
|
19.4 |
|
Data processing |
|
|
12,228 |
|
|
|
12,395 |
|
|
|
(167 |
) |
|
|
(1.3 |
) |
Advertising |
|
|
10,638 |
|
|
|
8,823 |
|
|
|
1,815 |
|
|
|
20.6 |
|
Telecommunications |
|
|
7,966 |
|
|
|
7,035 |
|
|
|
931 |
|
|
|
13.2 |
|
Intangible amortization |
|
|
7,907 |
|
|
|
5,311 |
|
|
|
2,596 |
|
|
|
48.9 |
|
Supplies |
|
|
6,245 |
|
|
|
5,736 |
|
|
|
509 |
|
|
|
8.9 |
|
Postage |
|
|
5,154 |
|
|
|
4,716 |
|
|
|
438 |
|
|
|
9.3 |
|
Professional fees |
|
|
5,057 |
|
|
|
5,393 |
|
|
|
(336 |
) |
|
|
(6.2 |
) |
Other |
|
|
46,139 |
|
|
|
43,780 |
|
|
|
2,359 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
365,991 |
|
|
$ |
316,291 |
|
|
$ |
49,700 |
|
|
|
15.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts included in the above totals which were contributed by
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
|
(in thousands) |
|
Salaries and employee benefits |
|
$ |
27,643 |
|
|
$ |
3,483 |
|
|
$ |
24,160 |
|
Net occupancy expense |
|
|
6,162 |
|
|
|
1,029 |
|
|
|
5,133 |
|
Equipment expense |
|
|
2,121 |
|
|
|
328 |
|
|
|
1,793 |
|
Data processing |
|
|
1,560 |
|
|
|
377 |
|
|
|
1,183 |
|
Advertising |
|
|
1,475 |
|
|
|
173 |
|
|
|
1,302 |
|
Telecommunications |
|
|
1,007 |
|
|
|
109 |
|
|
|
898 |
|
Intangible amortization |
|
|
3,483 |
|
|
|
711 |
|
|
|
2,772 |
|
Supplies |
|
|
572 |
|
|
|
132 |
|
|
|
440 |
|
Postage |
|
|
485 |
|
|
|
48 |
|
|
|
437 |
|
Professional fees |
|
|
403 |
|
|
|
82 |
|
|
|
321 |
|
Other |
|
|
4,818 |
|
|
|
562 |
|
|
|
4,256 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,729 |
|
|
$ |
7,034 |
|
|
$ |
42,695 |
|
|
|
|
|
|
|
|
|
|
|
31
The following table presents the components of other expenses for each of the past two years,
excluding the amounts contributed by acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
186,270 |
|
|
$ |
178,406 |
|
|
$ |
7,864 |
|
|
|
4.4 |
% |
Net occupancy expense |
|
|
30,331 |
|
|
|
28,246 |
|
|
|
2,085 |
|
|
|
7.4 |
|
Equipment expense |
|
|
12,130 |
|
|
|
11,610 |
|
|
|
520 |
|
|
|
4.5 |
|
Data processing |
|
|
10,668 |
|
|
|
12,018 |
|
|
|
(1,350 |
) |
|
|
(11.2 |
) |
Advertising |
|
|
9,163 |
|
|
|
8,650 |
|
|
|
513 |
|
|
|
5.9 |
|
Telecommunications |
|
|
6,959 |
|
|
|
6,926 |
|
|
|
33 |
|
|
|
0.5 |
|
Intangible amortization |
|
|
4,424 |
|
|
|
4,600 |
|
|
|
(176 |
) |
|
|
(3.8 |
) |
Supplies |
|
|
5,673 |
|
|
|
5,604 |
|
|
|
69 |
|
|
|
1.2 |
|
Postage |
|
|
4,669 |
|
|
|
4,668 |
|
|
|
1 |
|
|
|
|
|
Professional fees |
|
|
4,654 |
|
|
|
5,311 |
|
|
|
(657 |
) |
|
|
(12.4 |
) |
Other |
|
|
41,321 |
|
|
|
43,218 |
|
|
|
(1,897 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
316,262 |
|
|
$ |
309,257 |
|
|
$ |
7,005 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The discussion that follows addresses changes in other expenses, excluding acquisitions.
Salaries and employee benefits increased $7.9 million, or 4.4%, in 2006, with the salary expense
component increasing $6.8 million, or 4.7%. The increase was driven primarily by normal salary
increases for existing employees and, to a lesser extent, due to an increase in the number of
full-time employees. Also contributing to the increase in salaries was a $646,000 increase in
stock-based compensation expense and $1.3 million of bonuses accrued under a new corporate
management incentive compensation plan, offset by a $630,000 decrease in bonuses accrued under
pre-existing incentive compensation plans. Employee benefits increased $1.0 million, or
3.0%, due primarily to increased healthcare costs of $1.4 million, or 9.2%. Also contributing to
the increase was a $626,000, or 8.0%, increase in profit sharing expenses. These increases were
offset by decreased costs related to the Corporations defined benefit pension plan of $1.3
million, or 36.1%, as a result of a $10.7 million contribution to the plan in 2005.
Net occupancy expense increased $2.1 million, or 7.4%, due to the expansion of the branch network,
higher maintenance and utility costs, increased rent expense and depreciation of real property.
Equipment expense increased $520,000, or 4.5%, in 2006, due to increased depreciation expense for
equipment, higher rent expense related to office equipment and additions from the expansion of the
branch network. A total of 12 and 8 new branch offices were opened in 2006 and 2005,
respectively.
Data processing expense decreased $1.4 million, or 11.2%, due to savings realized from the
consolidation of back office systems of two of the Corporations recently acquired affiliate banks.
Advertising expense increased $513,000, or 5.9%, primarily related to increased discretionary
promotional campaigns during 2006. Professional fees decreased $657,000, or 12.4%, primarily
related to legal fee recoveries in 2006 related to recoveries of non-accrual loans.
Other expense decreased $1.9 million, or 4.4%, in 2006 mainly due to a decrease of $1.0 million in
losses recorded in connection with the settlement of a previously disclosed lawsuit. In addition,
in 2005, the Corporation recorded a $600,000 expense for a loss incurred in an affiliate banks
mortgage operations. Finally, the Corporation realized certain state tax recoveries in 2006.
2005 vs. 2004
Other Income
In 2005, total other income increased $5.4 million, or 3.9%, including $10.5 million contributed by
the acquisitions of SVB, First Washington and Resource. Excluding acquisitions and investment
securities gains, other income increased $5.7 million, or 5.4%. The discussion that follows, unless
noted, addresses changes in other income, excluding acquisitions.
32
Investment management and trust services decreased slightly by $104,000, or 0.3%. The 2005 decrease
was due to brokerage revenue decreasing $242,000, or 2.0%, offset by trust commission income
increasing $138,000, or 0.6%.
Total service charges on deposit accounts decreased $477,000, or 1.2%. The decrease was due to the
Corporation reducing service charges on deposit accounts in an effort to remain competitive and the
impact of rising interest rates on commercial deposit account service charge credits. This decrease
was offset by increases in overdraft and cash management fees. Overdraft fees increased $778,000,
or 4.7%, and cash management fees increased $229,000, or 3.0%. During 2005, the rising interest
rate environment began to make cash management services more attractive for business customers.
Other service charges and fees increased $3.0 million, or 14.6%. The increase was driven by growth
in letter of credit fees ($553,000, or 15.6%, increase), merchant fees ($2.2 million, or 44.4%,
increase) and debit card fees ($712,000, or 12.6%, increase). The growth in merchant fees was
primarily due to continued penetration in new markets. Debit card fees increased due to increased
volume.
Gains on sales of loans decreased only $108,000, or 1.3%, as overall volumes remained strong
despite a slight increase in longer-term mortgage rates. Other income increased $1.2 million, or
26.8%, due to growth in net servicing income on mortgage loans and gains on sales of other real
estate owned.
The gain on sale of deposits resulted from the Corporation selling three branches and related
deposits in two separate transactions during the second quarter of 2005. Virtually the entire $2.2
million gain resulted from the premiums received on the $36.7 million of deposits sold.
Including the impact of acquisitions, investment securities gains decreased $11.1 million, or
62.6%, in 2005. Investment securities gains included realized gains on the sale of equity
securities of $5.8 million in 2005, down from $14.8 million in 2004, reflecting the general decline
in the equity markets and bank stocks in particular, and $843,000 and $3.1 million in 2005 and
2004, respectively, on the sale of debt securities, which were generally sold to take advantage of
the interest rate environment.
Other Expenses
Total other expenses increased $38.8 million, or 14.0%, in 2005, including $34.1 million due to
acquisitions. The discussion that follows addresses changes in other expenses, excluding
acquisitions.
Salaries and employee benefits increased $1.0 million, or 0.7%, in 2005, with the salary expense
component increasing $856,000, or 0.7%. The increase was driven by normal salary increases for
existing employees and a slight increase in the number of full-time employees, offset by a decrease
in stock-based compensation expense from $3.9 million in 2004 to $1.0 million in 2005. The decrease
in stock-based compensation expense was primarily due to a change in vesting for stock options from
100% vesting for the 2004 grant to a three-year vesting period for the 2005 grant. Employee
benefits increased $163,000, or 0.6%, due primarily to increased retirement plan expenses, offset
by lower healthcare expenses as the Corporation changed to a lower cost healthcare provider in
2005.
Net occupancy expense increased $1.8 million, or 8.4%. The increase resulted from the expansion of
the branch network and the addition of new office space for certain affiliates. Equipment expense
decreased $396,000, or 4.1%, in 2005, due to lower depreciation expense for equipment as items
became fully depreciated, offset partially by increases due to additions for branch network and
office expansions.
Data processing expense decreased $324,000, or 3.0%, reflecting the Corporations success over the
past few years in renegotiating key processing contracts with certain vendors, most notably an
automated teller service provider, in 2005. Advertising expense increased $1.2 million, or 18.3%,
mainly due to growth in retail promotional campaigns.
Intangible amortization decreased $785,000, or 18.1%. Intangible amortization consists of the
amortization of unidentifiable intangible assets related to branch and loan acquisitions, core
deposit intangible assets and other identified intangible assets. The decrease in 2005 was related
to lower amortization related to core deposit intangible assets, which are amortized on an
accelerated basis over the estimated life of the acquired core deposits.
33
Other expense increased $2.2 million, or 4.6%, in 2005 mainly due to a $2.2 million legal reserve
recorded during the fourth quarter of 2005 related to the settlement of a lawsuit, which alleged
that Resource Bank violated the Telephone Consumer Protection Act (TCPA), prior to being acquired
by Fulton Financial in April 2004.
Income Taxes
Income taxes increased $9.1 million, or 12.7%, in 2006 and $6.7 million, or 10.3%, in 2005. The
Corporations effective tax rate (income taxes divided by income before income taxes) remained
fairly stable at 30.2%, 30.1% and 30.2% in 2006, 2005 and 2004, respectively. In general, the
variances from the 35% Federal statutory rate consisted of tax-exempt interest income and
investments in low and moderate income housing partnerships (LIH Investments), which generate
Federal tax credits. Net credits associated with LIH investments were $3.9 million, $4.9 million
and $4.5 million in 2006, 2005 and 2004, respectively.
For additional information regarding income taxes, see Note K, Income Taxes, in the Notes to
Consolidated Financial Statements.
34
FINANCIAL CONDITION
Total assets increased $2.5 billion, or 20.3%, to $14.9 billion at December 31, 2006, from $12.4
billion at December 31, 2005. Excluding the Columbia acquisition in February 2006, total assets
increased $969.0 million, or 7.8%. Total loans, net of the allowance for loan losses, increased
$1.9 billion, or 23.2% ($882.9 million, or 10.6%, excluding the acquisition of Columbia). During
2006, increases in deposits and proceeds from short and long-term borrowings were used to fund loan
growth, and to a lessor extent, investment security purchases. Total deposits increased $1.4
billion, or 16.2%, to $10.2 billion at December 31, 2006 ($458.7 million, or 5.2%, excluding the
acquisition of Columbia), and total borrowings increased $825.7 million, or 38.2% ($561.5 million,
or 26.0%, excluding the acquisition of Columbia).
The table below presents a condensed ending balance sheet for the Corporation, adjusted for the
balances recorded for the 2006 acquisition of Columbia, in comparison to 2005 ending balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase (decrease) (3) |
|
|
|
Fulton |
|
|
|
|
|
|
Fulton |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Columbia |
|
|
Financial |
|
|
Fulton |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Bancorp |
|
|
Corporation |
|
|
Financial |
|
|
|
|
|
|
|
|
|
(As Reported) |
|
|
(1) |
|
|
(2) |
|
|
Corporation |
|
|
$ |
|
|
% |
|
|
|
(dollars in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
355,018 |
|
|
$ |
46,407 |
|
|
$ |
308,611 |
|
|
$ |
368,043 |
|
|
$ |
(59,432 |
) |
|
|
(16.1 |
)% |
Other earning assets |
|
|
267,230 |
|
|
|
16,854 |
|
|
|
250,376 |
|
|
|
275,310 |
|
|
|
(24,934 |
) |
|
|
(9.1 |
) |
Investment securities |
|
|
2,878,238 |
|
|
|
186,034 |
|
|
|
2,692,204 |
|
|
|
2,562,145 |
|
|
|
130,059 |
|
|
|
5.1 |
|
Loans, net allowance |
|
|
10,267,439 |
|
|
|
1,052,684 |
|
|
|
9,214,755 |
|
|
|
8,331,881 |
|
|
|
882,874 |
|
|
|
10.6 |
|
Premises and equipment |
|
|
191,401 |
|
|
|
7,775 |
|
|
|
183,626 |
|
|
|
170,254 |
|
|
|
13,372 |
|
|
|
7.9 |
|
Goodwill and
intangible
assets |
|
|
663,775 |
|
|
|
218,060 |
|
|
|
445,715 |
|
|
|
448,422 |
|
|
|
(2,707 |
) |
|
|
(0.6 |
) |
Other assets |
|
|
295,863 |
|
|
|
20,586 |
|
|
|
275,277 |
|
|
|
245,500 |
|
|
|
29,777 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
14,918,964 |
|
|
$ |
1,548,400 |
|
|
$ |
13,370,564 |
|
|
$ |
12,401,555 |
|
|
$ |
969,009 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
10,232,469 |
|
|
$ |
968,936 |
|
|
$ |
9,263,533 |
|
|
$ |
8,804,839 |
|
|
$ |
458,694 |
|
|
|
5.2 |
% |
Short-term borrowings |
|
|
1,680,840 |
|
|
|
184,083 |
|
|
|
1,496,757 |
|
|
|
1,298,962 |
|
|
|
197,795 |
|
|
|
15.2 |
|
Long-term debt |
|
|
1,304,148 |
|
|
|
80,136 |
|
|
|
1,224,012 |
|
|
|
860,345 |
|
|
|
363,667 |
|
|
|
42.3 |
|
Other liabilities |
|
|
185,197 |
|
|
|
9,495 |
|
|
|
175,702 |
|
|
|
154,438 |
|
|
|
21,264 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
13,402,654 |
|
|
|
1,242,650 |
|
|
|
12,160,004 |
|
|
|
11,118,584 |
|
|
$ |
1,041,420 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,516,310 |
|
|
|
305,750 |
|
|
|
1,210,560 |
|
|
|
1,282,971 |
|
|
|
(72,411 |
) |
|
|
(5.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and
Shareholders
Equity |
|
$ |
14,918,964 |
|
|
$ |
1,548,400 |
|
|
$ |
13,370,564 |
|
|
$ |
12,401,555 |
|
|
$ |
969,009 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balances recorded for the February 1, 2006 acquisition of Columbia Bancorp. |
|
(2) |
|
Excluding balances recorded for Columbia Bancorp.
|
|
(3) |
|
Fulton Financial Corporation, excluding balances recorded for Columbia Bancorp, as compared to 2005. |
35
Loans
The following table presents loans outstanding, by type, as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(in thousands) |
|
Commercial industrial and financial |
|
$ |
2,603,224 |
|
|
$ |
2,044,010 |
|
|
$ |
1,946,962 |
|
|
$ |
1,594,451 |
|
|
$ |
1,489,990 |
|
Commercial agricultural |
|
|
361,962 |
|
|
|
331,659 |
|
|
|
326,176 |
|
|
|
354,517 |
|
|
|
189,110 |
|
Real-estate commercial mortgage |
|
|
3,213,809 |
|
|
|
2,831,405 |
|
|
|
2,461,016 |
|
|
|
1,992,650 |
|
|
|
1,527,143 |
|
Real-estate residential mortgage
and home equity |
|
|
2,152,275 |
|
|
|
1,773,256 |
|
|
|
1,650,139 |
|
|
|
1,322,977 |
|
|
|
1,239,603 |
|
Real-estate construction |
|
|
1,428,809 |
|
|
|
851,451 |
|
|
|
595,567 |
|
|
|
307,108 |
|
|
|
248,565 |
|
Consumer |
|
|
523,066 |
|
|
|
520,098 |
|
|
|
488,059 |
|
|
|
498,428 |
|
|
|
526,611 |
|
Leasing and other |
|
|
100,711 |
|
|
|
79,738 |
|
|
|
72,795 |
|
|
|
77,646 |
|
|
|
84,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,383,856 |
|
|
|
8,431,617 |
|
|
|
7,540,714 |
|
|
|
6,147,777 |
|
|
|
5,305,085 |
|
Unearned income |
|
|
(9,533 |
) |
|
|
(6,889 |
) |
|
|
(6,799 |
) |
|
|
(7,577 |
) |
|
|
(9,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
$ |
7,533,915 |
|
|
$ |
6,140,200 |
|
|
$ |
5,295,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income, increased $1.9 billion, or 23.1%, in 2006 ($884.8 million, or
10.5%, excluding the acquisition of Columbia). The internal growth of $884.8 million included
increases in total commercial loans ($282.3 million, or 13.8%), commercial mortgage loans ($245.1
million, or 8.7%), residential mortgage and home equity loans ($166.7 million, or 9.4%) and
construction loans ($142.4 million, or 16.7%).
Approximately $4.6 billion, or 44.8%, of the Corporations loan portfolio was in commercial
mortgage and construction loans at December 31, 2006, compared to 43.7% at December 31, 2005. While
the Corporation does not have a concentration of credit risk with any single borrower or industry,
repayments on loans in these portfolios can be negatively influenced by decreases in real estate
values. The Corporation mitigates this risk through stringent underwriting policies and procedures.
In addition, more than half of commercial mortgages were for owner-occupied properties as of
December 31, 2006. These types of loans are generally considered to involve less risk than
non-owner-occupied mortgages.
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 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
HTM |
|
|
AFS |
|
|
Total |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
|
|
|
$ |
165,636 |
|
|
$ |
165,636 |
|
|
$ |
|
|
|
$ |
135,532 |
|
|
$ |
135,532 |
|
|
$ |
|
|
|
$ |
170,065 |
|
|
$ |
170,065 |
|
U.S. Government securities |
|
|
|
|
|
|
17,066 |
|
|
|
17,066 |
|
|
|
|
|
|
|
35,118 |
|
|
|
35,118 |
|
|
|
|
|
|
|
68,449 |
|
|
|
68,449 |
|
U.S. Government sponsored
agency securities |
|
|
7,648 |
|
|
|
288,465 |
|
|
|
296,113 |
|
|
|
7,512 |
|
|
|
212,650 |
|
|
|
220,162 |
|
|
|
6,903 |
|
|
|
66,468 |
|
|
|
73,371 |
|
State and municipal |
|
|
1,262 |
|
|
|
488,279 |
|
|
|
489,541 |
|
|
|
5,877 |
|
|
|
438,987 |
|
|
|
444,864 |
|
|
|
10,658 |
|
|
|
332,455 |
|
|
|
343,113 |
|
Corporate debt
securities |
|
|
75 |
|
|
|
70,637 |
|
|
|
70,712 |
|
|
|
|
|
|
|
65,834 |
|
|
|
65,834 |
|
|
|
650 |
|
|
|
71,127 |
|
|
|
71,777 |
|
Collateralized mortgage
obligations |
|
|
|
|
|
|
492,524 |
|
|
|
492,524 |
|
|
|
|
|
|
|
262,503 |
|
|
|
262,503 |
|
|
|
|
|
|
|
1,374 |
|
|
|
1,374 |
|
Mortgage-backed securities |
|
|
3,539 |
|
|
|
1,343,107 |
|
|
|
1,346,646 |
|
|
|
4,869 |
|
|
|
1,393,263 |
|
|
|
1,398,132 |
|
|
|
6,790 |
|
|
|
1,714,920 |
|
|
|
1,721,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,524 |
|
|
$ |
2,865,714 |
|
|
$ |
2,878,238 |
|
|
$ |
18,258 |
|
|
$ |
2,543,887 |
|
|
$ |
2,562,145 |
|
|
$ |
25,001 |
|
|
$ |
2,424,858 |
|
|
$ |
2,449,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Total investment securities increased $316.1 million, or 12.3% ($202.3 million, or 7.9%,
excluding the acquisition of Columbia), to a balance of $2.9 billion at December 31, 2006.
The Corporation classified 99.6% of its investment portfolio as available for sale at December 31,
2006 and, as such, these investments were recorded at their estimated fair values. The net
unrealized loss on non-equity available for sale investment securities decreased $18.9 million to a
net unrealized loss of $41.0 million at December 31, 2006 from a net unrealized loss of $59.9
million at December 31, 2005, generally due to changes in interest rates.
At December 31, 2006, equity securities consisted of FHLB and other government agency stock ($72.3
million), stocks of other financial institutions ($79.8 million) and mutual funds ($13.5 million).
The financial institutions stock portfolio has historically been a source of capital appreciation
and realized gains ($7.0 million in 2006, $5.8 million in 2005 and $14.8 million in 2004).
Management periodically sells bank stocks when, in its opinion, valuations and market conditions
warrant such sales.
Other Assets
Cash and due from banks decreased $13.0 million, or 3.5% ($59.4 million, or 16.1%, excluding the
acquisition of Columbia). Because of the daily fluctuations that result in the normal course of
business, cash is more appropriately analyzed in terms of average balances. On an average balance
basis, cash and due from banks decreased $10.6 million, or 3.1%, from $346.5 million in 2005 to
$335.9 million in 2006. The decrease resulted from a reduction in the level of cash reserves
required to be held against deposit liabilities as transaction account balances decreased.
Premises and equipment increased $21.1 million, or 12.4%, to $191.4 million, which included $7.8
million as a result of the acquisition of Columbia. The remaining increase reflects additions
primarily for the construction of new branch facilities, offset by the sales of branch and office
facilities during 2006.
Goodwill and intangible assets increased $215.4 million, or 48.0%, primarily due to the acquisition
of Columbia. Other assets increased $50.4 million, or 20.5%, to $295.9 million, which included
$20.6 million as a result of the acquisition of Columbia. The remaining net increase was due
primarily to an increase in accrued interest receivable, as both loan balances and interest rates
increased, and an increase in the cash surrender value of the Corporations life insurance plans.
These increases were offset by a decrease in the defined benefit pension plan asset as a result of
recognizing the underfunded status of the plan, as required by Financial Accounting Standards Board
(FASB) Statement No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (Statement 158). See also Note L, Employee Benefit Plans, in the Notes to
Consolidated Financial Statements for additional information related to the Corporations pension
plan.
Deposits and Borrowings
Deposits increased $1.4 billion, or 16.2%, to $10.2 billion at December 31, 2006 ($458.7 million,
or 5.2%, excluding the acquisition of Columbia). During 2006, total demand deposits increased
$205.6 million, or 6.2% (decreased $128.5 million, or 3.9%, excluding the acquisition of Columbia),
savings deposits increased $161.7 million, or 7.6% (decreased $9.1 million, or 0.4%, excluding the
acquisition of Columbia), and time deposits increased $1.1 billion, or 31.5% ($596.2 million, or
17.7%, excluding the acquisition of Columbia). During 2006, consumers shifted from core demand and
savings accounts to higher yielding time deposits due to increases in available interest rates.
Short-term borrowings, which consist mainly of Federal funds purchased and customer cash management
accounts, increased $381.9 million, or 29.4% ($197.8 million, or 15.2%, excluding the acquisition
of Columbia). The increase in 2006 was due to increases in customer cash management accounts, in
the form of short-term promissory notes and purchases of Federal funds as loan growth outpaced
deposit increases. Long-term debt increased $443.8 million, or 51.6% ($363.7 million, or 42.3%,
excluding the acquisition of Columbia), primarily due to an increase in FHLB advances to fund loan
growth and investment purchases, as well as the Corporations issuance of $154.6 million of junior
subordinated deferrable interest debentures in January 2006.
37
Other Liabilities
Other liabilities increased $30.8 million, or 19.9% ($21.3 million, or 13.7%, excluding the
acquisition of Columbia). The increase was primarily attributable to an increase in accrued
interest payable related to the increase in available rates and time deposit balances, the
recognition of the Corporations underfunded defined benefit pension plan liability, as required by
Statement 158, and an increase in dividends payable to shareholders.
Shareholders Equity
Total shareholders equity increased $233.3 million, or 18.2%, to $1.5 billion, or 10.2% of ending
total assets, as of December 31, 2006. This growth was due primarily to 2006 net income of $185.5
million and $154.2 million of stock issued for the Columbia acquisition, offset by $100.9 million
of dividends paid to shareholders.
The Corporation periodically repurchases shares of its common stock under repurchase plans approved
by the Board of Directors. These repurchases have historically been through open market
transactions and have complied with all regulatory restrictions on the timing and amount of such
repurchases. Shares may also be repurchased through an Accelerated Share Repurchase Program
(ASR), which allows shares to be purchased immediately from an investment bank. The investment
bank, in turn, repurchases shares on the open market over a period that is determined by the
average daily trading volume of the Corporations shares, among other factors. Shares repurchased
have been added to treasury stock and are accounted for at cost. These shares are periodically
reissued for various corporate needs.
Total treasury stock purchases were approximately 1.1 million shares in 2006, 5.3 million shares in
2005 and 4.9 million shares in 2004. Included in these amounts are shares purchased under ASRs,
totaling 4.5 million in 2005 and 1.3 million in 2004. As of December 31, 2006, the Corporation had
a stock repurchase plan in place for 2.1 million shares through June 30, 2007. Through December 31,
2006, 1.1 million shares had been repurchased under this plan.
The Corporation and its subsidiary banks are subject to regulatory capital requirements
administered by various banking regulators. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a material effect on the Corporations
financial statements. The regulations require that banks maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and
Tier I capital to average assets (as defined). As of December 31, 2006, the Corporation and each of
its bank subsidiaries met the minimum capital requirements. In addition, the Corporation and each
of its bank subsidiaries capital ratios exceeded the amounts required to be considered
well-capitalized as defined in the regulations. See also Note J, Regulatory Matters, in the
Notes to Consolidated Financial Statements .
38
Contractual Obligations and Off-Balance Sheet Arrangements
The Corporation has various financial obligations that require future cash payments. These
obligations include the payment of liabilities recorded on the Corporations consolidated balance
sheet as well as contractual obligations for purchased services or for operating leases. The
following table summarizes significant contractual obligations to third parties, by type, that were
fixed and determinable at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In |
|
|
|
One Year |
|
|
One to |
|
|
Three to |
|
|
Over Five |
|
|
|
|
|
|
|
or Less |
|
|
Three Years |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated
maturity (1) |
|
$ |
5,802,422 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,802,422 |
|
Time deposits (2) |
|
|
3,414,830 |
|
|
|
603,802 |
|
|
|
191,573 |
|
|
|
219,842 |
|
|
|
4,430,047 |
|
Short-term borrowings (3) |
|
|
1,680,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,680,840 |
|
Long-term debt (3) |
|
|
190,305 |
|
|
|
243,732 |
|
|
|
89,711 |
|
|
|
780,400 |
|
|
|
1,304,148 |
|
Operating leases (4) |
|
|
11,813 |
|
|
|
17,741 |
|
|
|
13,325 |
|
|
|
44,000 |
|
|
|
86,879 |
|
Purchase obligations (5) |
|
|
15,511 |
|
|
|
23,239 |
|
|
|
6,676 |
|
|
|
|
|
|
|
45,426 |
|
|
|
|
(1) |
|
Includes demand deposits and savings accounts, which can be withdrawn by customers
at any time. |
|
(2) |
|
See additional information regarding time deposits in Note H, Deposits, in
the Notes to Consolidated Financial Statements. |
|
(3) |
|
See additional information regarding borrowings in Note I, Short-Term
Borrowings and Long-Term Debt, in the Notes to Consolidated Financial Statements. |
|
(4) |
|
See additional information regarding operating leases in Note N, Leases, in
the Notes to Consolidated Financial Statements. |
|
(5) |
|
Includes significant information technology, telecommunication and data
processing outsourcing contracts. Variable obligations, such as those based on
transaction volumes, are not included. |
In addition to the contractual obligations listed in the preceding table, the Corporation is a
party to financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include commitments to extend
credit and standby letters of credit, which involve, to varying degrees, elements of credit and
interest rate risk that are not recognized in the consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Standby letters of credit are conditional commitments issued
to guarantee the financial or performance obligation of a customer to a third party. Commitments
and standby letters of credit do not necessarily represent future cash needs as they may expire
without being drawn.
The following table presents the Corporations commitments to extend credit and letters of credit
as of December 31, 2006 (in thousands):
|
|
|
|
|
Commercial mortgage, construction and land development |
|
$ |
571,499 |
|
Home equity |
|
|
674,089 |
|
Credit card |
|
|
367,406 |
|
Commercial and other |
|
|
2,702,516 |
|
|
|
|
|
Total commitments to extend credit |
|
$ |
4,315,510 |
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
739,056 |
|
Commercial letters of credit |
|
|
34,193 |
|
|
|
|
|
Total letters of credit |
|
$ |
773,249 |
|
|
|
|
|
39
CRITICAL ACCOUNTING POLICIES
The following is a summary of those accounting policies that the Corporation considers to be most
important to the portrayal of its financial condition and results of operations, as they require
managements most difficult judgments as a result of the need to make estimates about the effects
of matters that are inherently uncertain.
Allowance and Provision for Loan Losses The Corporation accounts for the credit risk
associated with its lending activities through the allowance and provision for loan losses. The
allowance is an estimate of the losses inherent in the loan portfolio as of the balance sheet date.
The provision is the periodic charge to earnings, which is necessary to adjust the allowance to its
proper balance. On a quarterly basis, the Corporation assesses the adequacy of its allowance
through a methodology that consists of the following:
|
- |
|
Identifying loans for individual review under Statement 114. In general, these consist
of large balance commercial loans and commercial mortgages that are rated less than
satisfactory based upon the Corporations internal credit-rating process. |
|
|
- |
|
Assessing whether the loans identified for review under Statement 114 are impaired.
That is, whether it is probable that all amounts will not be collected according to the
contractual terms of the loan agreement, generally representing loans that management has
placed on non-accrual status. |
|
|
- |
|
For loans reviewed under Statement 114, calculating the estimated fair value, using
observable market prices, discounted cash flows or the value of the underlying
collateral. |
|
|
- |
|
Classifying all non-impaired large balance loans based on credit risk ratings and
allocating an allowance for loan losses based on appropriate factors, including recent
loss history for similar loans. |
|
|
- |
|
Identifying all smaller balance homogeneous loans for evaluation collectively under the
provisions of Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies (Statement 5). In general, these loans include residential mortgages,
consumer loans, installment loans, smaller balance commercial loans and mortgages and
lease receivables. |
|
|
- |
|
Statement 5 loans are segmented into groups with similar characteristics and an
allowance for loan losses is allocated to each segment based on recent loss history and
other relevant information. |
|
|
- |
|
Reviewing the results to determine the appropriate balance of the allowance for loan
losses. This review gives additional consideration to factors such as the mix of loans in
the portfolio, the balance of the allowance relative to total loans and non-performing
assets, trends in the overall risk profile of the portfolio, trends in delinquencies and
non-accrual loans and local and national economic conditions. |
|
|
- |
|
An unallocated allowance is maintained to recognize the inherent imprecision in estimating and measuring loss exposure. |
|
|
- |
|
Documenting the results of its review in accordance with SAB 102. |
The allowance review methodology is based on information known at the time of the review. Changes
in factors underlying the assessment could have a material impact on the amount of the allowance
that is necessary and the amount of provision to be charged against earnings. Such changes could
impact future results.
Accounting for Business Combinations The Corporation accounts for all business
acquisitions using the purchase method of accounting as required by Statement of Financial
Accounting Standards No. 141, Business Combinations (Statement 141). Purchase accounting requires
the purchase price to be allocated to the estimated fair values of the assets acquired and
liabilities assumed. It also requires assessing the existence of and, if necessary, assigning a
value to certain intangible assets. The remaining excess purchase price over the fair value of net
assets acquired is recorded as goodwill.
The purchase price is established as the value of securities issued for the acquisition, cash
consideration paid and certain acquisition-related expenses. The fair values of assets acquired and
liabilities assumed are typically established through appraisals, observable market values or
discounted cash flows. Management has engaged independent third-party valuation experts to assist
in valuing certain assets, particularly intangibles. Other assets and liabilities are generally
valued using the Corporations internal asset/liability modeling system. The assumptions used and
the final valuations, whether prepared internally or by a third party, are reviewed by management.
Due to the complexity of purchase accounting, final determinations of values can be time consuming
and, occasionally,
40
amounts included in the Corporations consolidated balance sheets and consolidated statements of income are
based on preliminary estimates of value.
Goodwill and Intangible Assets Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (Statement 142) addresses the accounting for goodwill and
intangible assets subsequent to acquisition. Intangible assets are amortized over their estimated
lives. Some intangible assets have indefinite lives and are, therefore, not amortized. All
intangible assets must be evaluated for impairment if certain events occur. Any impairment
write-downs are recognized as expense in the consolidated income statement.
Goodwill is not amortized to expense, but is evaluated at least annually for impairment. The
Corporation completes its annual goodwill impairment test as of October 31st of each year. The
Corporation tests for impairment by first allocating its goodwill and other assets and liabilities,
as necessary, to defined reporting units. A fair value is then determined for each reporting unit.
If the fair values of the reporting units exceed their book values, no write-down of the recorded
goodwill is necessary. If the fair values are less than the book values, an additional valuation
procedure is necessary to assess the proper carrying value of the goodwill. The Corporation
determined that no impairment write-offs were necessary during 2006, 2005 and 2004.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and
management judgments. Among these are future growth rates for the reporting units, selection of
comparable market transactions, discount rates and earnings capitalization rates. Changes in
assumptions and results due to economic conditions, industry factors and reporting unit performance
and cash flow projections could result in different assessments of the fair values of reporting
units and could result in impairment charges in the future.
If an event occurs or circumstances change that would more likely than not reduce the fair value of
a reporting unit below its carrying amount, an impairment test between annual tests is necessary.
Such events may include adverse changes in legal factors or in the business climate, adverse
actions by a regulator, unauthorized competition, the loss of key employees, or similar events. The
Corporation has not performed an interim goodwill impairment test during the past three years as no
such events have occurred. However, such an interim test could be necessary in the future.
Income Taxes The provision for income taxes is based upon income before income taxes,
adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition,
certain items of income and expense are reported in different periods for financial reporting and
tax return purposes. The tax effects of these temporary differences are recognized currently in the
deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on
the difference between the financial statement and income tax bases of assets and liabilities using
the applicable enacted marginal tax rate.
The Corporation must also evaluate the likelihood that deferred tax assets will be recovered from
future taxable income. If any such assets are more likely than not to not be recovered, a valuation
allowance must be recognized. The Corporation recorded a valuation allowance of $11.1 million as of
December 31, 2006 for certain state net operating losses that are not expected to be recovered. The
assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in
which could have a material impact on the Corporations financial statements.
See also Note K, Income Taxes, in the Notes to Consolidated Financial Statements .
Recent Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting
for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140
(Statement 155). Statement 155 amends the guidance in FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Statement 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole, thereby eliminating the
need to bifurcate the derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. Statement 155 is effective for all financial instruments
acquired, issued, or subject to a remeasurement date after the beginning of a companys first
fiscal year that begins after September 15, 2006, or January 1, 2007 for the Corporation. The
adoption of Statement 155 did not have an impact on the Corporations consolidated financial
statements.
41
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for
Servicing of Financial Assets an amendment of FASB Statement No. 140 (Statement 156). Statement
156 requires recognition of a servicing asset or liability at fair value each time an obligation is
undertaken to service a financial asset by entering into a servicing contract. Statement 156 also
provides guidance on subsequent measurement methods for each class of separately recognized
servicing assets and liabilities and specifies financial statement presentation and disclosure
requirements. This statement is effective for fiscal years beginning after September 15, 2006, or
January 1, 2007 for the Corporation. The Corporation had elected to continue amortizing mortgage
servicing rights over the estimated lives of the underlying loans. As a result, the adoption of
this standard did not impact the Corporations consolidated financial statements.
In April 2006, the FASB issued Staff Position FIN 46(R)-6, Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46(R) (Staff Position FIN 46(R)-6). This staff
position addresses how an entity should determine the variability to be considered in applying FASB
Interpretation No. FIN 46(R) (FIN 46). The variability that is to be considered in applying FIN 46
affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which
interests are variable interests in the entity and (c) which party, if any, is the primary
beneficiary of the VIE. The requirements prescribed by this staff position are to be applied
prospectively for all new arrangements at the commencement of the first reporting period that
begins after June 15, 2006, or July 1, 2006 for the Corporation. The new requirements need not be
applied to entities that have previously been analyzed under FIN 46 unless a reconsideration event
occurs. The staff position had no impact the Corporations consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Specifically, the interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of an income tax
position taken or expected to be taken in a tax return. This interpretation is effective for fiscal
years beginning after December 15, 2006, or January 1, 2007 for the Corporation. The Corporation is
evaluating the impact of FIN 48 on all tax positions and does not believe there is any material
impact of adopting FIN 48 upon any recognized tax positions as of December 31, 2006. See Note K,
Income Taxes, in the Notes to Consolidated Financial Statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurement (Statement 157). Statement 157 defines fair value, establishes a framework for
measuring fair value in U.S. generally accepted accounting principles, and expands disclosure
requirements for fair value measurements. Statement 157 does not require any new fair value
measurements and is effective for financial statements issued for fiscal years beginning after
November 15, 2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating
the impact of Statement 157 on the consolidated financial statements.
In September 2006, the FASB issued Statement 158, which requires employers to recognize the
overfunded or underfunded status of defined benefit pension and post-retirement plans as an asset
or liability in its balance sheet and to recognize changes in that funded status in the year in
which changes occur through other comprehensive income, in addition to expanded disclosure
requirements. The standard requires employers to measure defined benefit plan assets and
obligations as of the date of the employers fiscal year-end balance sheet, for fiscal years ending
after December 15, 2008, or December 31, 2008 for the Corporation. All other requirements of the
standard are effective for employers with defined benefit pension or post-retirement plans that
issue publicly traded equity securities, for fiscal years ending after December 15, 2006, or
December 31, 2006 for the Corporation. As of December 31, 2006, the Corporation adopted Statement
158 on a prospective basis, resulting in a reclassification of the Corporations Pension Plan and
Post-retirement Plan liabilities. For details related to the Corporations adoption of Statement
158, see Note L, Employee Benefit Plans, in the Notes to Consolidated Financial Statements.
In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (EITF 06-4). EITF 06-4 addresses accounting for endorsement split-dollar life
insurance arrangements that provide a benefit to an employee that extends to post-retirement
periods. EITF 06-4 requires that the post-retirement benefit aspects of an endorsement-type
split-dollar life insurance arrangement be recognized as a liability by the employer and that the
obligation is not settled upon entering into an insurance arrangement. EITF 06-4 is effective for
fiscal years beginning after December 15, 2007, or January 1, 2008 for the Corporation. The
Corporation is currently evaluating the impact of EITF 06-4 on the consolidated financial
statements.
42
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (Statement 159).
Statement 159 permits entities to choose to measure many financial instruments and certain other
items at fair value and amends Statement 115 to, among other things, require certain disclosures
for amounts for which the fair value option is applied. Additionally, this standard provides that
an entity may reclassify held-to-maturity and available-for-sale securities to the trading account
when the fair value option is elected for such securities, without calling into question the intent
to hold other securities to maturity in the future. This standard is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007, or January 1, 2008 for the
Corporation. Early adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the provisions of Statement 157.
The Corporation has not completed its assessment of SFAS 159 and the impact, if any, on the
consolidated financial statements.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain
financial instruments. The types of market risk exposures generally faced by financial institutions
include interest rate risk, equity market price risk, foreign currency risk and commodity price
risk. Due to the nature of its operations, only equity market price risk and interest rate risk are
significant to the Corporation.
Equity Market Price Risk
Equity market price risk is the risk that changes in the values of equity investments could have a
material impact on the financial position or results of operations of the Corporation. The
Corporations equity investments consist of common stocks of publicly traded financial
institutions, U.S. Government sponsored agency stocks and money market mutual funds. The equity
investments most susceptible to equity market price risk are the financial institutions stocks,
which had a cost basis of approximately $79.7 million and a fair value of $79.6 million at December
31, 2006. Gross unrealized gains in this portfolio were approximately $2.9 million at December 31,
2006.
Although the carrying value of the financial institutions stocks accounted for only 0.5% of the
Corporations total assets, any unrealized gains in the portfolio represent a potential source of
revenue. The Corporation has a history of realizing gains from this portfolio and, if values were
to decline significantly, this revenue could be materially impacted.
Management continuously monitors the fair value of its equity investments and evaluates current
market conditions and operating results of the companies. Periodic sale and purchase decisions are
made based on this monitoring process. None of the Corporations equity securities are classified
as trading. Future cash flows from these investments are not provided in the table on page 48 as
such investments do not have maturity dates.
The Corporation has evaluated, based on existing accounting guidance, whether any unrealized losses
on individual equity investments constituted other-than-temporary impairment, which would require
a write-down through a charge to earnings. Based on the results of such evaluations, the
Corporation recorded write-downs of $122,000 in 2006, $65,000 in 2005 and $137,000 in 2004 for
specific equity securities which were deemed to exhibit other-than-temporary impairment in value.
Additional impairment charges may be necessary depending upon the performance of the equity markets
in general and the performance of the individual investments held by the Corporation. See also Note
C, Investment Securities, in the Notes to Consolidated Financial Statements.
In addition to the risk of changes in the value of its equity portfolio, the Corporations
investment management and trust services revenue could also be impacted by fluctuations in the
securities markets. A portion of the Corporations trust revenue is based on the value of the
underlying investment portfolios. If securities markets contract, the Corporations revenue could
be negatively impacted. In addition, the ability of the Corporation to sell its brokerage services
is dependent, in part, upon consumers level of confidence in the outlook for rising securities
prices.
Interest Rate Risk, Asset/Liability Management and Liquidity
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on
the Corporations liquidity position and could affect its ability to meet obligations and continue
to grow. Second, movements in interest rates can create fluctuations in the Corporations net
interest income and changes in the economic value of its equity.
The Corporation employs various management techniques to minimize its exposure to interest rate
risk. An Asset/Liability Management Committee (ALCO), consisting of key financial and senior
management personnel, meets on a bi-weekly basis. The ALCO is responsible for reviewing the
interest rate sensitivity position of the Corporation, approving asset and liability management
policies, and overseeing the formulation and implementation of strategies regarding balance sheet
positions and earnings. The primary goal of asset/liability management is to address the liquidity
and net interest income risks noted above.
From a liquidity standpoint, the Corporation must maintain a sufficient level of liquid assets to
meet the ongoing cash flow requirements of customers, who, as depositors, may want to withdraw
funds or who, as borrowers, need credit availability. Liquidity sources are found on both sides of
the balance sheet. Liquidity is provided on a continuous basis through scheduled and unscheduled
principal reductions and interest payments on outstanding loans and investments. Liquidity is also
provided through the availability of deposits and borrowings.
44
The Corporations sources and uses of cash were discussed in general terms in the Overview
section of Managements Discussion. The consolidated statements of cash flows provide additional
information. The Corporation generated $199.3 million in cash from operating activities during
2006, mainly due to net income. Investing activities resulted in a net cash outflow of $1.1
billion, compared to a net cash outflow of $588.5 million in 2005. Financing activities resulted in
net cash proceeds of $911.8 million in 2006, compared to net cash proceeds of $532.0 million in
2005 as net funds were provided by increases in time deposits and borrowings, outpacing repayments
of long-term debt and shareholder dividends.
Liquidity must also be managed at the Fulton Financial Corporation parent company level. For
safety and soundness reasons, banking regulations limit the amount of cash that can be transferred
from subsidiary banks to the Parent Company in the form of loans and dividends. Generally, these
limitations are based on the subsidiary banks regulatory capital levels and their net income. The
Parent Company meets its cash needs through dividends and loans from subsidiary banks, and through
external borrowings.
In January 2006, the Corporation purchased all of the common stock of a new Delaware business
trust, Fulton Capital Trust I, which was formed for the purpose of issuing $150.0 million of trust
preferred securities at an effective rate of approximately 6.50%. In connection with this
transaction the Parent Company issued $154.6 million of junior subordinated deferrable interest
debentures to the trust. These debentures carry the same rate and mature on February 1, 2036. In
2005, the Corporation issued $100.0 million of ten-year subordinated notes, which mature April 1,
2015 and carry a fixed rate of 5.35%. Interest is paid semi-annually.
In 2004, the Parent Company entered into a revolving line of credit agreement with an unaffiliated
bank. Under the terms of the agreement, the Parent Company can borrow up to $100.0 million with
interest calculated at the one-month London Interbank Offering Rate (LIBOR) plus 0.35%. The credit
agreement requires the Corporation to maintain certain financial ratios related to capital strength
and earnings. As of December 31, 2006, there was $36.3 million borrowed against this line. The
Corporation was in compliance with all required covenants under the credit agreement as of December
31, 2006.
These borrowings, most notably the revolving line of credit agreement, supplement the liquidity
available from subsidiaries through dividends and provide some flexibility in Parent Company cash
management. Management continues to monitor the liquidity and capital needs of the Parent Company
and will implement appropriate strategies, as necessary, to remain well-capitalized and to meet its
cash needs.
At December 31, 2006, liquid assets (defined as cash and due from banks, short-term investments,
Federal funds sold, mortgages available for sale, securities available for sale, and
non-mortgage-backed securities held to maturity due in one year or less) totaled $3.5 billion, or
23.2% of total assets. This compares to $3.2 billion, or 25.5% of total assets, at December 31,
2005.
45
The following tables present the expected maturities of investment securities at December 31, 2006
and the weighted average yields of such securities (calculated based on historical cost):
HELD TO MATURITY (at amortized cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURING |
|
|
|
|
|
|
|
|
|
|
|
After One But |
|
|
After Five But |
|
|
|
|
|
|
Within One Year |
|
|
Within Five Years |
|
|
Within Ten Years |
|
|
After Ten Years |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(dollars in thousands) |
|
U.S. Government
sponsored
agency securities |
|
$ |
|
|
|
|
|
|
|
$ |
7,648 |
|
|
|
4.03 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
State and municipal (1) |
|
|
142 |
|
|
|
3.56 |
|
|
|
941 |
|
|
|
5.93 |
|
|
|
179 |
|
|
|
5.59 |
|
|
|
|
|
|
|
|
|
Other securities |
|
|
50 |
|
|
|
|
|
|
|
25 |
|
|
|
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
192 |
|
|
|
2.63 |
% |
|
$ |
8,614 |
|
|
|
4.23 |
% |
|
$ |
179 |
|
|
|
5.59 |
% |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities (2) |
|
$ |
3,539 |
|
|
|
6.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE FOR SALE (at estimated fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURING |
|
|
|
|
|
|
|
|
|
|
|
After One But |
|
|
After Five But |
|
|
|
|
|
|
Within One Year |
|
|
Within Five Years |
|
|
Within Ten Years |
|
|
After Ten Years |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(dollars in thousands) |
|
U.S. Government securities |
|
$ |
17,066 |
|
|
|
5.16 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
U.S. Government sponsored
agency securities (3) |
|
|
38,600 |
|
|
|
4.36 |
|
|
|
243,777 |
|
|
|
5.08 |
|
|
|
4,771 |
|
|
|
5.13 |
|
|
|
1,317 |
|
|
|
7.04 |
|
State and municipal (1) |
|
|
24,320 |
|
|
|
5.14 |
|
|
|
274,567 |
|
|
|
4.70 |
|
|
|
84,737 |
|
|
|
5.65 |
|
|
|
104,655 |
|
|
|
6.84 |
|
Other securities |
|
|
50 |
|
|
|
5.30 |
|
|
|
4,191 |
|
|
|
6.22 |
|
|
|
|
|
|
|
|
|
|
|
66,396 |
|
|
|
7.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80,036 |
|
|
|
4.77 |
% |
|
$ |
522,535 |
|
|
|
4.89 |
% |
|
$ |
89,508 |
|
|
|
5.63 |
% |
|
$ |
172,368 |
|
|
|
6.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations
(2) |
|
$ |
492,524 |
|
|
|
5.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(2) |
|
$ |
1,343,107 |
|
|
|
4.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average yields on tax-exempt securities have been computed on a fully
tax-equivalent basis assuming a tax rate of 35 percent. |
|
(2) |
|
Maturities for mortgage-backed securities and collateralized mortgage obligations are
dependent upon the interest rate environment and prepayments on the underlying loans. For the
purpose of this table, the entire balance and weighted average rate is shown in one period. |
|
(3) |
|
Includes Small Business Administration securities, whose maturities are dependent upon
prepayments on the underlying loans. For the purpose of this table, amounts are based upon
contractual maturities. |
The Corporations investment portfolio consists mainly of mortgage-backed securities and
collateralized mortgage obligations which have stated maturities that may differ from actual
maturities due to borrowers ability to prepay obligations. Cash flows from such investments are
dependent upon the performance of the underlying mortgage loans, and are generally influenced by
the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the
underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments
increase.
46
The following table presents the approximate contractual maturity and interest rate sensitivity of
certain loan types, excluding consumer loans and leases, subject to changes in interest rates as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One |
|
|
|
|
|
|
|
|
|
One Year |
|
|
Through |
|
|
More Than |
|
|
|
|
|
|
or Less |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Commercial, financial and agricultural: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
1,456,715 |
|
|
$ |
475,713 |
|
|
$ |
225,704 |
|
|
$ |
2,158,132 |
|
Fixed rate |
|
|
309,313 |
|
|
|
407,876 |
|
|
|
89,865 |
|
|
|
807,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,766,028 |
|
|
$ |
883,589 |
|
|
$ |
315,569 |
|
|
$ |
2,965,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
620,216 |
|
|
$ |
1,594,790 |
|
|
$ |
1,377,582 |
|
|
$ |
3,592,588 |
|
Fixed rate |
|
|
370,450 |
|
|
|
976,975 |
|
|
|
426,071 |
|
|
|
1,773,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
990,666 |
|
|
$ |
2,571,765 |
|
|
$ |
1,803,653 |
|
|
$ |
5,366,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real-estate construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
$ |
1,029,168 |
|
|
$ |
152,214 |
|
|
$ |
47,538 |
|
|
$ |
1,228,920 |
|
Fixed rate |
|
|
85,380 |
|
|
|
39,078 |
|
|
|
75,431 |
|
|
|
199,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,114,548 |
|
|
$ |
191,292 |
|
|
$ |
122,969 |
|
|
$ |
1,428,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From a funding standpoint, the Corporation has been able to rely over the years on a stable base of
core deposits. Even though the Corporation has experienced notable changes in the composition and
interest sensitivity of this deposit base, it has been able to rely on this base to provide needed
liquidity. In addition, the Corporation issues certificates of deposits in various denominations,
including jumbo time deposits, repurchase agreements and short-term borrowings as potential sources
of liquidity.
Contractual maturities of time deposits of $100,000 or more outstanding at December 31, 2006 are as
follows (in thousands):
|
|
|
|
|
Three months or less |
|
$ |
369,560 |
|
Over three through six months |
|
|
291,073 |
|
Over six through twelve months |
|
|
394,241 |
|
Over twelve months |
|
|
161,242 |
|
|
|
|
|
Total |
|
$ |
1,216,116 |
|
|
|
|
|
Each of the Corporations subsidiary banks is a member of the FHLB and has access to FHLB overnight
and term credit facilities. At December 31, 2006, the Corporation had $998.5 million in term
advances from the FHLB with an additional $1.3 billion of borrowing capacity (including both
short-term funding on its lines of credit and long-term borrowings). This availability, along with
Federal funds lines at various correspondent banks, provides the Corporation with additional
liquidity.
47
The following table provides information about the Corporations interest rate sensitive financial
instruments. The table presents expected cash flows and weighted average rates for each significant
interest rate sensitive financial instrument, by expected maturity period (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Period |
|
|
|
|
|
|
Estimated |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Beyond |
|
|
Total |
|
|
Fair Value |
|
Fixed rate loans (1) |
|
$ |
924,799 |
|
|
$ |
605,999 |
|
|
$ |
511,552 |
|
|
$ |
358,602 |
|
|
$ |
248,512 |
|
|
$ |
596,918 |
|
|
$ |
3,246,382 |
|
|
$ |
3,135,763 |
|
Average rate |
|
|
6.64 |
% |
|
|
6.35 |
% |
|
|
6.47 |
% |
|
|
6.60 |
% |
|
|
6.65 |
% |
|
|
6.33 |
% |
|
|
6.50 |
% |
|
|
|
|
Floating rate loans (7) (8) |
|
|
3,136,621 |
|
|
|
780,789 |
|
|
|
616,523 |
|
|
|
502,517 |
|
|
|
416,318 |
|
|
|
1,655,019 |
|
|
|
7,107,787 |
|
|
|
7,045,241 |
|
Average rate |
|
|
8.27 |
% |
|
|
7.74 |
% |
|
|
7.74 |
% |
|
|
7.77 |
% |
|
|
7.27 |
% |
|
|
6.72 |
% |
|
|
7.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate investments (2) |
|
|
485,813 |
|
|
|
465,730 |
|
|
|
414,713 |
|
|
|
618,332 |
|
|
|
263,061 |
|
|
|
419,856 |
|
|
|
2,667,505 |
|
|
|
2,626,069 |
|
Average rate |
|
|
4.27 |
% |
|
|
3.97 |
% |
|
|
4.17 |
% |
|
|
4.02 |
% |
|
|
4.52 |
% |
|
|
5.10 |
% |
|
|
4.30 |
% |
|
|
|
|
Floating rate investments (2) |
|
|
70 |
|
|
|
1,592 |
|
|
|
101 |
|
|
|
500 |
|
|
|
|
|
|
|
91,727 |
|
|
|
93,990 |
|
|
|
94,320 |
|
Average rate |
|
|
5.12 |
% |
|
|
4.99 |
% |
|
|
5.72 |
% |
|
|
6.25 |
% |
|
|
|
|
|
|
5.57 |
% |
|
|
5.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets |
|
|
267,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,230 |
|
|
|
267,230 |
|
Average rate |
|
|
6.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.92 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
4,814,533 |
|
|
$ |
1,854,110 |
|
|
$ |
1,542,889 |
|
|
$ |
1,479,951 |
|
|
$ |
927,891 |
|
|
$ |
2,763,520 |
|
|
$ |
13,382,894 |
|
|
$ |
13,168,623 |
|
Average rate |
|
|
7.48 |
% |
|
|
6.34 |
% |
|
|
6.36 |
% |
|
|
5.92 |
% |
|
|
6.32 |
% |
|
|
6.35 |
% |
|
|
6.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate deposits (3) |
|
$ |
3,422,714 |
|
|
$ |
457,792 |
|
|
$ |
137,390 |
|
|
$ |
99,857 |
|
|
$ |
82,354 |
|
|
$ |
194,524 |
|
|
$ |
4,394,631 |
|
|
$ |
4,377,688 |
|
Average rate |
|
|
4.50 |
% |
|
|
4.22 |
% |
|
|
4.14 |
% |
|
|
4.45 |
% |
|
|
4.75 |
% |
|
|
4.53 |
% |
|
|
4.46 |
% |
|
|
|
|
Floating rate deposits (4) |
|
|
1,737,694 |
|
|
|
273,033 |
|
|
|
273,033 |
|
|
|
260,297 |
|
|
|
253,787 |
|
|
|
3,039,959 |
|
|
|
5,837,803 |
|
|
|
5,837,803 |
|
Average rate |
|
|
3.01 |
% |
|
|
1.02 |
% |
|
|
1.02 |
% |
|
|
0.90 |
% |
|
|
0.84 |
% |
|
|
0.69 |
% |
|
|
1.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate borrowings (5) |
|
|
284,564 |
|
|
|
196,989 |
|
|
|
59,565 |
|
|
|
89,565 |
|
|
|
536 |
|
|
|
261,435 |
|
|
|
892,654 |
|
|
|
909,647 |
|
Average rate |
|
|
5.10 |
% |
|
|
5.17 |
% |
|
|
4.95 |
% |
|
|
5.92 |
% |
|
|
4.75 |
% |
|
|
5.87 |
% |
|
|
5.41 |
% |
|
|
|
|
Floating rate borrowings (6) |
|
|
1,861,951 |
|
|
|
228,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,565 |
|
|
|
2,091,516 |
|
|
|
2,091,516 |
|
Average rate |
|
|
5.03 |
% |
|
|
4.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.44 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
7,306,923 |
|
|
$ |
1,155,814 |
|
|
$ |
469,988 |
|
|
$ |
449,719 |
|
|
$ |
336,677 |
|
|
$ |
3,497,483 |
|
|
$ |
13,216,604 |
|
|
$ |
13,216,654 |
|
Average rate |
|
|
4.30 |
% |
|
|
3.73 |
% |
|
|
2.43 |
% |
|
|
2.69 |
% |
|
|
1.80 |
% |
|
|
1.30 |
% |
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are based on contractual payments and maturities, adjusted for estimated
prepayments. |
|
(2) |
|
Amounts are based on contractual maturities; adjusted for estimated prepayments on
mortgage-backed securities, collateralized mortgage obligations and expected call on agency
and municipal securities. |
|
(3) |
|
Amounts are based on contractual maturities of time deposits.
|
|
(4) |
|
Estimated based on history of deposit flows. |
|
(5) |
|
Amounts are based on contractual maturities of debt instruments, adjusted for possible
calls. |
|
(6) |
|
Amounts include Federal funds purchased, short-term promissory notes, floating FHLB
advances and securities sold under agreements to repurchase, which mature in less than 90
days, in addition to junior subordinated deferrable interest debentures. |
|
(7) |
|
Floating rate loans include adjustable rate mortgages. |
|
(8) |
|
Line of credit amounts are based on historical cash flows, with an average life of
approximately 5 years. |
The preceding table and discussion addressed the liquidity implications of interest rate risk
and focused on expected cash flows from financial instruments. Expected maturities, however, do not
necessarily reflect the net interest income impact of interest rate changes. Certain financial
instruments, such as adjustable rate loans, have repricing periods that differ from expected cash
flows. Fair market value adjustments related to acquisitions are not included in the preceding
table.
In addition to the interest rate sensitive financial instruments included in the preceding table,
the Corporation also had interest rate swaps with a notional amount of $290.0 million as of
December 31, 2006. These swaps were used to hedge certain long-term fixed rate certificates of
deposit. The terms of the certificates of deposit and the interest rate swaps are similar and were
committed to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed
rate receiver and the floating rate payer (generally tied to the three-month LIBOR, a common index
used for setting rates between financial institutions). The combination of
48
the interest rate swaps and the issuance of the certificates of deposit generates long-term
floating rate funding for the Corporation. As of December 31, 2006, the Corporations weighted
average receive and pay rates were 4.62% and 5.28%, respectively.
The Corporation uses three complementary methods to measure and manage interest rate risk. They are
static gap analysis, simulation of earnings, and estimates of economic value of equity.
Static gap provides a measurement of repricing risk in the Corporations balance sheet as of a
point in time. This measurement is accomplished through stratification of the Corporations assets
and liabilities into repricing periods. The sum of assets and liabilities in each of these periods
are compared for mismatches within that maturity segment. Core deposits having non-contractual
maturities are placed into repricing periods based upon historical balance performance. Repricing
for mortgage loans, mortgage-backed securities and collateralized mortgage obligations includes the
effect of expected cash flows. Estimated prepayment effects are applied to these balances based
upon industry projections for prepayment speeds. The Corporations policy limits the cumulative
six-month gap to plus or minus 15% of total earning assets. The cumulative six-month gap as of
December 31, 2006 was negative 4.1%. The cumulative six-month ratio of rate sensitive assets to
rate sensitive liabilities as of December 31, 2006 was 0.91.
Simulation of net interest income is performed for the next twelve-month period. A variety of
interest rate scenarios are used to measure the effects of sudden and gradual movements upward and
downward in the yield curve. These results are compared to the results obtained in a flat or
unchanged interest rate scenario. Simulation of earnings is used primarily to measure the
Corporations short-term earnings exposure to rate movements. The Corporations policy limits the
potential exposure of net interest income to 10% of the base case net interest income for every 100
basis point shock in interest rates. A shock is an immediate upward or downward movement of
short-term interest rates with changes across the yield curve based upon industry projections. The
following table summarizes the expected impact of interest rate shocks on net interest income:
|
|
|
|
|
|
|
Annual change |
|
|
Rate Shock |
|
in net interest income |
|
% Change |
+300 bp |
|
+ $7.5 million |
|
+1.6% |
+200 bp |
|
+ $5.1 million |
|
+1.1% |
+100 bp |
|
+ $2.7 million |
|
+0.6% |
-100 bp |
|
- $4.4 million |
|
-0.9% |
-200 bp |
|
- $11.8 million |
|
-2.4% |
-300 bp |
|
- $21.2 million |
|
-4.4% |
Economic value of equity estimates the discounted present value of asset cash flows and liability
cash flows. Discount rates are based upon market prices for like assets and liabilities. Upward and
downward shocks of interest rates are used to determine the comparative effect of such interest
rate movements relative to the unchanged environment. This measurement tool is used primarily to
evaluate the longer-term repricing risks and options in the Corporations balance sheet. A policy
limit of 10% of economic equity may be at risk for every 100 basis point shock in interest rates.
As of December 31, 2006, the Corporation was within policy limits for every basis point shock
movement in interest rates.
As with any modeling system, the results of the static gap and simulation of net interest income
and economic value of equity are a function of the assumptions and projections built into the
model. The actual behavior of the financial instruments could differ from these assumptions and
projections.
49
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
355,018 |
|
|
$ |
368,043 |
|
Interest-bearing deposits with other banks |
|
|
27,529 |
|
|
|
31,404 |
|
Federal funds sold |
|
|
659 |
|
|
|
528 |
|
Loans held for sale |
|
|
239,042 |
|
|
|
243,378 |
|
Investment securities: |
|
|
|
|
|
|
|
|
Held to maturity (estimated fair value of $12,534 in 2006 and $18,317 in 2005) |
|
|
12,524 |
|
|
|
18,258 |
|
Available for sale |
|
|
2,865,714 |
|
|
|
2,543,887 |
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
|
10,374,323 |
|
|
|
8,424,728 |
|
Less: Allowance for loan losses |
|
|
(106,884 |
) |
|
|
(92,847 |
) |
|
|
|
|
|
|
|
Net Loans |
|
|
10,267,439 |
|
|
|
8,331,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
191,401 |
|
|
|
170,254 |
|
Accrued interest receivable |
|
|
71,825 |
|
|
|
53,261 |
|
Goodwill |
|
|
626,042 |
|
|
|
418,735 |
|
Intangible assets |
|
|
37,733 |
|
|
|
29,687 |
|
Other assets |
|
|
224,038 |
|
|
|
192,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
14,918,964 |
|
|
$ |
12,401,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,831,419 |
|
|
$ |
1,672,637 |
|
Interest-bearing |
|
|
8,401,050 |
|
|
|
7,132,202 |
|
|
|
|
|
|
|
|
Total Deposits |
|
|
10,232,469 |
|
|
|
8,804,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
1,022,351 |
|
|
|
939,096 |
|
Other short-term borrowings |
|
|
658,489 |
|
|
|
359,866 |
|
|
|
|
|
|
|
|
Total Short-Term Borrowings |
|
|
1,680,840 |
|
|
|
1,298,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
61,392 |
|
|
|
38,604 |
|
Other liabilities |
|
|
123,805 |
|
|
|
115,834 |
|
Federal Home Loan Bank advances and long-term debt |
|
|
1,304,148 |
|
|
|
860,345 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
13,402,654 |
|
|
|
11,118,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
|
Common stock, $2.50 par value, 600 million shares authorized, 190.8 million shares issued
in 2006 and 181.0 million shares issued in 2005 |
|
|
476,987 |
|
|
|
430,827 |
|
Additional paid-in capital |
|
|
1,246,823 |
|
|
|
996,708 |
|
Retained earnings |
|
|
92,592 |
|
|
|
138,529 |
|
Accumulated other comprehensive loss |
|
|
(39,091 |
) |
|
|
(42,285 |
) |
Treasury stock (17.1 million shares in 2006 and 16.1 million shares in 2005), at cost |
|
|
(261,001 |
) |
|
|
(240,808 |
) |
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
1,516,310 |
|
|
|
1,282,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
14,918,964 |
|
|
$ |
12,401,555 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
50
|
|
|
|
|
CONSOLIDATED STATEMENTS OF INCOME |
(dollars in thousands, except per-share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
727,297 |
|
|
$ |
517,413 |
|
|
$ |
394,765 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
97,652 |
|
|
|
74,921 |
|
|
|
76,792 |
|
Tax-exempt |
|
|
14,896 |
|
|
|
12,114 |
|
|
|
9,553 |
|
Dividends |
|
|
6,568 |
|
|
|
4,793 |
|
|
|
4,023 |
|
Loans held for sale |
|
|
15,564 |
|
|
|
14,940 |
|
|
|
8,407 |
|
Other interest income |
|
|
2,530 |
|
|
|
1,586 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
864,507 |
|
|
|
625,767 |
|
|
|
493,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
246,941 |
|
|
|
140,774 |
|
|
|
89,779 |
|
Short-term borrowings |
|
|
78,043 |
|
|
|
34,414 |
|
|
|
15,182 |
|
Long-term debt |
|
|
53,960 |
|
|
|
38,031 |
|
|
|
31,033 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
378,944 |
|
|
|
213,219 |
|
|
|
135,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
485,563 |
|
|
|
412,548 |
|
|
|
357,649 |
|
Provision for Loan Losses |
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After
Provision for Loan Losses |
|
|
482,065 |
|
|
|
409,428 |
|
|
|
352,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Investment management and trust services |
|
|
37,441 |
|
|
|
35,669 |
|
|
|
34,817 |
|
Service charges on deposit accounts |
|
|
43,773 |
|
|
|
40,198 |
|
|
|
39,451 |
|
Other service charges and fees |
|
|
26,792 |
|
|
|
24,229 |
|
|
|
20,494 |
|
Gains on sales of loans |
|
|
21,086 |
|
|
|
25,032 |
|
|
|
19,262 |
|
Investment securities gains |
|
|
7,439 |
|
|
|
6,625 |
|
|
|
17,712 |
|
Other |
|
|
13,344 |
|
|
|
12,545 |
|
|
|
7,128 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
|
149,875 |
|
|
|
144,298 |
|
|
|
138,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
213,913 |
|
|
|
181,889 |
|
|
|
166,026 |
|
Net occupancy expense |
|
|
36,493 |
|
|
|
29,275 |
|
|
|
23,813 |
|
Equipment expense |
|
|
14,251 |
|
|
|
11,938 |
|
|
|
10,769 |
|
Data processing |
|
|
12,228 |
|
|
|
12,395 |
|
|
|
11,430 |
|
Advertising |
|
|
10,638 |
|
|
|
8,823 |
|
|
|
6,943 |
|
Intangible amortization |
|
|
7,907 |
|
|
|
5,311 |
|
|
|
4,726 |
|
Other |
|
|
70,561 |
|
|
|
66,660 |
|
|
|
53,808 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
365,991 |
|
|
|
316,291 |
|
|
|
277,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
265,949 |
|
|
|
237,435 |
|
|
|
214,281 |
|
Income Taxes |
|
|
80,422 |
|
|
|
71,361 |
|
|
|
64,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
$ |
149,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per-Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Basic) |
|
$ |
1.07 |
|
|
$ |
1.01 |
|
|
$ |
0.95 |
|
Net Income (Diluted) |
|
|
1.06 |
|
|
|
1.00 |
|
|
|
0.94 |
|
Cash Dividends |
|
|
0.581 |
|
|
|
0.540 |
|
|
|
0.493 |
|
See Notes to Consolidated Financial Statements
51
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
(dollars in thousands) |
|
Balance at January 1, 2004 |
|
|
149,189,000 |
|
|
$ |
284,480 |
|
|
$ |
648,155 |
|
|
$ |
104,187 |
|
|
$ |
12,267 |
|
|
$ |
(100,772 |
) |
|
$ |
948,317 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,608 |
|
|
|
|
|
|
|
|
|
|
|
149,608 |
|
Unrealized loss on securities
(net of $5.6 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,329 |
) |
|
|
|
|
|
|
(10,329 |
) |
Less reclassification adjustment for
gains included in net income (net of
$6.2 million tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,513 |
) |
|
|
|
|
|
|
(11,513 |
) |
Minimum pension liability adjustment
(net of $300,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(558 |
) |
|
|
|
|
|
|
(558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend - 5% |
|
|
|
|
|
|
15,278 |
|
|
|
100,247 |
|
|
|
(115,615 |
) |
|
|
|
|
|
|
|
|
|
|
(90 |
) |
Stock issued, including related tax benefits |
|
|
1,376,000 |
|
|
|
|
|
|
|
(9,141 |
) |
|
|
|
|
|
|
|
|
|
|
19,027 |
|
|
|
9,886 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
3,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900 |
|
Stock issued for acquisition of
Resource Bankshares Corporation |
|
|
11,851,000 |
|
|
|
21,498 |
|
|
|
164,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,863 |
|
Stock issued for acquisition of
First Washington FinancialCorp. |
|
|
7,533,000 |
|
|
|
14,348 |
|
|
|
110,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,225 |
|
Acquisition of treasury stock |
|
|
(4,941,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,966 |
) |
|
|
(78,966 |
) |
Cash dividends $0.493 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,256 |
) |
|
|
|
|
|
|
|
|
|
|
(77,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
165,008,000 |
|
|
$ |
335,604 |
|
|
$ |
1,018,403 |
|
|
$ |
60,924 |
|
|
$ |
(10,133 |
) |
|
$ |
(160,711 |
) |
|
$ |
1,244,087 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,074 |
|
|
|
|
|
|
|
|
|
|
|
166,074 |
|
Unrealized loss on securities
(net of $14.1 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,219 |
) |
|
|
|
|
|
|
(26,219 |
) |
Unrealized loss on derivative financial
instruments (net of $1.2 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,185 |
) |
|
|
|
|
|
|
(2,185 |
) |
Less reclassification adjustment for
gains included in net income (net of
$2.3 million tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,306 |
) |
|
|
|
|
|
|
(4,306 |
) |
Minimum pension liability adjustment
(net of $300,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-for-4 stock split paid in the form of a
25 % stock dividend |
|
|
|
|
|
|
84,046 |
|
|
|
(84,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
Stock issued, including related tax benefits |
|
|
1,176,000 |
|
|
|
1,809 |
|
|
|
4,179 |
|
|
|
|
|
|
|
|
|
|
|
5,071 |
|
|
|
11,059 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,041 |
|
Stock issued for acquisition of
SVB Financial Services, Inc. |
|
|
3,934,000 |
|
|
|
9,368 |
|
|
|
57,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,567 |
|
Acquisition of treasury stock |
|
|
(5,250,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,168 |
) |
|
|
(85,168 |
) |
Cash dividends $0.540 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,469 |
) |
|
|
|
|
|
|
|
|
|
|
(88,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
164,868,000 |
|
|
$ |
430,827 |
|
|
$ |
996,708 |
|
|
$ |
138,529 |
|
|
$ |
(42,285 |
) |
|
$ |
(240,808 |
) |
|
$ |
1,282,971 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
|
|
|
|
|
|
|
|
|
|
185,527 |
|
Unrealized gain on securities
(net of $9.8 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,132 |
|
|
|
|
|
|
|
18,132 |
|
Unrealized loss on derivative financial
instrument (net of $702,000 tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,304 |
) |
|
|
|
|
|
|
(1,304 |
) |
Less reclassification adjustment for
gains included in net income (net of
$2.6 million tax expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,835 |
) |
|
|
|
|
|
|
(4,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply Statement 158
(net of $3.1 million tax effect) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,799 |
) |
|
|
|
|
|
|
(8,799 |
) |
Stock dividend - 5% |
|
|
|
|
|
|
22,648 |
|
|
|
107,952 |
|
|
|
(130,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, including related tax benefits |
|
|
1,222,000 |
|
|
|
2,989 |
|
|
|
6,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,857 |
|
Stock-based compensation awards |
|
|
|
|
|
|
|
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,687 |
|
Stock issued
for acquisition of Columbia Bancorp |
|
|
8,619,000 |
|
|
|
20,523 |
|
|
|
133,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,131 |
|
Acquisition of treasury stock |
|
|
(1,061,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,770 |
) |
|
|
(16,770 |
) |
Accelerated share repurchase settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,423 |
) |
|
|
(3,423 |
) |
Cash dividends $0.581 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,864 |
) |
|
|
|
|
|
|
|
|
|
|
(100,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
173,648,000 |
|
|
$ |
476,987 |
|
|
$ |
1,246,823 |
|
|
$ |
92,592 |
|
|
$ |
(39,091 |
) |
|
$ |
(261,001 |
) |
|
$ |
1,516,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
185,527 |
|
|
$ |
166,074 |
|
|
$ |
149,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
Depreciation and amortization of premises and equipment |
|
|
16,905 |
|
|
|
14,338 |
|
|
|
12,409 |
|
Net amortization of investment security premiums |
|
|
3,608 |
|
|
|
5,158 |
|
|
|
9,906 |
|
Deferred income tax (benefit) expense |
|
|
(5,779 |
) |
|
|
990 |
|
|
|
816 |
|
Investment securities gains |
|
|
(7,439 |
) |
|
|
(6,625 |
) |
|
|
(17,712 |
) |
Gains on sales of loans |
|
|
(21,086 |
) |
|
|
(25,468 |
) |
|
|
(19,262 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
1,948,276 |
|
|
|
2,300,098 |
|
|
|
1,475,000 |
|
Originations of mortgage loans held for sale |
|
|
(1,922,854 |
) |
|
|
(2,315,410 |
) |
|
|
(1,456,465 |
) |
Amortization of intangible assets |
|
|
7,907 |
|
|
|
5,311 |
|
|
|
4,726 |
|
Stock-based compensation |
|
|
1,687 |
|
|
|
1,041 |
|
|
|
3,900 |
|
Excess tax benefits from stock-based compensation |
|
|
(783 |
) |
|
|
(269 |
) |
|
|
(177 |
) |
(Increase) decrease in accrued interest receivable |
|
|
(11,908 |
) |
|
|
(10,501 |
) |
|
|
22 |
|
(Increase) decrease in other assets |
|
|
(12,613 |
) |
|
|
5,376 |
|
|
|
4,636 |
|
Increase (decrease) in accrued interest payable |
|
|
21,741 |
|
|
|
11,008 |
|
|
|
(759 |
) |
(Decrease) increase in other liabilities |
|
|
(7,384 |
) |
|
|
(7,756 |
) |
|
|
3,266 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
13,776 |
|
|
|
(19,583 |
) |
|
|
25,023 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
199,303 |
|
|
|
146,491 |
|
|
|
174,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
147,194 |
|
|
|
143,806 |
|
|
|
235,332 |
|
Proceeds from maturities of securities held to maturity |
|
|
5,923 |
|
|
|
10,846 |
|
|
|
8,870 |
|
Proceeds from maturities of securities available for sale |
|
|
598,111 |
|
|
|
666,060 |
|
|
|
816,834 |
|
Purchase of securities held to maturity |
|
|
(698 |
) |
|
|
(4,403 |
) |
|
|
(11,402 |
) |
Purchase of securities available for sale |
|
|
(868,876 |
) |
|
|
(861,897 |
) |
|
|
(269,776 |
) |
Decrease (increase) in short-term investments |
|
|
20,598 |
|
|
|
78,265 |
|
|
|
(9,188 |
) |
Net increase in loans |
|
|
(886,372 |
) |
|
|
(589,053 |
) |
|
|
(577,403 |
) |
Net cash (paid for) received from acquisitions |
|
|
(109,729 |
) |
|
|
(3,791 |
) |
|
|
7,810 |
|
Net purchase of premises and equipment |
|
|
(30,277 |
) |
|
|
(28,336 |
) |
|
|
(16,161 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,124,126 |
) |
|
|
(588,503 |
) |
|
|
184,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in demand and savings deposits |
|
|
(137,546 |
) |
|
|
35,153 |
|
|
|
293,331 |
|
Net increase (decrease) in time deposits |
|
|
596,240 |
|
|
|
400,672 |
|
|
|
(174,453 |
) |
Additions to long-term debt |
|
|
550,166 |
|
|
|
319,606 |
|
|
|
45,000 |
|
Repayments of long-term debt |
|
|
(186,499 |
) |
|
|
(168,207 |
) |
|
|
(63,509 |
) |
Increase (decrease) in short-term borrowings |
|
|
197,795 |
|
|
|
104,438 |
|
|
|
(338,845 |
) |
Dividends paid |
|
|
(98,022 |
) |
|
|
(85,495 |
) |
|
|
(74,802 |
) |
Net proceeds from issuance of common stock |
|
|
9,074 |
|
|
|
10,722 |
|
|
|
9,619 |
|
Excess tax benefits from stock-based compensation |
|
|
783 |
|
|
|
269 |
|
|
|
177 |
|
Acquisition of treasury stock |
|
|
(20,193 |
) |
|
|
(85,168 |
) |
|
|
(78,966 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
911,798 |
|
|
|
531,990 |
|
|
|
(382,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Due From Banks |
|
|
(13,025 |
) |
|
|
89,978 |
|
|
|
(22,901 |
) |
Cash and Due From Banks at Beginning of Year |
|
|
368,043 |
|
|
|
278,065 |
|
|
|
300,966 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Due From Banks at End of Year |
|
$ |
355,018 |
|
|
$ |
368,043 |
|
|
$ |
278,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
357,203 |
|
|
$ |
202,211 |
|
|
$ |
136,753 |
|
Income taxes |
|
|
77,327 |
|
|
|
60,539 |
|
|
|
54,457 |
|
See Notes to Consolidated Financial Statements
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Fulton Financial Corporation (Parent Company) is a multi-bank financial holding company
which provides a full range of banking and financial services to businesses and consumers through
its wholly owned banking subsidiaries: Fulton Bank, Lebanon Valley Farmers Bank, Swineford National
Bank, Lafayette Ambassador Bank, FNB Bank N.A., Hagerstown Trust, Delaware National Bank, The Bank,
The Peoples Bank of Elkton, Skylands Community Bank, Resource Bank, First Washington State Bank,
Somerset Valley Bank and The Columbia Bank as well as its financial services subsidiaries, Fulton
Financial Advisors, N.A., and Fulton Insurance Services Group, Inc. In addition, the Parent Company
owns the following non-bank subsidiaries: Fulton Financial Realty Company, Fulton Reinsurance
Company, LTD, Central Pennsylvania Financial Corp., FFC Management, Inc. and FFC Penn Square, Inc.
Collectively, the Parent Company and its subsidiaries are referred to as the Corporation.
The Corporations primary sources of revenue are interest income on loans and investment securities
and fee income on its products and services. Its expenses consist of interest expense on deposits
and borrowed funds, provision for loan losses, other operating expenses and income taxes. The
Corporations primary competition is other financial services providers operating in its region.
Competitors also include financial services providers located outside the Corporations
geographical market as a result of the growth in electronic delivery systems. The Corporation is
subject to the regulations of certain Federal and state agencies and undergoes periodic
examinations by such regulatory authorities.
The Corporation offers, through its banking subsidiaries, a full range of retail and commercial
banking services throughout central and eastern Pennsylvania, Maryland, Delaware, New Jersey and
Virginia. Industry diversity is the key to the economic well being of these markets and the
Corporation is not dependent upon any single customer or industry.
Basis of Financial Statement Presentation: The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States (U.S.
GAAP) and include the accounts of the Parent Company and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The preparation of
financial statements in accordance with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements as well as revenues and expenses
during the period. Actual results could differ from those estimates.
Investments: Debt securities are classified as held to maturity at the time of purchase when the
Corporation has both the intent and ability to hold these investments until they mature. Such debt
securities are carried at cost, adjusted for amortization of premiums and accretion of discounts
using the effective yield method. The Corporation does not engage in trading activities, however,
since the investment portfolio serves as a source of liquidity, most debt securities and all
marketable equity securities are classified as available for sale. Securities available for sale
are carried at estimated fair value with the related unrealized holding gains and losses reported
in shareholders equity as a component of other comprehensive income, net of tax. Realized security
gains and losses are computed using the specific identification method and are recorded on a trade
date basis. Securities are evaluated periodically to determine whether a decline in their value is
other than temporary. Declines in value that are determined to be other than temporary are recorded
as realized losses.
Loans and Revenue Recognition: Loan and lease financing receivables are stated at their principal
amount outstanding, except for loans held for sale which are carried at the lower of aggregate cost
or market value. Interest income on loans is accrued as earned. Unearned income on lease financing
receivables is recognized on a basis which approximates the effective yield method. Premiums and
discounts on purchased loans are amortized as an adjustment to interest income using the effective
yield method.
Accrual of interest income is generally discontinued when a loan becomes 90 days past due as to
principal or interest, except for adequately collateralized mortgage loans. When interest accruals
are discontinued, unpaid interest credited to income is reversed. Non-accrual loans are restored to
accrual status when all delinquent principal and interest become current or the loan is considered
secured and in the process of collection.
Loan Origination Fees and Costs: Loan origination fees and the related direct origination costs
are offset and the net amount is deferred and amortized over the life of the loan using the
effective interest method as an adjustment to interest income. For mortgage loans sold, the net
amount is included in gain or loss upon the sale of the related mortgage loan.
54
Allowance for Loan Losses: The allowance for loan losses is increased by charges to expense and
decreased by charge-offs, net of recoveries. Managements periodic evaluation of the adequacy of
the allowance for loan losses is based on the Corporations past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the borrowers ability to
repay, the estimated fair value of the underlying collateral, and current economic conditions.
Management believes that the allowance for loan losses is adequate, however, future changes to the
allowance may be necessary based on changes in any of these factors.
The allowance for loan losses consists of two components specific allowances allocated to
individually impaired loans, as defined by the Financial Accounting Standards Boards (FASB)
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan (Statement 114), and allowances calculated for pools of loans under Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies (Statement 5).
Commercial loans and commercial mortgages are reviewed for impairment under Statement 114 if they
are both greater than $100,000 and are rated less than satisfactory based upon the Corporations
internal credit-rating process. A satisfactory loan does not present more than a normal credit risk
based on the strength of the borrowers management, financial condition and trends, and the type
and sufficiency of underlying collateral. It is expected that the borrower will be able to satisfy
the terms of the loan agreement.
A loan is considered to be impaired when, based on current information and events, it is probable
that the Corporation will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Generally, these are loans that management has placed on non-accrual status.
Impaired loans are measured based on the present value of expected future cash flows discounted at
the loans effective interest rate, or at the loans observable market price or fair value of the
collateral if the loan is collateral dependent. An allowance is allocated to an impaired loan if
the carrying value exceeds the calculated estimated fair value.
All loans not reviewed for impairment are evaluated under Statement 5. In addition to commercial
loans and mortgages not meeting the impairment evaluation criteria discussed above, these include
residential mortgages, consumer loans, installment loans and lease receivables. These loans are
segmented into groups with similar characteristics and an allowance for loan losses is allocated to
each segment based on quantitative factors such as recent loss history and qualitative factors such
as economic conditions and trends.
Loans and lease financing receivables deemed to be a loss are written off through a charge against
the allowance for loan losses. Consumer loans are generally charged off when they become 120 days
past due if they are not adequately secured by real estate. All other loans are evaluated for
possible charge-off when it is probable that the balance will not be collected, based on the
ability of the borrower to pay and the value of the underlying collateral. Recoveries of loans
previously charged off are recorded as an increase to the allowance for loan losses. Past due
status is determined based on contractual due dates for loan payments.
Lease financing receivables include both open and closed end leases for the purchase of vehicles
and equipment. Residual values are set at the inception of the lease and are reviewed periodically
for impairment. If the impairment is considered to be other than temporary, the resulting reduction
in the net investment in the lease is recognized as a loss in the period.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is generally computed using the
straight-line method over the estimated useful lives of the related assets, which are a maximum of
50 years for buildings and improvements, 8 years for furniture and 5 years for equipment.
Leasehold improvements are amortized over the shorter of 15 years or the non-cancelable lease term.
Interest costs incurred during the construction of major bank premises are capitalized.
Other Real Estate Owned: Assets acquired in settlement of mortgage loan indebtedness are recorded
as other real estate owned and are included in other assets initially at the lower of the estimated
fair value of the asset less estimated selling costs or the carrying amount of the loan. Costs to
maintain the assets and subsequent gains and losses on sales are included in other income and other
expense.
Mortgage Servicing Rights: The estimated fair value of mortgage servicing rights (MSRs) related
to loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans.
MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying
loans. In addition, MSRs are evaluated quarterly for impairment and, if necessary, additional
amortization is recorded.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for
Servicing of Financial Assets an amendment of FASB Statement No. 140 (Statement 156). Statement
156 requires recognition of a servicing asset or liability at fair value each time an obligation is
undertaken to service a financial asset by entering into a servicing contract. Statement
55
156 also provides guidance on subsequent measurement methods for each class of separately
recognized servicing assets and liabilities and specifies financial statement presentation and
disclosure requirements. This statement is effective for fiscal years beginning after September 15,
2006, or January 1, 2007 for the Corporation. The Corporation has elected to continue amortizing
MSRs over the estimated lives of the underlying loans. As a result, the adoption of this standard
did not impact the Corporations consolidated financial statements.
Derivative Financial Instruments: As of December 31, 2006, interest rate swaps with a notional
amount of $290.0 million were used to hedge certain long-term fixed rate certificates of deposit.
The terms of the certificates of deposit and the interest rate swaps are similar and were committed
to simultaneously. Under the terms of the swap agreements, the Corporation is the fixed rate
receiver and the floating rate payer (generally tied to the three month London Interbank Offering
Rate, or LIBOR, a common index used for setting rates between financial institutions). The interest
rate swaps are classified as fair value hedges and both the interest rate swaps and the
certificates of deposit are recorded at fair value, with changes in the fair values during the
period recorded to other income or expense. For interest rate swaps accounted for as fair value
hedges, ineffectiveness is the difference between the changes in the fair value of the interest
rate swaps and the hedged items, in this case the certificates of deposit. The Corporations
analysis of effectiveness indicated the hedges were highly effective as of December 31, 2006. For
the year ended December 31, 2006, a net gain of $217,000 was recorded in other expense,
representing the net impact of the changes in fair values of the interest rate swaps and the
certificates of deposit, compared to a net loss of $110,000 recorded for the year ended December
31, 2005.
The Corporation entered into a forward-starting interest rate swap with a notional amount of $150.0
million in October 2005 in anticipation of the issuance of $150.0 million of trust preferred
securities in January 2006. This was accounted for as a cash flow hedge as it hedges the
variability of interest payments attributable to changes in interest rates on the forecasted
issuance of fixed-rate debt. As of December 31, 2005, $2.2 million had been recorded as an other
comprehensive loss, representing the estimated fair value of the swap on that date, net of a $1.2
million tax effect. The Corporation settled this derivative in January 2006 for a total payment of
$5.5 million to the counterparty that resulted in an additional $1.4 million charge to other
comprehensive loss, net of a $751,000 tax effect. The total amount recorded to other comprehensive
loss, $3.6 million, is being amortized to interest expense over the life of the related securities
using the effective interest method. The total amount of net losses in accumulated other
comprehensive loss that will be reclassified to interest expense in 2007 is expected to be
approximately $185,000.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting
for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140
(Statement 155). Statement 155 amends the guidance in FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Statement 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole, thereby eliminating the
need to bifurcate the derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. Statement 155 is effective for all financial instruments
acquired, issued, or subject to a remeasurement date after the beginning of a companys first
fiscal year that begins after September 15, 2006, or January 1, 2007 for the Corporation. Adoption
of Statement 155 did not have an impact on the Corporations consolidated financial
statements.
Income Taxes: The provision for income taxes is based upon income before income taxes,
adjusted primarily for the effect of tax-exempt income and net credits received from investments in
low and moderate income housing partnerships (LIH investments). Certain items of income and expense
are reported in different periods for financial reporting and tax return purposes. The tax effects
of these temporary differences are recognized currently in the deferred income tax provision or
benefit. Deferred tax assets or liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the applicable enacted
marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the
deferred tax asset or liability from period to period.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Specifically, the interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006, or January 1, 2007 for the Corporation. The Corporation is evaluating the impact of FIN 48 in all tax positions and does not believe there is any material impact of adopting FIN 48 on the Corporations consolidated financial statements.
Stock-Based Compensation: The Corporation accounts for its stock-based compensation awards in
accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment
(Statement 123R), which requires public companies to recognize compensation expense related to
stock-based compensation awards in their income statements. Compensation expense is equal to the
56
fair value of the stock-based compensation awards, net of estimated forfeitures, and is recognized
over the vesting period of such awards.
Net Income Per Share: The Corporations basic net income per share is calculated as net income
divided by the weighted average number of shares outstanding. For diluted net income per share, net
income is divided by the weighted average number of shares outstanding plus the incremental number
of shares added as a result of converting common stock equivalents, calculated using the treasury
stock method. The Corporations common stock equivalents consist of outstanding stock options.
A reconciliation of the weighted average shares outstanding used to calculate basic net income per
share and diluted net income per share follows. There were no adjustments to net income to arrive
at diluted net income per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Weighted average shares outstanding (basic) |
|
|
172,830 |
|
|
|
164,234 |
|
|
|
156,759 |
|
Impact of common stock equivalents |
|
|
2,042 |
|
|
|
2,026 |
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (diluted) |
|
|
174,872 |
|
|
|
166,260 |
|
|
|
158,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the diluted shares
computation as their effect would have been anti-dilutive |
|
|
2,179 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosures about Segments of an Enterprise and Related Information: The Corporation does not have
any operating segments which require disclosure of additional information. While the Corporation
owns several separate banks, each engages in similar activities, provides similar products and
services, and operates in the same general geographical area. The Corporations non-banking
activities are immaterial and, therefore, separate information has not been disclosed.
Financial Guarantees: Financial guarantees, which consist primarily of standby and commercial
letters of credit, are accounted for by recognizing a liability equal to the fair value of the
guarantees and crediting the liability to income over the term of the guarantee. Fair value is
estimated using the fees currently charged to enter into similar agreements with similar terms.
Business Combinations and Intangible Assets: The Corporation accounts for its acquisitions using
the purchase accounting method as required by Statement of Financial Accounting Standards No. 141,
Business Combinations. Purchase accounting requires the total purchase price to be allocated to
the estimated fair values of assets and liabilities acquired, including certain intangible assets
that must be recognized. Typically, this allocation results in the purchase price exceeding the
fair value of net assets acquired, which is recorded as goodwill.
As required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (Statement 142), goodwill is not amortized to expense, but is tested for impairment at
least annually. Write-downs of the balance, if necessary as a result of the impairment test, are to
be charged to expense in the period in which goodwill is determined to be impaired. The Corporation
performs its annual test of goodwill impairment as of October 31st of each year. Based on the
results of these tests the Corporation concluded that there was no impairment and no write-downs
were recorded in 2006, 2005 or 2004. If certain events occur which might indicate goodwill has been
impaired between annual tests, the goodwill must be tested when such events occur.
As required by Statement of Financial Accounting Standards No. 147, Acquisitions of Certain
Financial Institutions the excess purchase price recorded in qualifying branch acquisitions are
treated in the same manner as Statement 142 goodwill.
Variable Interest Entities: FASB Interpretation No. 46, Consolidation of Variable Interest
Entities An Interpretation of ARB No. 51 (FIN 46), provides guidance on when to consolidate
certain Variable Interest Entities (VIEs) in the financial statements of the Corporation. VIEs
are entities in which equity investors do not have a controlling financial interest or do not have
sufficient equity at risk for the entity to finance activities without additional financial support
from other parties. Under FIN 46, a company must consolidate a VIE if the company has a variable
interest that will absorb a majority of the VIEs losses, if they occur, and/or receive a majority
of the VIEs residual returns, if they occur. For the Corporation, FIN 46 affects securities issued
by subsidiary trusts (Subsidiary Trusts) and its LIH investments.
57
As required by Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in
Applying FASB Interpretation No. 46(R) (Staff Position FIN 46(R)-6), the Corporation has addressed
how an entity should determine the variability to be considered in applying FIN 46, including, the
determination of (a) whether the entity is a VIE, (b) which interests are variable interests in
the entity and (c) which party, if any, is the primary beneficiary of the VIE. The staff position
had no impact the Corporations consolidated financial statements.
The provisions of FIN 46 related to Subsidiary Trusts, as interpreted by the Securities and
Exchange Commission (SEC), disallow consolidation of Subsidiary Trusts in the financial statements
of the Corporation. As a result, securities that were issued by the trusts (Trust Preferred
Securities) are not included in the Corporations consolidated balance sheets. The junior
subordinated debentures issued by the Parent Company to the Subsidiary Trusts, which have the same
total balance and rate as the combined equity securities and trust preferred securities issued by
the Subsidiary Trusts, remain in long-term debt (See Note I, Short-Term Borrowings and Long-Term
Debt).
LIH Investments are amortized under the effective interest method over the life of the Federal
income tax credits generated as a result of such investments, generally ten years. At December 31,
2006 and 2005, the Corporations LIH Investments, included in other assets in the consolidated balance sheets, totaled $41.3 million and $44.2 million,
respectively. The net income tax benefit associated with these investments was $3.9 million, $4.9
million, and $4.5 million in 2006, 2005 and 2004, respectively. None of the Corporations LIH
Investments met the consolidation criteria of FIN 46 or Staff Position FIN 46(R)-6 as of December
31, 2006 or 2005.
Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurement (Statement 157). Statement 157 defines fair value,
establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure requirements
for fair value measurements. Statement 157 does not require any new fair value measurements and is
effective for financial statements issued for fiscal years beginning after November 15, 2007, or
January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of
Statement 157 on the consolidated financial statements.
Endorsement Split-Dollar Life Insurance Arrangements: In September 2006, the FASB ratified Emerging
Issues Task Force (EITF) issue 06-4, Accounting for Deferred Compensation and Post-retirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4
addresses accounting for endorsement split-dollar life insurance arrangements that provide a
benefit to an employee that extends to post-retirement periods. EITF 06-4 would require that the
post-retirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be
recognized as a liability by the employer and that the obligation is not settled upon entering into
an insurance arrangement. EITF 06-4 is effective for fiscal years beginning after December 15,
2007, or January 1, 2008 for the Corporation. The Corporation is currently evaluating the impact of
EITF 06-4 on the consolidated financial statements.
Fair Value Option for Financial Assets and Liabilities: In February 2007, the FASB issued Statement
No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (Statement 159). Statement 159 permits entities to choose to
measure many financial instruments and certain other items at fair value and amends Statement 115
to, among other things, require certain disclosures for amounts for which the fair value option is
applied. Additionally, this standard provides that an entity may reclassify held-to-maturity and
available-for-sale securities to the trading account when the fair value option is elected for such
securities, without calling into question the intent to hold other securities to maturity in the
future. This standard is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007, or January 1, 2008 for the Corporation. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also
elects to apply the provisions of Statement 157. The Corporation has not completed its assessment
of SFAS 159 and the impact, if any, on the consolidated financial statements.
Reclassifications and Restatements: Certain amounts in the 2005 and 2004 consolidated financial
statements and notes have been reclassified to conform to the 2006 presentation.
The Corporation paid a 5% stock dividend in June 2006. All share and per-share information has
been restated to reflect the impact of this stock dividend.
NOTE B RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporations subsidiary banks are required to maintain reserves, in the form of cash and
balances with the Federal Reserve Bank, against their deposit liabilities. The amount of such
reserves as of December 31, 2006 and 2005 was $13.7 million and $97.4 million, respectively.
58
NOTE C INVESTMENT SECURITIES
The following tables present the amortized cost and estimated fair values of investment securities
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(in thousands) |
|
2006 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
7,648 |
|
|
$ |
|
|
|
$ |
(68 |
) |
|
$ |
7,580 |
|
State and municipal securities |
|
|
1,262 |
|
|
|
11 |
|
|
|
|
|
|
|
1,273 |
|
Corporate debt securities |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
Mortgage-backed securities |
|
|
3,539 |
|
|
|
68 |
|
|
|
(1 |
) |
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,524 |
|
|
$ |
79 |
|
|
$ |
(69 |
) |
|
$ |
12,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
165,931 |
|
|
$ |
2,960 |
|
|
$ |
(3,255 |
) |
|
$ |
165,636 |
|
U.S. Government securities |
|
|
17,062 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
17,066 |
|
U.S. Government sponsored
agency securities |
|
|
289,816 |
|
|
|
129 |
|
|
|
(1,480 |
) |
|
|
288,465 |
|
State and municipal securities |
|
|
493,525 |
|
|
|
1,599 |
|
|
|
(6,845 |
) |
|
|
488,279 |
|
Corporate debt securities |
|
|
69,575 |
|
|
|
1,449 |
|
|
|
(387 |
) |
|
|
70,637 |
|
Collateralized mortgage obligations |
|
|
494,484 |
|
|
|
1,609 |
|
|
|
(3,569 |
) |
|
|
492,524 |
|
Mortgage-backed securities |
|
|
1,376,651 |
|
|
|
2,265 |
|
|
|
(35,809 |
) |
|
|
1,343,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,907,044 |
|
|
$ |
10,016 |
|
|
$ |
(51,346 |
) |
|
$ |
2,865,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agency securities |
|
$ |
7,512 |
|
|
$ |
|
|
|
$ |
(103 |
) |
|
$ |
7,409 |
|
State and municipal securities |
|
|
5,877 |
|
|
|
19 |
|
|
|
|
|
|
|
5,896 |
|
Mortgage-backed securities |
|
|
4,869 |
|
|
|
143 |
|
|
|
|
|
|
|
5,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,258 |
|
|
$ |
162 |
|
|
$ |
(103 |
) |
|
$ |
18,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
137,462 |
|
|
$ |
2,029 |
|
|
$ |
(3,959 |
) |
|
$ |
135,532 |
|
U.S. Government securities |
|
|
35,124 |
|
|
|
|
|
|
|
(6 |
) |
|
|
35,118 |
|
U.S. Government sponsored
agency securities |
|
|
213,748 |
|
|
|
163 |
|
|
|
(1,261 |
) |
|
|
212,650 |
|
State and municipal securities |
|
|
444,034 |
|
|
|
1,044 |
|
|
|
(6,091 |
) |
|
|
438,987 |
|
Corporate debt securities |
|
|
64,478 |
|
|
|
1,860 |
|
|
|
(504 |
) |
|
|
65,834 |
|
Collateralized mortgage obligations |
|
|
265,033 |
|
|
|
301 |
|
|
|
(2,831 |
) |
|
|
262,503 |
|
Mortgage-backed securities |
|
|
1,445,796 |
|
|
|
556 |
|
|
|
(53,089 |
) |
|
|
1,393,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,605,675 |
|
|
$ |
5,953 |
|
|
$ |
(67,741 |
) |
|
$ |
2,543,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
The amortized cost and estimated fair value of debt securities at December 31, 2006, by contractual
maturity, are shown in the following table. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Due in one year or less |
|
$ |
192 |
|
|
$ |
192 |
|
|
$ |
80,242 |
|
|
$ |
80,036 |
|
Due from one year to five years |
|
|
8,614 |
|
|
|
8,556 |
|
|
|
529,333 |
|
|
|
522,535 |
|
Due from five years to ten years |
|
|
179 |
|
|
|
179 |
|
|
|
90,153 |
|
|
|
89,508 |
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
170,250 |
|
|
|
172,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,985 |
|
|
|
8,927 |
|
|
|
869,978 |
|
|
|
864,447 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
494,484 |
|
|
|
492,524 |
|
Mortgage-backed securities |
|
|
3,539 |
|
|
|
3,607 |
|
|
|
1,376,651 |
|
|
|
1,343,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,524 |
|
|
$ |
12,534 |
|
|
$ |
2,741,113 |
|
|
$ |
2,700,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains totaling $7.1 million, $5.9 million and $14.8 million were realized on the sale of
equity securities during 2006, 2005 and 2004, respectively. Gross losses on the sale of equity
securities, including losses recognized for other than temporary impairment, as discussed below,
totaling $163,000, $68,000 and $149,000 were realized during 2006, 2005 and 2004, respectively.
Gross gains totaling $555,000, $1.7 million and $3.1 million were realized on the sale of debt
securities during 2006, 2005 and 2004, respectively. Gross losses totaling $81,000, $811,000 and
$28,000 were realized on the sale of debt securities during 2006, 2005 and 2004, respectively.
Securities carried at $1.4 billion and $1.3 billion at December 31, 2006 and 2005, respectively,
were pledged as collateral to secure public and trust deposits, customer repurchase agreements and
interest rate swaps. Available for sale equity securities include restricted investment securities issued by the Federal Home Loan Bank and Federal Reserve Bank totaling $71.8 million and $56.9 million at December 31, 2006 and 2005, respectively.
The following table presents the gross unrealized losses and estimated fair values of investments,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
FairValue |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
U.S. Government securities |
|
$ |
5,948 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,948 |
|
|
$ |
(1 |
) |
U.S. Government sponsored agency securities |
|
|
121,546 |
|
|
|
(361 |
) |
|
|
130,767 |
|
|
|
(1,187 |
) |
|
|
252,313 |
|
|
|
(1,548 |
) |
State and municipal securities |
|
|
60,640 |
|
|
|
(500 |
) |
|
|
294,956 |
|
|
|
(6,345 |
) |
|
|
355,596 |
|
|
|
(6,845 |
) |
Corporate debt securities |
|
|
8,112 |
|
|
|
(145 |
) |
|
|
13,180 |
|
|
|
(242 |
) |
|
|
21,292 |
|
|
|
(387 |
) |
Collateralized mortgage obligations |
|
|
175,527 |
|
|
|
(1,045 |
) |
|
|
120,192 |
|
|
|
(2,524 |
) |
|
|
295,719 |
|
|
|
(3,569 |
) |
Mortgage-backed securities |
|
|
99,432 |
|
|
|
(2,075 |
) |
|
|
1,034,860 |
|
|
|
(33,735 |
) |
|
|
1,134,292 |
|
|
|
(35,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
471,205 |
|
|
|
(4,127 |
) |
|
|
1,593,955 |
|
|
|
(44,033 |
) |
|
|
2,065,160 |
|
|
|
(48,160 |
) |
Equity securities |
|
|
22,325 |
|
|
|
(1,638 |
) |
|
|
16,623 |
|
|
|
(1,617 |
) |
|
|
38,948 |
|
|
|
(3,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
493,530 |
|
|
$ |
(5,765 |
) |
|
$ |
1,610,578 |
|
|
$ |
(45,650 |
) |
|
$ |
2,104,108 |
|
|
$ |
(51,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the mortgage-backed securities shown in the above table were purchased during 2003
and 2004 when mortgage rates were at historical lows. Unrealized losses on these securities at
December 31, 2006 resulted from the increase in market rates over the past 30 months. Because the
Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association guarantee the
timely payment of principal on mortgage-backed securities, the credit risk for these securities is
minimal and, as such, no impairment write-offs were considered to be necessary. For similar
reasons, the Corporation does not consider unrealized losses associated with U.S. government
sponsored agency securities or state and municipal securities as an indication of impairment.
60
The Corporation evaluates whether unrealized losses on equity investments indicate other than
temporary impairment. Based upon this evaluation, losses of $122,000, $65,000 and $137,000 were
recognized in 2006, 2005 and 2004, respectively.
NOTE D LOANS AND ALLOWANCE FOR LOAN LOSSES
Gross loans are summarized as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Commercial industrial and financial |
|
$ |
2,603,224 |
|
|
$ |
2,044,010 |
|
Commercial agricultural |
|
|
361,962 |
|
|
|
331,659 |
|
Real-estate commercial mortgage |
|
|
3,213,809 |
|
|
|
2,831,405 |
|
Real-estate residential mortgage |
|
|
696,836 |
|
|
|
567,733 |
|
Real-estate home equity |
|
|
1,455,439 |
|
|
|
1,205,523 |
|
Real-estate construction |
|
|
1,428,809 |
|
|
|
851,451 |
|
Consumer |
|
|
523,066 |
|
|
|
520,098 |
|
Leasing and other |
|
|
100,711 |
|
|
|
79,738 |
|
|
|
|
|
|
|
|
|
|
|
10,383,856 |
|
|
|
8,431,617 |
|
Unearned income |
|
|
(9,533 |
) |
|
|
(6,889 |
) |
|
|
|
|
|
|
|
|
|
$ |
10,374,323 |
|
|
$ |
8,424,728 |
|
|
|
|
|
|
|
|
Changes in the allowance for loan losses were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
$ |
77,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
(6,969 |
) |
|
|
(8,204 |
) |
|
|
(8,877 |
) |
Recoveries of loans previously charged off |
|
|
4,517 |
|
|
|
5,196 |
|
|
|
4,520 |
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off |
|
|
(2,452 |
) |
|
|
(3,008 |
) |
|
|
(4,357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
3,498 |
|
|
|
3,120 |
|
|
|
4,717 |
|
Allowance purchased |
|
|
12,991 |
|
|
|
3,108 |
|
|
|
11,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
106,884 |
|
|
$ |
92,847 |
|
|
$ |
89,627 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents non-performing assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Non-accrual loans |
|
$ |
33,113 |
|
|
$ |
36,560 |
|
Accruing loans greater than 90 days past due |
|
|
20,632 |
|
|
|
9,012 |
|
Other real estate owned |
|
|
4,103 |
|
|
|
2,072 |
|
|
|
|
|
|
|
|
|
|
$ |
57,848 |
|
|
$ |
47,644 |
|
|
|
|
|
|
|
|
The amount of overdraft deposit balances that have been reported as loans were $24.3 million and $18.9 million as of December 31, 2006 and 2005, respectively.
Interest of approximately $2.6 million, $3.0 million and $1.5 million was not recognized as
interest income due to the non-accrual status of loans during 2006, 2005 and 2004, respectively.
The recorded investment in loans that were considered to be impaired as defined by Statement 114
was $18.5 million and $13.2 million at December 31, 2006 and 2005, respectively. At December 31,
2006 and 2005, impaired loans had related allowances for loan losses of $5.1 million and $5.9
million, respectively. There were no impaired loans in 2006 and 2005 that did not have a related
61
allowance for loan losses. The average recorded investment in impaired loans during the years ended
December 31, 2006, 2005 and 2004 was approximately $13.7 million, $9.1 million and $7.4 million,
respectively.
The Corporation applies all payments received on non-accruing impaired loans to principal until
such time as the principal is paid off, after which time any additional payments received are
recognized as interest income. The Corporation recognized interest income of approximately
$636,000, $462,000 and $55,000 on impaired loans in 2006, 2005 and 2004, respectively.
The Corporation has extended credit to the officers and directors of the Corporation and to their
associates. Related-party loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with unrelated persons
and do not involve more than the normal risk of collectibility. The aggregate dollar amount of
these loans, including unadvanced commitments, was $273.8 million and $267.2 million at December
31, 2006 and 2005, respectively. During 2006, additions totaled $65.3 million and repayments
totaled $90.0 million. The Columbia Bank added $16.4 million to related party loans.
The total portfolio of mortgage loans serviced by the Corporation for unrelated third parties was
$981.4 million and $1.1 billion at December 31, 2006 and 2005, respectively.
NOTE E PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Land |
|
$ |
30,610 |
|
|
$ |
26,693 |
|
Buildings and improvements |
|
|
203,551 |
|
|
|
180,153 |
|
Furniture and equipment |
|
|
136,576 |
|
|
|
119,179 |
|
Construction in progress |
|
|
8,034 |
|
|
|
5,483 |
|
|
|
|
|
|
|
|
|
|
|
378,771 |
|
|
|
331,508 |
|
Less: Accumulated depreciation and amortization |
|
|
(187,370 |
) |
|
|
(161,254 |
) |
|
|
|
|
|
|
|
|
|
$ |
191,401 |
|
|
$ |
170,254 |
|
|
|
|
|
|
|
|
NOTE F GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
418,735 |
|
|
$ |
364,019 |
|
|
$ |
127,202 |
|
Goodwill additions |
|
|
207,307 |
|
|
|
54,716 |
|
|
|
236,817 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
626,042 |
|
|
$ |
418,735 |
|
|
$ |
364,019 |
|
|
|
|
|
|
|
|
|
|
|
See Note Q, Mergers and Acquisitions for information regarding goodwill acquired in 2006 and
2005.
62
The following table summarizes intangible assets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit |
|
$ |
50,279 |
|
|
$ |
(17,927 |
) |
|
$ |
32,352 |
|
|
$ |
35,590 |
|
|
$ |
(11,214 |
) |
|
$ |
24,376 |
|
Non-compete |
|
|
475 |
|
|
|
(230 |
) |
|
|
245 |
|
|
|
475 |
|
|
|
(135 |
) |
|
|
340 |
|
Unidentifiable |
|
|
8,897 |
|
|
|
(6,305 |
) |
|
|
2,592 |
|
|
|
8,897 |
|
|
|
(5,206 |
) |
|
|
3,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizing |
|
|
59,651 |
|
|
|
(24,462 |
) |
|
|
35,189 |
|
|
|
44,962 |
|
|
|
(16,555 |
) |
|
|
28,407 |
|
Non-amortizing |
|
|
2,544 |
|
|
|
|
|
|
|
2,544 |
|
|
|
1,280 |
|
|
|
|
|
|
|
1,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,195 |
|
|
$ |
(24,462 |
) |
|
$ |
37,733 |
|
|
$ |
46,242 |
|
|
$ |
(16,555 |
) |
|
$ |
29,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible assets are amortized using an accelerated method over the estimated
remaining life of the acquired core deposits. As of December 31, 2006, these assets had a weighted
average remaining life of approximately eight years. Unidentifiable intangible assets related to
branch acquisitions are amortized on a straight-line basis over ten years. Non-compete intangible
assets are being amortized on a straight-line basis over five years, which is the term of the
underlying contracts. Amortization expense related to intangible assets totaled $7.9 million, $5.3
million and $4.7 million in 2006, 2005 and 2004, respectively.
Amortization expense for the next five years is expected to be as follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2007 |
|
$ |
7,463 |
|
2008 |
|
|
6,222 |
|
2009 |
|
|
5,489 |
|
2010 |
|
|
4,692 |
|
2011 |
|
|
3,514 |
|
NOTE G MORTGAGE SERVICING RIGHTS
The following table summarizes the changes in mortgage servicing rights (MSRs), which are included
in other assets in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Balance at beginning of year |
|
$ |
7,515 |
|
|
$ |
8,157 |
|
|
$ |
8,396 |
|
Originations of mortgage servicing rights |
|
|
724 |
|
|
|
1,548 |
|
|
|
2,138 |
|
Amortization expense |
|
|
(1,640 |
) |
|
|
(2,190 |
) |
|
|
(2,377 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
6,599 |
|
|
$ |
7,515 |
|
|
$ |
8,157 |
|
|
|
|
|
|
|
|
|
|
|
MSRs represent the economic value to be derived by the Corporation from its existing contractual
rights to service mortgage loans that have been sold. Accordingly, prepayments of the underlying
mortgage loan prepayments can impact the value of MSRs.
The Corporation estimates the fair value of its MSRs by discounting the estimated cash flows of
servicing revenue, net of costs, over the expected life of the underlying loans at a discount rate
commensurate with the risk associated with these assets. Expected life is based on the contractual
terms of the loans, as adjusted for prepayment projections for mortgage-backed securities with
rates and terms comparable to the loans underlying the MSRs. The estimated fair value of MSRs was
approximately $8.2 million and $8.8 million at December 31, 2006 and 2005, respectively.
63
Estimated MSR amortization expense for the next five years, based on balances at December 31, 2006
and the expected remaining lives of the underlying loans follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2007 |
|
$ |
1,649 |
|
2008 |
|
|
1,477 |
|
2009 |
|
|
1,280 |
|
2010 |
|
|
1,055 |
|
2011 |
|
|
800 |
|
NOTE H DEPOSITS
Deposits consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Noninterest-bearing demand |
|
$ |
1,831,419 |
|
|
$ |
1,672,637 |
|
Interest-bearing demand |
|
|
1,683,857 |
|
|
|
1,637,007 |
|
Savings and money market accounts |
|
|
2,287,146 |
|
|
|
2,125,475 |
|
Time deposits |
|
|
4,430,047 |
|
|
|
3,369,720 |
|
|
|
|
|
|
|
|
|
|
$ |
10,232,469 |
|
|
$ |
8,804,839 |
|
|
|
|
|
|
|
|
Included in time deposits were certificates of deposit equal to or greater than $100,000 of $1.2
billion and $749.6 million at December 31, 2006 and 2005, respectively. The scheduled maturities of
time deposits as of December 31, 2006 were as follows (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2007 |
|
$ |
3,414,830 |
|
2008 |
|
|
461,853 |
|
2009 |
|
|
141,949 |
|
2010 |
|
|
104,901 |
|
2011 |
|
|
86,672 |
|
Thereafter |
|
|
219,842 |
|
|
|
|
|
|
|
$ |
4,430,047 |
|
|
|
|
|
NOTE I SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings at December 31, 2006, 2005 and 2004 and the related maximum amounts
outstanding at the end of any month in each of the three years then ended are presented below. The
securities underlying the repurchase agreements remain in available for sale investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
Maximum Outstanding |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
$ |
1,022,351 |
|
|
$ |
939,096 |
|
|
$ |
676,922 |
|
|
$ |
1,236,941 |
|
|
$ |
939,096 |
|
|
$ |
849,200 |
|
Securities sold under agreements to repurchase |
|
|
339,207 |
|
|
|
352,937 |
|
|
|
500,206 |
|
|
|
498,541 |
|
|
|
573,991 |
|
|
|
708,830 |
|
Short-term promissory notes |
|
|
279,076 |
|
|
|
|
|
|
|
|
|
|
|
282,035 |
|
|
|
|
|
|
|
|
|
FHLB overnight repurchase agreements |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
Revolving line of credit |
|
|
36,318 |
|
|
|
|
|
|
|
11,930 |
|
|
|
55,600 |
|
|
|
33,180 |
|
|
|
26,000 |
|
Other |
|
|
3,888 |
|
|
|
4,929 |
|
|
|
5,466 |
|
|
|
5,435 |
|
|
|
13,219 |
|
|
|
5,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,680,840 |
|
|
$ |
1,298,962 |
|
|
$ |
1,194,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The following table presents information related to securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(dollars in thousands) |
Amount outstanding at December 31 |
|
$ |
339,207 |
|
|
$ |
352,937 |
|
|
$ |
500,206 |
|
Weighted average interest rate at year end |
|
|
3.57 |
% |
|
|
2.61 |
% |
|
|
1.03 |
% |
Average amount outstanding during the year |
|
$ |
356,561 |
|
|
$ |
436,244 |
|
|
$ |
531,196 |
|
Weighted average interest rate during the year |
|
|
3.40 |
% |
|
|
2.12 |
% |
|
|
0.97 |
% |
The Corporation has a $100.0 million revolving line of credit agreement with an unaffiliated bank
that provides for interest to be paid on outstanding balances at the one-month LIBOR plus 0.35%.
The credit agreement requires the Corporation to maintain certain financial ratios related to
capital strength and earnings. The Corporation was in compliance with all required covenants under
the credit agreement as of December 31, 2006.
Federal Home Loan Bank advances and long-term debt included the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Federal Home Loan Bank advances |
|
$ |
998,521 |
|
|
$ |
717,037 |
|
Junior subordinated deferrable interest debentures |
|
|
206,705 |
|
|
|
40,724 |
|
Subordinated debt |
|
|
100,000 |
|
|
|
100,000 |
|
Other long-term debt |
|
|
1,999 |
|
|
|
3,880 |
|
Unamortized issuance costs |
|
|
(3,077 |
) |
|
|
(1,296 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,304,148 |
|
|
$ |
860,345 |
|
|
|
|
|
|
|
|
Excluded from the preceding table is the Parent Companys revolving line of credit with its
subsidiary banks ($75.0 million and $61.4 million outstanding at December 31, 2006 and 2005,
respectively). This line of credit is secured by equity securities and insurance investments and
bears interest at the prime rate, minus 1.5%. Although the line of credit and related interest have
been eliminated in consolidation, this borrowing arrangement is senior to the subordinated debt and
the junior subordinated deferrable interest debentures.
In January 2006, the Corporation purchased all of the common stock of a subsidiary trust, Fulton
Capital Trust I, which was formed for the purpose of issuing $150.0 million of Trust Preferred
Securities at a fixed rate of 6.29% and an effective rate of approximately 6.50% as a result of
issuance costs and the settlement cost of the forward-starting interest rate swap. In connection
with this transaction, $154.6 million of junior subordinated deferrable interest debentures were
issued to the trust. These debentures carry the same rate and mature on February 1, 2036.
65
In addition to Fulton Capital Trust I, the Parent Company owns all of the common stock of eight
Subsidiary Trusts, which have issued Trust Preferred Securities in conjunction with the Parent
Company issuing junior subordinated deferrable interest debentures to the trusts. The terms of the
junior subordinated deferrable interest debentures are the same as the terms of the Trust Preferred
Securities. The Parent Companys obligations under the debentures constitute a full and
unconditional guarantee by the Parent Company of the obligations of the trusts. The Trust Preferred
Securities are redeemable on specified dates, or earlier if the deduction of interest for Federal
income taxes is prohibited, the Trust Preferred Securities no longer qualify as Tier I regulatory
capital, or if certain other contingencies arise. The Trust Preferred Securities must be redeemed
upon maturity. The following table details the terms of the debentures (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed/ |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Callable |
|
Debentures Issued to |
|
Variable |
|
2006 |
|
|
Amount |
|
|
Maturity |
|
Callable |
|
Rate |
|
Premier Capital Trust |
|
Fixed |
|
|
8.57 |
% |
|
$ |
10,310 |
|
|
8/15/2028 |
|
8/15/2008 |
|
|
104.3 |
% |
PBI Capital Trust II |
|
Variable |
|
|
8.86 |
% |
|
|
15,464 |
|
|
11/7/2032 |
|
11/7/2007 |
|
|
100.0 |
|
Resource Capital Trust III |
|
Variable |
|
|
8.86 |
% |
|
|
3,093 |
|
|
11/7/2032 |
|
11/7/2007 |
|
|
100.0 |
|
Bald Eagle Statutory Trust I |
|
Variable |
|
|
8.81 |
% |
|
|
4,124 |
|
|
7/31/2031 |
|
7/31/2006 |
|
|
107.5 |
|
Bald Eagle Statutory Trust
II |
|
Variable |
|
|
8.92 |
% |
|
|
2,578 |
|
|
6/26/2032 |
|
6/26/2007 |
|
|
100.0 |
|
Columbia Capital Trust I |
|
Variable |
|
|
8.01 |
% |
|
|
6,186 |
|
|
6/30/2039 |
|
6/30/2009 |
|
|
100.0 |
|
Columbia Capital Trust II |
|
Variable |
|
|
7.25 |
% |
|
|
4,124 |
|
|
3/15/2035 |
|
3/15/2010 |
|
|
100.0 |
|
Columbia Capital Trust III |
|
Variable |
|
|
7.13 |
% |
|
|
6,186 |
|
|
6/15/2035 |
|
6/15/2010 |
|
|
100.0 |
|
Fulton Capital Trust I |
|
Fixed |
|
|
6.29 |
% |
|
|
154,640 |
|
|
12/31/2036 |
|
NA |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
206,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $100.0 million of subordinated debt matures April 1, 2015 and carries a fixed rate of 5.35%.
Interest is paid semi-annually in October and April of each year.
Federal Home Loan Bank advances mature through March 2027 and carry a weighted average interest
rate of 4.76%. As of December 31, 2006, the Corporation had an additional borrowing capacity of
approximately $1.3 billion with the Federal Home Loan Bank. Advances from the Federal Home Loan
Bank are secured by Federal Home Loan Bank stock, qualifying residential mortgages, investments and
other assets.
The following table summarizes the scheduled maturities of Federal Home Loan Bank advances and
long-term debt as of December 31, 2006 (in thousands):
|
|
|
|
|
Year |
|
|
|
|
2007 |
|
$ |
190,305 |
|
2008 |
|
|
184,594 |
|
2009 |
|
|
59,138 |
|
2010 |
|
|
89,116 |
|
2011 |
|
|
595 |
|
Thereafter |
|
|
780,400 |
|
|
|
|
|
|
|
$ |
1,304,148 |
|
|
|
|
|
NOTE J REGULATORY MATTERS
Dividend and Loan Limitations
The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain
legal and regulatory limitations. Under such limitations, the total amount available for payment of
dividends by subsidiary banks was approximately $320 million at December 31, 2006.
Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may
loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed
10%, and the aggregate of loans to all affiliates may not exceed 20%
66
of each bank subsidiarys regulatory capital. At December 31, 2006, the maximum amount available
for transfer from the subsidiary banks to the Parent Company in the form of loans and dividends was
approximately $410 million.
Regulatory Capital Requirements
The Corporations subsidiary banks are subject to various regulatory capital requirements
administered by banking regulators. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporations financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
subsidiary banks must meet specific capital guidelines that involve quantitative measures of the
subsidiary banks assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The subsidiary banks capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary
banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets (as defined in the regulations). Management believes, as of
December 31, 2006, that all of its bank subsidiaries meet the capital adequacy requirements to
which they are subject.
As of December 31, 2006, the Corporations five significant subsidiaries, Fulton Bank, The Columbia
Bank, Lafayette Ambassador Bank, The Bank and Resource Bank were well-capitalized under the
regulatory framework for prompt corrective action based on their capital ratio calculations. As of
December 31, 2005, the Corporations four significant subsidiaries, Fulton Bank, Lafayette
Ambassador Bank, The Bank and Resource Bank were also well-capitalized. To be categorized as
well-capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or events since
December 31, 2006 that management believes have changed the institutions categories.
The following tables present the total risk-based, Tier I risk-based and Tier I leverage
requirements for the Corporation and its significant subsidiaries with total assets in excess of
$1.0 billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
Actual |
|
Adequacy Purposes |
|
Well-Capitalized |
As of December 31, 2006 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,287,443 |
|
|
|
11.7 |
% |
|
$ |
880,074 |
|
|
|
8.0 |
% |
|
$ |
1,100,093 |
|
|
|
10.0 |
% |
Fulton Bank |
|
|
496,555 |
|
|
|
11.2 |
|
|
|
356,238 |
|
|
|
8.0 |
|
|
|
445,297 |
|
|
|
10.0 |
|
The Columbia Bank |
|
|
147,565 |
|
|
|
11.9 |
|
|
|
99,272 |
|
|
|
8.0 |
|
|
|
124,090 |
|
|
|
10.0 |
|
The Bank |
|
|
119,237 |
|
|
|
11.4 |
|
|
|
83,679 |
|
|
|
8.0 |
|
|
|
104,599 |
|
|
|
10.0 |
|
Lafayette Ambassador Bank |
|
|
107,102 |
|
|
|
10.7 |
|
|
|
80,069 |
|
|
|
8.0 |
|
|
|
100,086 |
|
|
|
10.0 |
|
Resource Bank |
|
|
107,459 |
|
|
|
11.2 |
|
|
|
76,921 |
|
|
|
8.0 |
|
|
|
96,151 |
|
|
|
10.0 |
|
Tier I Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,083,953 |
|
|
|
9.9 |
% |
|
$ |
440,037 |
|
|
|
4.0 |
% |
|
$ |
660,056 |
|
|
|
6.0 |
% |
Fulton Bank |
|
|
401,584 |
|
|
|
9.0 |
|
|
|
178,119 |
|
|
|
4.0 |
|
|
|
267,178 |
|
|
|
6.0 |
|
The Columbia Bank |
|
|
134,167 |
|
|
|
10.8 |
|
|
|
49,636 |
|
|
|
4.0 |
|
|
|
74,454 |
|
|
|
6.0 |
|
The Bank |
|
|
96,821 |
|
|
|
9.3 |
|
|
|
41,840 |
|
|
|
4.0 |
|
|
|
62,759 |
|
|
|
6.0 |
|
Lafayette Ambassador Bank |
|
|
90,332 |
|
|
|
9.0 |
|
|
|
40,035 |
|
|
|
4.0 |
|
|
|
60,052 |
|
|
|
6.0 |
|
Resource Bank |
|
|
89,215 |
|
|
|
9.3 |
|
|
|
38,460 |
|
|
|
4.0 |
|
|
|
57,691 |
|
|
|
6.0 |
|
Tier I Capital (to Average Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,083,953 |
|
|
|
7.7 |
% |
|
$ |
425,125 |
|
|
|
3.0 |
% |
|
$ |
708,541 |
|
|
|
5.0 |
% |
Fulton Bank |
|
|
401,584 |
|
|
|
7.1 |
|
|
|
168,974 |
|
|
|
3.0 |
|
|
|
281,624 |
|
|
|
5.0 |
|
The Columbia Bank |
|
|
134,167 |
|
|
|
9.2 |
|
|
|
43,573 |
|
|
|
3.0 |
|
|
|
72,622 |
|
|
|
5.0 |
|
The Bank |
|
|
96,821 |
|
|
|
7.5 |
|
|
|
38,821 |
|
|
|
3.0 |
|
|
|
64,701 |
|
|
|
5.0 |
|
Lafayette Ambassador Bank |
|
|
90,332 |
|
|
|
7.0 |
|
|
|
38,942 |
|
|
|
3.0 |
|
|
|
64,904 |
|
|
|
5.0 |
|
Resource Bank |
|
|
89,215 |
|
|
|
7.0 |
|
|
|
38,209 |
|
|
|
3.0 |
|
|
|
63,681 |
|
|
|
5.0 |
|
67
e
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
Actual |
|
Adequacy Purposes |
|
Well-Capitalized |
As of December 31, 2005 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(dollars in thousands) |
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
1,102,891 |
|
|
|
12.1 |
% |
|
$ |
730,115 |
|
|
|
8.0 |
% |
|
$ |
912,644 |
|
|
|
10.0 |
% |
Fulton Bank |
|
|
409,653 |
|
|
|
11.1 |
|
|
|
295,353 |
|
|
|
8.0 |
|
|
|
369,191 |
|
|
|
10.0 |
|
Lafayette Ambassador Bank |
|
|
102,007 |
|
|
|
11.6 |
|
|
|
70,539 |
|
|
|
8.0 |
|
|
|
88,173 |
|
|
|
10.0 |
|
The Bank |
|
|
101,532 |
|
|
|
11.0 |
|
|
|
73,965 |
|
|
|
8.0 |
|
|
|
92,456 |
|
|
|
10.0 |
|
Resource Bank |
|
|
105,343 |
|
|
|
11.9 |
|
|
|
70,786 |
|
|
|
8.0 |
|
|
|
88,482 |
|
|
|
10.0 |
|
Tier I Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
910,044 |
|
|
|
10.0 |
% |
|
$ |
365,057 |
|
|
|
4.0 |
% |
|
$ |
547,586 |
|
|
|
6.0 |
% |
Fulton Bank |
|
|
323,466 |
|
|
|
8.8 |
|
|
|
147,676 |
|
|
|
4.0 |
|
|
|
221,515 |
|
|
|
6.0 |
|
Lafayette Ambassador Bank |
|
|
85,331 |
|
|
|
9.7 |
|
|
|
35,269 |
|
|
|
4.0 |
|
|
|
52,904 |
|
|
|
6.0 |
|
The Bank |
|
|
80,820 |
|
|
|
8.7 |
|
|
|
36,983 |
|
|
|
4.0 |
|
|
|
55,474 |
|
|
|
6.0 |
|
Resource Bank |
|
|
86,825 |
|
|
|
9.8 |
|
|
|
35,393 |
|
|
|
4.0 |
|
|
|
53,089 |
|
|
|
6.0 |
|
Tier I Capital (to Average Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
910,044 |
|
|
|
7.7 |
% |
|
$ |
355,090 |
|
|
|
3.0 |
% |
|
$ |
591,817 |
|
|
|
5.0 |
% |
Fulton Bank |
|
|
323,466 |
|
|
|
7.1 |
|
|
|
137,077 |
|
|
|
3.0 |
|
|
|
228,462 |
|
|
|
5.0 |
|
Lafayette Ambassador Bank |
|
|
85,331 |
|
|
|
7.0 |
|
|
|
36,492 |
|
|
|
3.0 |
|
|
|
60,821 |
|
|
|
5.0 |
|
The Bank |
|
|
80,820 |
|
|
|
7.0 |
|
|
|
34,606 |
|
|
|
3.0 |
|
|
|
57,676 |
|
|
|
5.0 |
|
Resource Bank |
|
|
86,825 |
|
|
|
7.9 |
|
|
|
33,116 |
|
|
|
3.0 |
|
|
|
55,194 |
|
|
|
5.0 |
|
NOTE K INCOME TAXES
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
85,010 |
|
|
$ |
69,611 |
|
|
$ |
63,440 |
|
State |
|
|
1,191 |
|
|
|
760 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,201 |
|
|
|
70,371 |
|
|
|
63,857 |
|
Deferred tax (benefit) expense |
|
|
(5,779 |
) |
|
|
990 |
|
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80,422 |
|
|
$ |
71,361 |
|
|
$ |
64,673 |
|
|
|
|
|
|
|
|
|
|
|
The differences between the effective income tax rate and the Federal statutory income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Effect of tax-exempt income |
|
|
(3.1 |
) |
|
|
(2.8 |
) |
|
|
(2.9 |
) |
Effect of low income housing investments |
|
|
(1.5 |
) |
|
|
(2.1 |
) |
|
|
(2.1 |
) |
State income taxes, net of Federal benefit |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
Bank-owned life insurance |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Other |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
30.2 |
% |
|
|
30.1 |
% |
|
|
30.2 |
% |
|
|
|
|
|
|
|
|
|
|
68
The net deferred tax asset recorded by the Corporation is included in other assets and consists of
the following tax effects of temporary differences at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
37,409 |
|
|
$ |
32,496 |
|
Unrealized holding losses on securities available for sale |
|
|
14,432 |
|
|
|
21,592 |
|
Loss and credit carryforwards |
|
|
11,111 |
|
|
|
9,217 |
|
Deferred compensation |
|
|
8,954 |
|
|
|
7,234 |
|
Post-retirement and defined benefit plans |
|
|
5,370 |
|
|
|
621 |
|
LIH Investments |
|
|
3,644 |
|
|
|
3,318 |
|
Other accrued expenses |
|
|
2,594 |
|
|
|
2,412 |
|
Stock-based compensation |
|
|
1,930 |
|
|
|
1,867 |
|
Derivative financial instruments |
|
|
1,868 |
|
|
|
1,177 |
|
Premises and equipment |
|
|
1,059 |
|
|
|
|
|
Other than temporary impairment of investments |
|
|
568 |
|
|
|
1,400 |
|
Other |
|
|
175 |
|
|
|
129 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
89,114 |
|
|
|
81,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
10,368 |
|
|
|
6,847 |
|
Direct leasing |
|
|
5,007 |
|
|
|
9,357 |
|
Mortgage servicing rights |
|
|
2,315 |
|
|
|
2,653 |
|
Acquisition premiums/discounts |
|
|
983 |
|
|
|
1,832 |
|
Premises and equipment |
|
|
|
|
|
|
747 |
|
Other |
|
|
2,700 |
|
|
|
2,997 |
|
|
|
|
|